Category: Features

The Australian

22 July 2019

Editorial

After decades in which successive governments have shifted the superannuation goalposts, the last things savers want is the Morrison government’s forthcoming review to recommend changes that could shrink their nest eggs. But savers would be the winners if reforms are enacted to save them fees and make the $2.8 trillion sector more efficient. As Adam Creighton reports today, Josh Frydenberg is facing concerns from a broad group of Coalition backbenchers who believe the government should ditch the legislated rise in the compulsory superannuation guarantee. The guarantee is scheduled to increase to 10 per cent in July 2021 and reach 12 per cent in July 2025. The group includes the chairmen of two influential parliamentary committees — Victorian MP Tim Wilson and West Australian MP Andrew Hastie.

If the size of the guarantee is to be reviewed it would make sense to factor the matter into the review, which will have much to consider. A recent study by the Grattan Institute showed that raising compulsory superannuation in stages would leave many workers poorer, as they would forgo wage rises, some of which would stimulate demand and economic activity. On the other hand, almost 30 years after the Keating government brought in compulsory super, taxpayers are still carrying most of the burden of providing retirement incomes for our ageing population. In 1992, 80 per cent of retirees received government income support; the same percentage still receive full or part pensions. On current settings, Treasury analysis shows the proportion not drawing a pension will remain static at 20 per cent in 2047. What is changing slowly is that fewer people are receiving full pensions. So far, despite vast growth in the super savings, the goal of more Australians becoming financially independent remains elusive.

Part of the problem, as Nobel prize-winning economists Eugene Fama and Richard Thaler identified recently, is that Australia’s funds have some of the highest costs in the world.

Any systemic changes must put workers’ and retirees’ needs first, which has not been the case for a long time.

The Australian

13 July 2019

Scott Francis

Longevity risk is important to think about in planning around financial futures — the risk of outliving our assets.

To make some sort of assessment about managing this risk, indeed about managing our investments and income, we need to be able to build a set of financial assumptions that provide an estimate of the future.

The key input into this process is the rate of return that is assumed for the investment portfolio earnings.

Given that this is effectively a forecast for the future, it is clearly not possible to know what that number will be — the challenge is in making the best estimate of the range of possible earnings that we can.

This estimate is especially important for people who might be contemplating a long retirement. They might retire in their 50s and live into their 90s or beyond.

Let’s consider a person who is now 60 and looking to retire.

Let’s assume they have a generous investment portfolio of $1,500,000. They know they will not receive any part age pension to supplement their investment income.

From an asset allocation perspective, let’s then assume they are targeting $75,000 per year to live on, and want to keep four years of living costs, $300,000 in cash and fixed interest assets, and invest the remaining $1,200,000 in growth assets (an 80 per cent growth, 20 per cent defensive split).

Historical data suggests an attractive rate of return from cash investments in Australia compared to what is currently available.

For example, from 1990 to 2018 the average annual return from cash investments was 5.5 per cent per annum (according to Vanguard), against an inflation rate for this period of 2.5 per cent, suggesting an after-inflation (or real) rate of return of 3 per cent a year.

However, for realistic expectations with the RBA cash rate at 1 per cent, and the best cash and term deposit accounts not providing a return significantly higher than this, a more realistic assumption for the long-run return from the cash and fixed-interest investments in a portfolio would be a real return of about 1 per cent a year.

Insuring for the future

Jeremy Siegel, Wharton finance professor and author of Stocks for the Long Run, has long been a proponent of maths that suggests the long run real (inflation adjusted) return from the sharemarket is 6-7 per cent a year.

Let’s make this an optimistic calculation of an expected return to start with, and use the 7 per cent real return.

We now have a real return of 1 per cent per annum from the 20 per cent cash/fixed interest part of the portfolio, and a 7 per cent real return from the growth (shares) part of the portfolio, to provide a total real return of 1 per cent x 20 per cent, and 7 per cent x 80 per cent, creating a total combined return of 5.8 per cent per annum.

The average real return from Australian shares over the period 1900 to the end of 2018 has been measured at 6.75 per cent per annum.

This is not much different from the Siegel figure and would provide a total real return for the portfolio of 5.6 per cent.

One note of caution worth sounding is that the Australian sharemarket returns have been world-leading over this period (1900 to 2018).

The average return from world markets, calculated for the Credit Suisse Global Investment Returns Yearbook, was a real return of 5 per cent a year.

In our range of scenarios, it is worth considering the possibility that future Australian returns will be similar to the average world return.

For a portfolio that is made up of 20 per cent cash and fixed interest investments, and 80 per cent growth investments, the total real return will be 4.2 per cent a year.

Over the 1900 to 2018 period, the Australian sharemarket was an outperformer.

But what if there was a period of underperformance?

If the world average return is 5 per cent a year, and the Australian sharemarket were to underperform world markets by 20 per cent, that would provide a return of 4 per cent a year.

Of course, one of the key ways of insuring against Australian underperformance is exposure to international shares, but let’s assume that the portfolio is largely Australian and underperforms the 5 per cent per annum real return by 20 per cent, providing a real return of 4 per cent a year.

The total real return from this portfolio will be 3.2 per cent per annum, and provides us with a “conservative case” figure for calculations.

Assuming that the person in the case study only wants to spend their investment returns each year — and remember they hoped for $75,000 a year — the range of estimates for their spending is between $51,000 and $87,000 a year.

There remain other issues to consider, including fees, taxes (although you would assume in retirement this level of assets should be able to be structured to be tax-free) and the tendency for investors to achieve lower-than-market average returns through efforts at market timing and stock selection.

Separately, there is the possibility of a sharp downturn from which the portfolio struggles to recover and, on the positive side, the added benefit of franking credits in the Australian tax system.

There is also the question of whether the retiree might be prepared to withdraw some of their portfolio capital to add to the investment returns.

All of this is not easy to quantify.

Starting with a reasonable understanding of the possible range of investment returns is important.

The Australian

13 July 2019

James Kirby – Wealth Editor

For a moment there it looked like the entire self-managed super fund scene was in a tailspin: thriving industry funds, woeful tales of bad financial advice and a deeper sense that for many the entire experiment in self-directed retirement had lost its way.

Yes, growth in the SMSF sector is slowing.

But the SMSF scene is alive and well. Moreover, SMSF operators are getting younger, they are starting funds with less money than previously and importantly they are double-dipping in a very smart way, with almost half of those launching new funds making sure to retain investments in their original employer funds.

Our picture of the sector gets better each year, with better data. The latest Vanguard/Investment Trends survey, which is based on no fewer than 5000 SMSF operators and 300 specialist planners, offers an exceptional snapshot of the market.

There are 20,000 new SMSF funds opening each year (against 40,000 a decade ago). However, there is every chance this number will grow from here now that the Morrison government has been returned and the threat of a pro-industry fund ALP regime has been removed.

More importantly, the big development this year is what might be tagged as the “hybrid approach” — keeping two funds going for different purposes. The new generation of SMSF operators are not “anti-industry funds” — it would seem they are much too smart to take an entrenched position of that sort when there are advantages to having one foot in the APRA-regulated fund ­sector.

Until very recently, the choice between SMSF and big funds was seen as binary — you went one way or the other. But now it is common to use both formats for different purposes. The survey shows that almost half (49 per cent) of people who started SMSFs last year held on to money inside their former funds as well. What’s more, that figure is climbing fast — it was only 29 per cent in 2017, then 34 per cent in 2018. Investors are holding on to money inside the larger funds primarily to keep their access to cheaper life insurance: big funds get better rates than if you are operating by yourself in an SMSF.

However, Michael Blomfield, chief executive of Investment Trends, also says people are leaving money inside industry funds to diversify, especially to get access to unlisted investments such as infrastructure and private equity.

“It’s what you might call a core and satellite approach,” says Blomfield.

Indeed, this trend has been exploited by industry fund Hostplus, which has just launched a range of funds that SMSFs can access without actually becoming members of Hostplus.

If this so-called self-managed option experiment at Hostplus succeeds, no doubt a string or rival industry funds will copy the initiative in the years ahead.

Younger and younger

Separately, the survey shows a median SMSF commencement age of 47 (down from 52 in 2010) and a median starting amount per capita (per trustee) of $230.000.

This is surely a healthy development and suggests the sector is going to become more mainstream and less heavily identified with wealthier, older Australians than it has been in the past.

Just to look at the trend a little closer, the median amount trustees have when starting a new fund has dropped consistently — it was $420,000 before the global financial crisis and $320,000 in 2014. So much for analysts suggesting you need $500,000-$1 million to start a fund. SMSFs are for people who want to control and manage their own money.

This new research also attempts to answer one of the most commonly asked questions about SMSFs, which is how much time do they take to run? The easy response might be “how long is a piece of string?” After all, the more complex a portfolio the longer it is going to take to manage. Nonetheless, it is suggested on average the whole business takes eight hours a month (we’ll assume the survey did not try to measure that most elusive figure — time spent “thinking” about investment allocation).

Among the most obvious developments in the area is the steady and welcome diversification away from Australian shares and cash — though notably the average cash holding is still a whopping 25 per cent and it has barely changed even as rates have slid to historically low levels. Indeed, the allocation increased slightly over the past 12 months.

In terms of where the diversification is taking place, it is in the exchange-traded funds market, which is emerging as the key gateway to the wider world for private investors. There are 190,000 investors using or planning to use ETFs, up from 140,000 a year earlier.

There is also a consistent lack of confidence in the financial advice sector shown in the survey, which may improve in the months ahead as new standards are introduced in relations to educational qualifications for advisers.

Similarly, it would seem confidence levels on market returns are low, too. “Investors’ outlook for market returns is very low at 1.4 per cent, far below the expectations of many economists, including our own,” says Robin Bowerman, head of market strategy at Vanguard Australia.

One last thing: despite the gloom and doom among SMSFs, it looks like there has been a lot more talk than action. Examining the intentions of SMSF operators for the future, the survey found one in five had considered closing their funds over the past year — a fourfold increase on the numbers in 2013. But in reality, the actual figure was less than 10,000.

Weekend Australian Magazine

13 July 2019

Bernard Salt – Columnist

My fellow baby boomers. I know that many of you are feeling pleased with yourselves, having at the federal election staved off an attack on the benefits associated with your recent or imminent retirement. I’d like to report that thanks to this collective effort the issue of franking credits has receded into the annals of history, never to be spoken of again.

That is what I would like to say – but of course that wouldn’t be the truth. The truth is that the franking credits issue, and the angst over a range of other retiree benefits and entitlements, will never disappear. It’ll merely hibernate before bursting back into life. The reason is obvious: politicians will see populist opportunity in finding ever more inventive ways to limit public spending on retirement.

It is foolhardy for any political party to launch a full-throttle attack on middle-class baby boomers now. Those born between 1946 and 1964 are currently aged 55 to 73 and straddle both full-time work and retirement. They are fit and healthy (for their age) and many are still at the top of their game, which means that if attacked they can inflict lethal damage on an aggressor. And that is precisely what happened at the May election.

Dark forces that seek the curtailment (or demise) of the self-funded retiree say we can no longer afford to keep these privileged Australians in the manner to which they have become accustomed; we must wipe away some – some – of the egregious benefits that coddle their pampered retirement. And those dark forces have an unassailable advantage over their ageing quarry. They are younger. They are leaner. They are hungrier. All they need to do is wait. The next assault on the reserves of the well-off baby boomers will come as their numbers diminish, as their herd frays. Some time in the next decade, the stalkers of self-funded retirees will re-emerge, take aim at the by then wearied and bedraggled boomers, and release – with glee – their slings and arrows of discontent. Strike the weakened: that is the brutal law of the jungle, and of politics. Future tribes of self-funded retirees may well huddle together for protection, but the assailing forces will be too strong, and intoxicated by the promised spoils.It was always going to end this way for the self-funded retiree life form: their numbers afford a measure of protection early in retirement, but later it’s a different story.

By the 2030s the great retirement reorganisation will have taken place and the once vast herds of roaming, roaring baby boomersaurus will have diminished. And, of course, as the thinning progresses, and as the savannah’s resources are recovered and redistributed, a new generation of retirees will present itself.

Enter the Xer retiree, born 1965-1982. This is the get-on-with-it generation, the Quiet Generation, the generation that for a lifetime was besieged from above and below by louder and more opinionated voices. A lifetime of access to a national superannuation scheme will deliver Xer retirees into a kind of promised land, largely free of bothersome baby boomers and totally disconnected from the mutterings of the infernal Millennials.

And here is the irony. The vast number of boomers in retirement forces a rethink about the benefits bestowed upon retirees. But when Xers get to retirement’s promised land, it’ll be time for politicians to loosen the purse strings. Boomer retirees do the heavy lifting; Xer retirees reap the rewards. Is this karma or is this luck? I suspect the answer depends on which generation you were born into.

The Australian

11 July 2019

John Durie – Senior Writer/Columnist

The federal government is committed to increasing the guaranteed superannuation level from 9.5 per cent to 12 per cent and arguments against the move continue but for the wrong reasons.

The Grattan Institute is leading the charge. It concedes that its modelling will produce the outcome it wants, based on the inputs that, at the right levels, support its view that superannuation robs workers’ wages.

The facts are somewhat different when the system is measured from a more holistic economic view and looking at people’s income in both work and retirement.

The think tank acknowledges its work is based on assumptions, which could be questioned.

Next year, Treasury is due to hold its next intergenerational review, which every five years looks at the sustainability of present policies, and using its MARIA model will map out long-term pension needs.

This, too, should provide some context for the coming changes.

Still, Grattan’s latest missive met with the expected torrent of arguably self-interested abuse from the superannuation industry, which was so loud in its protest against the claim that super robs people of wages that it almost invites suspicion.

The reality is when the system started in the late 1980s and early 1990s, one aim was to provide retirement income and another was to offset inflationary wages.

Such a claim can hardly be supported today.

Another reality is that national savings and retirement income have not been studied in depth since Vince Fitzgerald’s report in 1993, which is why it makes sense to look at the issue again before the contribution rate rises and after some obvious low-hanging fruit in the industry is cleaned up.

The Productivity Commission report was centred on the ­efficiency and effectiveness of superannuation, not incomes policy.

The Productivity Commission comes at the issue from a different view, arguing that increasing the superannuation guarantee may have an impact on employment levels, because a boss faced with high costs won’t employ someone.

The impact of the minimum wage on employment was addressed in its 2015 workplace relations report.

That is why it wants the government to have a look at the issue as part of its inquiry into retirement income.

It doesn’t agree with the Grattan view on super robbing people of wages, but is not sure about the impact on employment, a debate that obviously extends to the minimum wage.

The low-hanging fruit being acted on includes closing so-called zombie funds, which are multiple accounts held by people moving jobs but costing them collectively something like $2.7 billion in fees.

There is the default debate that links wages awards to superannuation, which should be cut and the issue is just how.

One version being kicked around Canberra is an extension of the PC’s best-in-class 10 funds from which employers can choose to including 20 funds but rotating five of them each year as a natural selection process.

The governance issue is overblown, but in theory there is no reason to keep bad governance alive just because some super funds are performing well right now.

Like its sometimes banking ­industry parents, the superannuation managers have not complained about this windfall.

Another issue is default fund portability, which is what to do with money contributed as you change funds.

One often forgotten answer is member choice, which means any worker can choose whichever fund they like.

There are allegedly some award defaults that cannot be transportable, which is obviously dumb.

The contribution rate is scheduled to increase by 0.5 per cent a year from 2021, taking it from 9.5 per up to a maximum 12 per cent in 2025.

This means there is plenty of time to decide the level of increases and make the appropriate reforms ahead of the present legislated timetable.

The Grattan report was conflicting because not so long ago it was arguing that the increase in the guaranteed rate would not have an impact on pensions. Now it is saying an increased rate means less pension.

This, of course, is what industry consultants Rice Warner and others are arguing, saying it’s actually good for the overall budget and economy. People save more through super than they do outside the system because the money is managed better.

It argues that, over time, any losses in income tax are more than offset by the tax collected long-term from super and the extra savings are spent in retirement while also saving pension payments.

But the debate is a sensitive one, as the last election showed, with a strong vote against the Labor Party’s franked income tax policies.

NAB has added more grist for the mill yesterday with its updated economic forecasts showing this year’s tax cuts will add 0.1 per cent to GDP growth, as opposed to the RBA rate cut, which will add 0.8 per cent to 2.8 per cent.

This puts the government’s arguments about enough fiscal stimulus into a new light, because it basically says the tax cuts will have no real impact on the economy, but the much-maligned interest rate cuts will.

For the record, NAB is tipping 1.7 per cent average growth this calendar year, increasing to 2.3 per cent next year.

In contrast, the RBA has the economy growing by 2 per cent this year and by 2.8 per cent for the rest of our natural lives.

On the other side, the age pension costs the economy about 2.6 per cent, which is relatively low by world standards. But if the super increase was scrapped, the increase in the cost of the pension, to about 4.6 per cent, would be meaningful. In an ageing economy, that is a big hit.

Tech giants to testify

Representatives of four tech ­giants will appear before a US congressional antitrust committee as part of a review into their market power and impact on private lives.

The review comes as Josh Frydenberg prepares to release the Australian Competition & Consumer Commission report into the power of platforms, which could be as soon as next week.

The Treasurer has yet to decide whether to release the report of its inquiry into Google, Facebook and Australian news and advertising with a formal government response.

The Wall Street Journal reports the US House antitrust committee has summoned representatives from Google, Facebook, Apple and Amazon as part of a review into “online platforms and market power”.

The hearing comes ahead of a major debate in Washington about whether to limit the influence of tech giants over Americans’ lives, and how. Australia is in some respects ahead of the US, with the ACCC having studied the issue for 18 months, including its impact on media.

The issue is not restricted to the Western world, with the China Skinny newsletter reporting a big slump in the appeal of tech giant Baidu, due to concerns over the way it operates. Chinese authorities are also cracking down on practices that Google and others have faced in the West, including directing ­advertisements from its own pop-ups.

Google is banned from operating its search unit in China.

The report said digital ad spending in China is forecast to grow 22 per cent this year.

While Baidu’s share is shrinking, Alibaba’s ad revenue is forecast to be $US27.3bn ($39.4bn) — 63 per cent greater than total ad spending on TV. According to eMarketer, digital ad spending is expected to account for 69.5 per cent of total media ad spend this year, and Alibaba’s digital advertising revenue will be more than double that of Baidu’s.

China Skinny reports Baidu’s market share has fallen from 86 per cent in August 2015 to 64 per cent in May this year. Baidu reported its first net loss in the first quarter.

The Australian

3 June 2019

Michael Roddan – Reporter

The age pension will be the “primary source” of income for most Australians if the government ditches plans to force workers to hive off more of their wages into superannuation, according to research from the nation’s top retirement income expert.

Michael Rice, chief executive of actuarial firm Rice Warner, will today present a paper to the Actuaries Institute annual summit in Sydney urging the government not to derail the planned increase in the super guarantee from 9.5 to 12 per cent.

The paper, prepared by Mr Rice, Australia’s foremost actuary, and Rice Warner head of superannuation Nathan Bonarius, will be launched as the government prepares to build a case to potentially scrap the scheduled increase in the guarantee rate with a wide-ranging review of the adequacy of the $2.7 trillion super system, as recommended by the Productivity Commission.

An inquiry will also focus on generous tax concessions built into the system, which are projected to cost the federal budget more in foregone revenue than the system saves in age pension outlays until at least 2070.

There has already been fierce resistance from the funds management sector and the ACTU, which have been campaigning for a rate of at least 15 per cent.

Josh Frydenberg says the government has “no plans” to freeze the rate, while Labor has been vocal about any attempt to stop the planned increase in the amount of money Australians are forced to put away until retirement.

“If the SG was left at the current 9.5 per cent the age pension, rather than the SG, would be the primary source of income for most Australians,” the Rice Warner paper said. “An SG below 10 per cent would not be an optimal solution.”

According to analysis of different contribution rates, Mr Rice said a rate of between 10 and 15 per cent would provide a standard of living in retirement that was adequate “for most while not being excessively generous to too many”.

However, a higher rate would need to be paired with lowering some of the tax concessions for wealthier Australians.

Under their scenario, about 15 to 20 per cent of the population would be supported by welfare and social security while between 35 and 40 per cent would have enough savings to allow them to partly supplement their income with the age pension until later in life, when they would become more reliant on the government payment.

Wealthier retirees, accounting for between 40 and 50 per cent of the population, should be self-sufficient, Rice Warner said.

“An SG below 10 per cent would result in median income earners relying on the age pension for most of their retirement income,” the paper said.

“While this would provide a comfortable living standard for middle-income Australians, it’s not a desirable result if we want people to be self sufficient in retirement. Further, many people living on a full age pension (particularly renters) are living in poverty, indicating the age pension by itself is not enough.”

The Grattan Institute has found that, by the time it is fully implemented in 2025-26, a 12 per cent super guarantee would strip up to $20 billion a year from workers’ wages, or nearly 1 per cent of GDP.

The think tank has argued a higher super rate would mostly benefit wealthier Australians, punish poorer workers and cost the budget an extra $2bn a year in tax concessions.

Michael Roddan – Reporter

Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.

Australian Financial Review

30 May 2019

Martin Fahy

Australians want to have a high standard of living in retirement, and they are prepared to pay for it via a 12 per cent super guarantee.

The Grattan Institute is making the same mistake unsuccessful pundits made with respect to the federal election, by making assumptions about what Australians want.

Grattan’s modelling of our retirement is selling Australia short. More specifically, it is using misleading fiscal projections and costings to decide public policy rather than listening to people.

Based on a flawed interpretation of the data, its modelling envisages an austere future that stymies aspiration and refuses to redefine retirement to meet the changing expectations of Baby Boomers and working Australians.

Superannuation is about lifting living standards in retirement and it does this on a cost-effective basis.

We know that Australia beats most other countries when it comes to reducing the fiscal impact of the age pension. Even when tax concessions for superannuation are factored in, it is well below the current OECD average and will be even more affordable by 2050. We currently spend 2.6 per cent of GDP on the age pension, down from 4 per cent in 2015 and significantly below the OECD average of 8.9 per cent. We spend less than Canada, Germany and the UK. The only countries that have a lower fiscal burden are Mexico and Korea.

We need to recognise that the Grattan definition is not what Australians aspire to. We know that Australians would rather their retirement be substantially self-sufficient and reserve the full age pension for those who need it most.

Retirement is the new chapter in the emerging narrative of Australian life: 30 or more years of retirement, punctuated by the joys of travel, children and grandchildren, as well as adequate aged care and health care.

We cannot think of retirement in binary terms. The reality is people will continue to work on a flexible basis as they move into their later years, in order to stay healthy and productive.

Australians have been shown to be remarkably responsible about saving for retirement and are willing to delay gratification to achieve this. In fact, a new ASFA survey released today conducted by CoreData, found 90 per cent of people supported compulsory superannuation and 80 per cent supported lifting the Superannuation Guarantee to 12 per cent from its current 9.5 per cent of wages.

Further, the survey found that 80 per cent of people would like to be able to spend at least the amount defined in ASFA’s comfortable Retirement Standard for home owners. That’s $61,061 per year for a couple, and $43,255 per year for a single person. In fact, nearly 40 per cent want to be in a financial position to spend even more than that.

The Household, Income and Labour Dynamics in Australia Survey has also investigated retirement expectations. It found that the view of people aged 45 years and over of what they need for retirement aligns closely with ASFA’s comfortable Retirement Standard.

With increased longevity, people look forward to a rewarding retirement, with the ability to choose the right balance of work, community and recreation to enjoy a full and active life. And they’re happy to pay for it.

Increasing the super guarantee to 12 per cent is a way of ensuring the best future for all Australians. Refusing to move to 12 per cent condemns nearly 70 per cent of Australians to dependence on the age pension during retirement. For people to properly prepare for the future, they need to be able to plan with certainty. For government, that means resisting the temptation to constantly tinker with superannuation settings.

The election result has clearly shown that Australians aspire to a better retirement than their grandparents or their parents. They don’t want to be a burden to the state, or their children, and they take pride in their financial independence. The changes that were made to the age pension in 2016 have made the system sustainable from a fiscal point of view and the time is right to move to a 12 per cent super guarantee now.

Superannuation means we’re not mortgaging our kids’ futures with ever-increasing age pension costs. Compulsory super means that our retirement income system is affordable for both individuals and future governments.

We cannot allow the story of Australian retirement to be the Dickensian misery that the Grattan Institute would foist upon us. It should instead be a vision for Australia’s bold and prosperous future.

Dr Martin Fahy is chief executive of the Association of Superannuation Funds of Australia.

The Australian

28 May 2019

Ticky Fullerton

$3.8 billion. That is the latest lump of retiree savings that AustralianSuper has awarded to IFM Investors to look after and grow. How good is industry super!

In the post-Hayne, post-Fox- and-the-Hen-House era of ­nationwide cynicism towards financial services, the profit for members sector is luring literally billions of dollars across from the retail funds.

IFM Investors is itself owned by the industry funds and the latest mandate takes its funds under management to a cool $130bn.

IFM’s chief Brett Himbury is a type for the times, low key with the pitch perfect message of workers’ savings driving investments for the benefit of the people: Main Street, not Wall Street money, driving impressive returns, much of it from infrastructure.

“Often understated, but motivation is a critical ingredient in driving superior net returns,” Himbury explains.

“If you are motivated solely by the returns to investors and not confused or distracted by any other motive, that has to help.

“Then it’s about your asset allocation, then it’s about your manager selection and then it’s about your fees, and so those funds that have performed superior have got a terrific unrelenting motivation on member returns.

“They have had an asset allocation which has accessed, among other things, the illiquidity premium in unlisted markets. They have been really focused on a smaller number of relationships so they can use their scale to drive fees down.”

Worrying for retail active managers is that increasingly industry funds are choosing to bring investment management in-house.

AustralianSuper recently sacked three managers and their loss would seem to be IFM’s gain.

But this development is symptomatic of a much bigger political issue because with money brings power and influence.

Critics of industry super see two clear threats to business: the first is a push for broadscale wage hikes from within the boardroom driven by union activists like the ACTU who have already declared this to be their agenda; the second is that industry funds with so much money and a mandate to grow have major listed companies in their crosshairs to take private.

John Howard on election night called the result a vote to end class warfare pushed by Labor but, ironically, since the result there has been a concerted campaign from the right side of politics warning government of the risks of union-backed industry super spreading its wings and demanding those wings be clipped.

They see the Keating legacy of industry super now delivering huge and unrepresentative union power right into the boardrooms of ASX companies. Class warfare is shifting to the super sector.

Reaffirmed Treasurer John Frydenberg has already committed to a review of super, and we can all expect a good stoush on whether the Productivity Commission’s recommendations on single default super for new employees and a top-10 best in show are carried.

Himbury says he simply wants political and business leaders to get on board. “It would be lovely if governments and companies and chairmen absolutely scrutinise the challenges, but really better understood us and, in so doing, looked at the opportunity as well as the risks of embracing IFM, the industry funds sector.

“Because there is a magnificent opportunity for members, for participants and for the country.”

Himbury promises to be active, not activist, on a register. He proffers a now familiar line that pressure for environment, social and governance changes are not just good for society, but good for the enterprise long term and hence good for long-term returns.

Whether this argument also extends to pressure for wage hikes is one of those known unknowns, but like industry super leaders Heather Ridout and Greg Combet, Himbury does not see unions riding roughshod.

“Let me be clear — the industry super fund on the (shareholder) register is working for working people and that’s it. There’s the unions and the employers that sit on the boards of industry super funds,” Himbury says.

“There’s clearly a lot of discussion about the role of unions, but it is a dual representative model that has worked so well.

“Look, I acknowledge the debate and it’s not going to go away, but I would really love to try and evidence — and we can — how our form of capital has really helped enterprises improve their proposition to customers and drive up superior enterprise value, which has driven superior returns to our members. If we could shift that thinking that would be fantastic.”

There’s is a big leap of faith required from business that unions will not influence industry super to the detriment of a company’s growth and profitability.

Some see the dual representative model as far from balanced, with the typically middle-ranking employer representatives a pushover for unions, and as keen to entrench a current system that ain’t broke. Interesting then, that the new Morrison government is to reignite the battle for independent boards. The shock Morrison victory was a clear blow for industry fund leaders: the faces said it all. Himbury was flying back from the US as the result came through.

I put it to him that Labor’s controversial changes to franking credit policy would have benefited industry super with yet more funds pouring in from self-managed super.

“No and it hasn’t happened for a range of reasons, but I think the growth of the system, super all up and the growth of industry super will still be strong and continued because of the broader proposition that has otherwise delivered for working people. It’s a wonderful asset.

“We’ve got other assets that we dig out of the ground. How about mining, for want of a better word, the super pool? We, the industry funds sector and the super sector more broadly, whatever the government of the time, are really looking forward to a much more collaborative and co-operative relationship, so we can do some great things together.”

Well, perhaps Himbury would say that wouldn’t he, talk up collaboration, especially given the surprise turn of events in Canberra? One way or another, IFM needs asset growth and higher returns. Super savings in Australia have already reached 140 per cent of GDP.

“Growth in the country and around the world is coming off and we’ve got to look at productivity measures to sustain and improve the growth prospects, and again I think there’s an exciting opportunity for the private sector and the public sector to really look at how we might engender and sustain greater productivity growth.”

Yet this exciting opportunity Himbury talks about is the other contentious area for boards. AustralianSuper is reported to have plans to take at least one ASX listed company private a year, and given the well aired conflicts that emerged in both the failed Healthscope takeover and the successful Navitas play, does Himbury think boards should fear having industry super or IFM as a stakeholder on their register? “Absolutely not. I think they should question, and they should critique, but I would hope that they don’t fear. This is a large, growing pool of capital that would love to work with enterprises, respect the role of boards, respect the role of management, but provide a long term source of sustainable capital to enable them to invest in their business to grow the enterprise, to impact society, to improve the service to their customers and enhance the returns to members.

“I hope and believe that the more discerning companies and boards are clearly looking at some of the risks but opening up and embracing some of the opportunity to work with a different long-term form of capital that can help them.”

There you have it chaps, this won’t hurt a bit.

Ticky Fullerton is the Sky News Business Editor

The Australian

22 May 2019

Glenda Korporaal

The re-election of the Morrison government means people saving for their retirement can focus on what they need to do before June 30 instead of worrying how they might be hit by a slew of changes under a Shorten government.

In theory at least, the basic framework of superannuation as well as negative gearing, capital gains tax, the taxation of trusts, and dividend imputation — and even the tax-deductibility of accounting fees — is now protected from government intervention for the next three years.

“We now have some certainty in terms of government superannuation policy,” said Peter Burgess, the general manager technical services with AMP’s SuperConcepts.

“Now off the table are the Labor Party’s proposals to remove refundable franking credits which clearly would have impacted many SMSFs, reductions in contribution caps and other superannuation concessions.”

If Labor had been elected, the abolition of cash refunds for franking credits, which would have kicked in from July 1, would have made some savers think twice about investing in Australian shares, particularly those with self-managed super funds. It could have encouraged more ordinary Australians saving for their retirement to take the riskier path of ­investing in offshore shares.

Uncertainty about the treatment of super under Labor could have discouraged people with SMSFs from putting in extra post-tax dollars into their super before June 30. (Some 1.2 million Australians now have SMSFs in both ­accumulation and pension mode with total assets of $726 billion, a sizeable chunk of the $2.65 trillion in super as of December.)

But even for those without SMSFs, savers on lower incomes with blue-chip Australian shares would have worried about losing potential cash refunds once they moved into retirement.

Labor had decided to exempt people on the age pension from their proposed abolition of cash refunds for franking credits.

But the question is whether those in this situation actually knew of the distinction or, if they did, were prepared to believe it.

And if they did, they could have been encouraged to spend some of their savings to qualify for the age pension and still retain the potential for cash refunds from their franking credits after July 1.

Whichever way you cut it, Labor’s proposals were set to distort the system and generate concern that more tax hikes on savers and changes to the super system could be on the cards from a party focused on “taxing the rich”, including retirees.

A generation ago few ordinary Australians even had shares.

But now it is common for ordinary Australians heading to retirement to have a small portfolio of blue-chip shares including some such as Commonwealth Bank and Telstra held since their privatisations.

With its roots in the English class warfare mythology (which must be a mystery to a generation of aspirational new Australians from non-English backgrounds), the Labor campaign harked back to another era when ordinary Australians did not own shares.

Australian shares are the biggest single component of SMSFs which benefit from cash refunds once they move into retirement mode where their investments are tax-free. The fact is that the cash refunds from franking credits only benefit people whose tax rate is below the company tax rate of 30 per cent. People with marginal tax rates of 30 per cent or higher would never get franking credit tax refunds anyway.

Superannuation is not a big deal for the very rich and the poor rely largely on the age pension.

But the development of the compulsory super and the evolution of SMSFs created a new generation of middle-of-the-road Australians who had set their sights on managing their affairs for a self-funded retirement.

Constantly changing the goalposts to reduce the ability to contribute to super and reduce its attraction has already eroded some confidence in the system.

Labor was prepared to go another step further with its policies.

To be fair to Labor, the party decided that retirees and near-retirees with shares and those with SMSFs were easy targets, unable to organise themselves politically to oppose their proposed changes.

But they didn’t count on the well of concern in some circles about changes to super announced by the Turnbull government under Treasurer Scott Morrison before the 2016 election.

The Turnbull-Morrison government did a good job of portraying middle-income people wanting to put extra money into super as being greedy tax avoiders.

Anger at the tax changes, which included the imposition of the $1.6m cap on the amount which could be put into super in the tax-free pension mode, the end of the attraction of transition to retirement schemes and constantly lowering contribution caps — and the rhetoric surrounding the announcement — were all too easily dismissed. Indeed, if anyone knew the anger in some circles about the changes to super it would have been Morrison.

Some argue that anger almost cost Turnbull the 2016 election with otherwise Liberal voters not putting their hands in their pockets for donations or to help distributing how-to-vote cards and opting to make a protest vote for minor parties in the Senate.

Fast forward to this election and the Morrison government was all too willing to find itself back on the side of aspirational savers once Labor announced its policies. And having seen how easy it was for Morrison to change the rules on super a few years ago, there was a cohort of people like Geoff Wilson and Self Managed Super Fund Association chair Deborah Ralston who realised the need to lobby hard against the changes. Hopefully stability of the system can prevail and the results of the election will reduce the power of the Treasury to argue that super is an “easy nick” which can be targeted in the future for more tax revenue.

The Australian

7 May 2019

Judith Sloan – Contributing Economics Editor

When it comes to monumental policy failings of the Coalition’s period in government, a standout is superannuation.

The changes that were made to the regulation and taxation of superannuation, as well as the ones the Coalition failed to make, in aggregate deserve an F — a big, fat failure.

The Coalition has come close to destroying self-managed super­annuation while giving an epic leg-up to union-sponsored industry super funds. It has paved the way for these funds to dictate the types of companies that will be allowed to operate in this country and how they will operate. Low-income workers continue to be ripped off while genuine superannuation savers have been speared in the eye.

Superannuation now exists primarily for the benefit of the industry rather than the members. It’s been a debacle.

Notwithstanding the clear pledges made in 2015 by Scott Morrison as treasurer that a ­Coalition government would not make changes that would hurt members, the measures contained in the 2016 budget were a repudiation of this.

Without any grandfathering, a cap was set for tax-free super­annuation balances; lower limits were put in place for both concessional and non-concessional contributions; the contributions’ tax was lifted for some members; and other complex restrictions were put in place.

They were essentially the wishlist of the industry super funds. These funds had the ear of influential bureaucrats able to persuade the ill-informed, gullible Coalition economic ministers of these changes.

It has made superannuation a much less attractive retirement ­income option for medium to high-income earners as well as hitting retired superannuants. (Low-income earners will always rely on the age pension and were not ­affected by these budget changes.)

It was hardly surprising that there was such a severe reaction from the Coalition’s base, including some Liberal members. It was a blatant broken promise, yet this didn’t prevent the minister principally responsible for the changes, Kelly O’Dwyer, insisting she was proud of them.

Then again, she had described superannuation tax concessions as gifts from the government, not unlike Bill Shorten’s description of cash refunds for franking credits.

Having made these ill-considered changes — and note that the surge of revenue from superannuation taxes has not been forthcoming in part because they are so dependent on the state of the share market — there were needed reforms to protect low-income workers, particularly those with multiple accounts.

The government faffed around for the next three years, putting forward bills and then withdrawing bills. The key issues were the consolidation of multiple accounts, the enablement of single default accounts, limits on fees, making insurance opt-in for low-balance accounts, the governance of super funds to include independent trustees, and defining superannuation’s purpose.

The end result of this unedifying process was legislating the role of the Australian Taxation Office to merge inactive accounts, a useful if modest outcome. But the great bulk of the Coalition’s super reform agenda was not completed.

Superannuation is a particularly dud product for low-income earners with a number of jobs within a short period of time. They typically end up with multiple accounts and are charged fees and unwanted insurance by each. At 30 they find their overall super­annuation balances trivial.

The obvious answer is to insist that workers are enrolled in a single fund that follows them through their working life unless they choose to change. This was a recommendation of the final report of the banking royal commission. But no progress was made on this.

The final issue on which the Coalition failed was in relation to the legislated increases in the super contribution charge, increases simply impossible to justify. The present rate is 9.5 per cent, but according to the legislated schedule, this rate will increase to 10 per cent on July 1, 2021. The rate will ratchet up over the subsequent years to 12 per cent in 2025.

This is bad news for low-­income earners, particularly with low wages growth.

The Grattan Institute estimates that the increase will strip $20 billion from wages. For a 1 per cent boost in retirement incomes, workers will lose 2.5 per cent of their wages. Moreover, every half a percentage point increase in the super guarantee charge costs the federal budget about $2bn a year.

Unsurprisingly, the father of compulsory superannuation, Paul Keating, has taken exception to the Grattan Institute’s suggestion that the SGC should be frozen at 9.5 per cent. Having previously conceded that the SGC reflects itself in the form of lower wage rises, he thinks the world has changed so that employers will bear the burden of any increase.

Demonstrating that perhaps Keating’s understanding of economics always was shallow, he quotes misleading figures about wage and productivity growth (using arbitrary starting points and failing to understand the distinction between consumer and producer wages) to suggest that employers can absorb an increase in the SGC without having an impact on wages.

But just think this through: if employers are able to restrict productivity gains from flowing through to wages, how can it be the case that employers will voluntarily absorb the impost of a higher SGC? What Keating is saying is ­illogical.

The Coalition has made a complete hash of superannuation policy to the point that the system is a discredited policy when it comes to providing retirement incomes and lowering the dependence on the age pension. It is very bad for low-income earners and it is also very bad for many middle-income earners. For the very wealthy, it is irrelevant.

Things will be worse under Labor given its complete capture by the industry funds. The SGC increases will proceed, there will be more taxation on members, the elimination of cash refunds for franking credits will devastate self-managed superannuation and there will be no progress on the ­establishment of single default funds because the industry super funds don’t want it.

The industry super funds will become more dominant and influential, including by forcing companies to take into account non-commercial considerations under the heading environment, social and governance.

Just don’t forget, it was the ­Coalition started this ball rolling.