Category: Newspaper/Blog Articles/Hansard

Retirees warn of hit to their incomes worth tens of billions of dollars

13 June 2020

Sydney Morning Herald

Shane Wright – Senior economics correspondent for The Age and The Sydney Morning Herald.

Retirees are facing a massive hit to more than $100 billion worth of vital income streams as the coronavirus pandemic crushes their superannuation, personal savings and share dividends.

Older Australians say the retirement system is in crisis and leaving them financially vulnerable, forcing them to call on the Morrison government to consider changes in areas such as the age pension, deeming rates and access to the Commonwealth Seniors Health Card.

The Alliance for a Fairer Retirement System, representing millions of retirees and older investors, has written to key finance and welfare ministers urging reforms including to measures previously introduced to take pressure off the federal budget.

In the letter, obtained by The Sun-Herald and The Sunday Age, the alliance says the coronavirus pandemic has dramatically hit retirees dependent on investment income to such an extent it now put the nation’s economic recovery at risk.

“Retiree spending, and willingness to spend, will have critical impacts on the economy in any post-stimulus recovery phase,” the alliance said.

“However, under the current market conditions, there is a risk older Australians will further withdraw from the economy, slowing the recovery. Retirees are unlikely to have the confidence to spend if they continue to face significant impacts on their income.”

Retirees are facing a string of inter-related hits to their finances. Company dividends are being slashed by many listed firms in a development that JPMorgan estimates will cut income to investors by $68 billion in 2020.

Falling interest rates, while beneficial to those with mortgages, are leaving people dependent on their savings cash-strapped.

Interest rates on savings and term deposits continue to fall. In the past week, the average rate on a five-year term deposit edged down to a fresh record low of 1.09 per cent.

On a one-year term deposit, the average interest rate fell a quarter of a percentage point last week to a record low of 1.2 per cent.

Income from rental properties have also collapsed with many tenants unable to cover their rent.

The alliance said it all meant many retired Australians’ incomes were being stripped away by the impact of the coronavirus and the situation “could extend for years”.

The government has already reduced the deeming rates – the assumed rate of return made on investments that affects the pension income test – due to the fall in global interest rates caused by central banks trying to protect their economies from the pandemic.

But the alliance wants the government to go further, starting with another cut in the deeming rate.

It also wants an automatic revaluation of assets used by Centrelink to determine the pension accessibility for retirees, arguing the last revaluation was done at the peak of the share market before the start of the pandemic.

The alliance has also called for the government to re-think the taper rate changes it introduced in 2017 that helped save billions in pension payments. The alliance says those changes now mean that couples who may have almost $900,000 in assets are up to $1000 a month worse off in income compared to a couple with $450,000 in assets.

While people of retirement age are entitled to the Commonwealth Seniors Health Card if they have an income of less than $55,808, the alliance argues many self-funded retirees are unaware of their eligibility to the scheme. It wants all retirees to have access to the card and for the government to promote its availability.

The federal government is nearing the end of a review of the retirement income system, prompted by a Productivity Commission review of the superannuation sector, although its reporting date has been pushed back to July 24 due to the pandemic’s impact on agencies.

Superannuation sapped of $13.5bn, APRA reports

The Australian Business Review

9 June 2020

Gerard Cockburn – Business Reporter

Billions of dollars continue to be leached from Australian super funds as early withdrawal requests near two million.

The latest figures released by the Australian Prudential Regulation Authority show $13.5bn has been drained from the country’s near $3 trillion retirement pool, by members requesting hardship payments due to COVID-19.

As at May 31, 1.96 million Australians had lodged withdrawals requests with the Australian Taxation Office, for an average payment of $7473.

 

The regulator’s weekly statistics highlight that the scheme has still been paying out more than $1bn per week, following the initial $8bn rush to access funds in its first week of operation.

In the week ending May 31, $1.3bn was paid out to account holders, while the previous week had $1.6bn withdrawn. The week ending May 17, also experienced a $1.6bn.

The early release of super scheme was implemented by the federal government in April, as a support measure to assist Australians who have been affected by the economic downturn induced by the pandemic.

People that have become unemployed or experienced a reduction in working hours are able to access up to $10,000 this current financial year and the 2021 financial year.

Liberal Senator Jane Hume said the estimated total payment figure from the ATO stands at $16bn.

“The early release of super is projected in total to be only around 1 per cent of Australian superannuation assets,” Ms Hume said.

“While it’s confronting to see so many Australians in hardship, it’s been pleasing to see the money flowing to people who really need it.”

Ms Hume noted if the scheme was not implemented, people facing financial hardship would be forced into more expensive forms of financing such as credit card or personal loan debt.

Data from APRA showed 95 per cent of claims were being paid within five business days, while the median processing time is 3.3 days.

APRA said it is contacting funds which are not paying members in the recommended five business days turnaround period.

Members of major industry funds continue to make up the bulk of withdrawal requests, as a large proportion of members are employed in sectors that were significantly impacted during the shutdown.

AustralianSuper, Hostplus, Sunsuper, Rest and Cbus constitute $6.5bn of the total funds paid out to members.

AustralianSuper has paid out $1.8bn to 240,455 members, the largest of any fund. The average request from an AustralianSuper account holder is $7,473.

Sunsuper has received 206,899 withdrawal requests, already handing out $1.4bn to approximately 195,000 members.

Hospitality and event focused fund Hostplus dished out $1.3bn to more than 180,000 members, as at May 31.

Approximately 3 per cent of funds under management have been withdrawn from Hostplus.

$1.2bn has been paid out by retail workers industry fund Rest, while $764m has been sapped from Cbus.

Rest chief executive Vicki Doyle said the major fund is “well placed” to cope with the large outflow of funds, but noted ongoing uncertainty caused by COVID-19 will impact its long term investment capabilities.

“It’s important that a short term approach to the current crisis does not create a longer term crisis for Australia’s retirement savings,” Ms Doyle said.

“If members’ super is regularly called upon to provide short-term fiscal support to the economy, it changes the way we invest on behalf of our members.”

SMSFs suffer $70bn hit in virus shock

The Australian Business Review

27 May 2020

Gerard Cockburn – Business Reporter

Self-managed super funds suffered a $70bn hit from the market turmoil in the March quarter, putting further strain on the retirement savings of investors already battling a crash in interest rates and a rental freeze.

New figures released by financial regulator APRA outline the damage to superannuation with nearly $230bn sliced from to the nation’s super pool, putting the sector back 12 months in total assets under management.

Industry funds, which are generally more exposed to infrastructure, suffered a $54bn hit to asset values in the three months to the end of March, while retail super funds with their higher exposure to riskier assets such as shares were savaged with an $80bn drop in asset values.

But SMSF investors, who generally are exposed to property, shares and cash, suffered the worst hit since the global financial crisis with total assets falling by 9.4 per cent in the March quarter.

The global meltdown in markets triggered an aggressive policy response from central banks around the world, slashing already rock bottom interest rates to new lows.

APRA’s latest figures show the country’s $3 trillion superannuation industry contracted 7.7 per cent, with $227.8bn being lost over the March quarter.

The figures don’t capture the federal government’s early withdrawal of super scheme, which allows Australians to access up to $10,000 both this financial year and the next.

Industry funds are expected to see an additional outflow of funds into the June quarter.

National Senior Australia chief advocate Ian Henschke, said self-funded retirees were still coming to terms with the economic shocks sparked by COVID-19, with some members only just recovering from losses incurred during the global financial crisis.

“They (self-funded retirees) feel they are being forgotten and must simply accept this,” Mr Henschke said.

“They are not necessarily wealthy, but receive little or no assistance and despite the huge hit to their income are not eligible for the pension because their asset values have changed little so far.”

Mr Henschke noted some SMSF retirees were being forced to sell shares at low prices just to supplement foregone income — including relief on rental properties — further diminishing the size of their portfolios.

SMSF Association policy manager Franco Morelli said APRA’s figures were lower than expected within the industry, which had estimated the hit to the sector could see assets fall by as much as 30 per cent.

“The next quarter up to June will be interesting, as there is so much uncertainty,” Mr Morelli said.

However, he said the SMSF sector could react quicker to rebalance than other sectors. “We have a much larger cohort of individuals allocated to more liquid funds,” Mr Morelli said.

The halving of the pension drawdown rate by the federal government in March has helped self-funded retirees to top up their pension.

Total superannuation assets at the end of the March quarter stood at $2.73 trillion — nearly twice the nation’s economic output.

Public sector funds were the relative best performers during the March quarter with total assets falling just under $10bn to $523.6bn.

Industry funds make up the single biggest sector with $717bn under management, while the collective assets held by SMSFs fell back to $675.6bn. Retail funds totalled $558bn at the end of March.

Superannuation contributions rose 6.9 per cent to $121.1bn compared to the same quarter in the previous year, while the total paid in benefits was $85.8bn, a rise of 14.5 per cent.

Net inflow of funds compared to March last year increased by 27.7 per cent to $45.4bn.

Self-managed Independent Superannuation Funds Association managing director Michael Lorimer said the impacts to financial markets were experienced at the tail end of the quarter. He said APRA’s next round of data would likely show some signs of recovery, as market performance had started to rebound.

Early release regime cracks open the superannuation system

The Australian Business Review

22 May 2020

James Kirby – Wealth Editor

The controversial decision to allow early access to superannuation has lit a fuse. Suddenly everything is on the table. Is the system actually successful? Would investors be better off putting their money elsewhere?

It has also opened doors that were previously shut for the government. Having broken the taboo of “upsetting the super system”, more changes will come. As actuary Michael Rice puts it: “We now have a huge debt and the government will be looking to pay it off, so superannuation will not be as sacred as it was in the past.”

In effect, the super system has been cracked open — a target for everyone on the left and right of public policy but perhaps most squarely in the sights of the Australian Taxation Office.

With $15bn already flowing out of super, there has been consternation around younger people taking out everything they have saved — roughly 100,000 have drained their accounts.

Under the terms of the scheme, anyone of any age can take out a total of $20,000 over the next two financial years.

But perhaps the unexpected dimension of this story so far is the realisation that so few people understand that super is their own money kept locked away in a tax-protected environment until retirement.

In recent weeks I have been running a free Q&A Facebook webcast and it’s alarming that so many people know so little about how the system works. Despite a quarter of a century of mandatory contributions, ­people who are well versed in property or share investing still don’t realise that super is not an investment choice but a tax framework in which you can make investment choices.

There are highly resilient myths about self-managed super funds: speculation that people “need their super” to access property developments or at worst that they can somehow have a new home through super. (In general, you don’t “need” super for property, you need access to capital. You can’t use your super for your home — the family home is already a tax shelter being exempt as a primary residence from capital gains tax.)

But the questions around early super release schemes are the most intriguing, largely because the subject is brand new.

One recurring question is: “Can you take the money out of super and buy your first home?” The answer here is yes — there are no rules on what you do with the funds. That’s why there have been reports of people using newly released super money for online gambling.

In principle I’ve been against the early release of super because younger people will pay a huge price in the long run for missing out on the compounding effect of investing over their working life.

But now that the early release proposal has become reality, there have been situations where I am forced to consider the issue more deeply.

Until this crisis broke, the biggest issue for younger people is not so much paying mortgages (where interest rates are at historic lows) but getting the deposit for homes.

In some cases a person may well be better off getting $20,000 to complete a deposit on their first home rather than having that money in super. There are benefits in home ownership that spread far wider than we can immediately calculate just as there are some super funds that perform less successfully than others.

Dilemmas in the super system are rarely simple to solve. No wonder policy specialists are now scouring the system for more potential opportunities.

At Pitcher Partners, Brad Twentyman has promoted a proposal that the 9.5 per cent super guarantee contribution could be cut in half during these difficult times so that all workers have more money to spend.

If this proposal was successful while the early release scheme is running, we would have money literally draining out of the front and back end of the super system: is that the best way forward? The debate on these issues will intensify ahead of the release of the Retirement Income Review in July.

Before the government trawls the system for new tax revenue it urgently needs two changes. First, we need a huge improvement in education around the system — it should be taught in schools and in every workplace.

Second, the system needs incentives. There is a black spot for super savings between $400,000 and $700,000 — on a week to week income basis many people in this zone may be better off on a full government pension. This is the biggest failing in the system, it has to be re-engineered.

Retirees facing financial as well as health risks in coronavirus pandemic

The Australian

21 May 2020

Peter Van Onselen

Spare a thought for self-funded retirees in these difficult times. Not only are they in the age bracket most at risk from the virus, but their financial wellbeing in retirement is being put at substantial risk.

The collapse in the stock market, including among most blue chip stocks, is just the start of their financial pain. These big businesses, even if they survive, aren’t likely to pay out the dividends they once did for years to come, if ever.

The financial plans of self-funded retirees are built around dividend projections which therefore no longer apply, and with interest rates so low its not as though they can simply transfer their saving into cash accounts and do any better.

The RBA cash rate is at a record low.

The difficulties self-funded retirees face in low interest rate environments is the flip side to the benefits those of us with homes loans get from lower rates for borrowing.

Lower interest rates has become a way of life, but the prospects of rates surging north again anytime soon seems unlikely. Even if it does happen, it will only be in conjunction with inflation, which erodes spending power at the same time.

On the policy front, there isn’t much there for self-funded retirees to cushion the blow. While Jobseeker and JobKeeper are doling out tens of billions of taxpayers dollars to keep working age Australians in jobs or at least above the poverty line, self-funded retirees are getting no such support.

Even pensioners have received a boost to their pensions to help them get through these tough times. But the self-funded retirees who voted en-masse against Bill Shorten and his franking credits policy have become the forgotten people among Coalition supporters.

Their loyalty hasn’t translated into being looked after now. And because Labor is still licking its wounds from last year’s May election defeat, it hasn’t exactly been inclined to highlight their plight and put pressure on the government to do something to help this large voting cohort.

Rather, Labor has focused its attention on the plight of many casuals who are missing out on JobKeeper, and the university sector which isn’t eligible for the payments. Or childcare users who would benefit from free childcare continuing for longer. Or workers for foreign companies ineligible for JobKeeper. Or indeed anyone who might benefit from Newstart not returning to the low levels it was pegged at previously.

What about self-funded retirees? They truly are the forgotten people in this crisis. Taken for granted by a government that would not have won the last election had it not been for their support. Forgotten by an opposition that has written them off politically.

While I have long been critical of the unsustainable tax breaks for many older Australians, especially those with very large savings, the self-funded retirees who only just miss out on a part pension and concession card benefits are the ones caught in the middle right now.

As Ian Henschke from National Seniors has pointed out, some self-funded retirees — because of this crisis — are now drawing on an annual payout from their investments lower than the annual pension. To survive they would need to draw down their savings right at a time when their value has been halved. He wants to see discussion about legislating a universal pension in the wake of this crisis to ensure that can’t happen.

Whether that is a long-term solution or not is debatable — indeed whether it is fiscally viable is highly debatable. But there is little doubt this cohort of senior Australians deserves more than the cold shoulder.

Especially from a Coalition government.

Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.

Superannuation funds bounce back in April

The Australian Business Review

18 May 2020

Cliona O’Dowd – Journalist

Super funds paid out $9bn in early release payments in the three weeks to May 10, with just five industry funds bearing the brunt of the pain, shelling out $4.3bn to members battling through the coronavirus crisis, according to data released by the Australian Prudential Regulation Authority.

Funds across the sector received 1.34 million applications for early super access between April 20, when the scheme opened, and May 10, with 1.19 million of those paid out by the same date, the regulator announced on Monday.

Industry funds have been hardest hit by the government scheme, with AustralianSuper already leaping past the $1bn payout, and Hostplus, Sunsuper and REST not far behind.

As at May 10, AustralianSuper had paid out $1.14bn to members. This compares with the $909m Hostplus had forked out and the $932m and $812m paid by Sunsuper and REST. CBUS rounded out the top five, shelling out $474m to members over the three-week period.

Sunsuper was among a handful of funds that paid out all member applications within the five-day time frame, while the other major industry funds paid more than 95 per cent of requests within the APRA-imposed deadline.

While the biggest funds have to date coped with the deluge of withdrawal requests, a number of smaller funds have been slow with their payouts.

Among the worst offenders has been Australian Catholic Superannuation and Retirement, which paid out funds within the five business day time frame just 15 per cent of the time and up to nine business days just 32.6 per cent of the time.

Intrust Super Fund, Retirement Benefits Fund, BT’s Advance Retirement Suite have also been dragging their heels, as has Qantas Super, which has so far paid out funds in the five business days just 51.5 per cent of the time.

Across the industry, the average payment made was $7546. Funds are taking on average 3.3 business days to pay members, while 94 per cent of applications are being paid within the expected five-day time frame, APRA said.

The update from the regulator comes after research house Chant West revealed that super fund performance bounced back in April as sharemarkets around the globe rallied despite the threat of a worldwide recession due to the coronavirus pandemic. It follows a dismal March performance that saw funds suffer their worst monthly returns in close to 30 years.

The median growth fund, which typically is 60 to 80 per cent invested in growth assets, bounced back 3.1 per cent in April, according to the latest date from super research house Chant West.

But the gain wasn’t enough to fully offset the 12 per cent battering funds took in February and March, leaving the return for the ten months of the financial year to date in the red at -3.3 per cent.

“April saw share markets rebound as investors grew more optimistic around coronavirus curves flattening around the world, the expectations of lockdowns easing and economies starting to reopen, partially at least,” Chant West senior investment research manager Mano Mohankumar said.

“While this provided some relief after the pounding markets took in the previous two months, it’s still far too early to tell what the full impact of COVID-19 will be on individual companies, industries and the global economy.

While the median growth fund gained just over 3 per cent in the month, the median balanced option returned 2.3 per cent and high growth returned 3.9 per cent.

Super members should brace for further volatility ahead, Mr Mohankumar warned, as he cautioned against members switching to less risky options without taking financial advice first.

“Unfortunately, super funds have already seen some members hurt themselves by locking in losses in March by switching to a more conservative option perhaps with the intention of switching back later as markets rallied. This is the very thing we caution against,” he said.

“If you take panic action after share markets have already fallen you only convert paper losses into real ones. Not only that, you also risk missing out when markets rebound as they will at some point. Being out of the market during share market volatility, even for a few key days, can make a significant difference to your returns.”

The Australian sharemarket bounced 9 per cent in the month, while international shares were up 10.6 per cent in hedged terms. Factoring in the rise in the Australian dollar over the month, international shares gained 3.6 per cent, unhedged.

Superannuation drawn into political crossfire in coronavirus crisis

The Australian

19 April 2020

John Durie

Scott Morrison may well get his wish if private equity, backed by industry superannuation fund money, does bid for Virgin Australia, but not the way the Prime Minister intended, which has once again politicised super.

For the super sector, that is the problem of being the creation of politicians that has meant being subject to their often hypocritical whims to suit the purpose of the day. A few weeks ago the government thought it was clever opening the way for people to withdraw money early from their superannuation.

Josh Frydenberg noted “it’s your money” so you can get ­access to it if you are caught in a ­financial mess because of the government-imposed shutdown.

When the industry funds said they could face losses of up to $50bn in cash withdrawals, the Minister for Superannuation, Jane Hume, saw it as another leg in the push to consolidate superannuation funds.

Hume argued that some funds like Hostplus and REST were too reliant on the hospitality and retail sectors and, like others, had a concentrated pool from which to raise funds because industry fund contributions were often tied to industry industrial relations awards.

Diversification, she said, should be the rule in membership and investment strategy.

Then Morrison came up with the bright idea that specialist industry superannuation funds had plenty of cash so someone like the TWU, with a heavy dose of Virgin Australia workers, should be diverting funds into the airline.

The three pronouncements from the relevant ministers underlines the political bias against industry funds, breathtaking hypocrisy and, more importantly, a dangerous ignorance about how funds manage their money.

By law, managers must invest for the long term to boost member returns and this fiduciary duty would by definition prevent a fund making a national interest investment because that would suit the prime minister of the day.

When the government opened the door to early withdrawal of funds last month it not only risked members losing up to $84,0000 in lifetime savings but risked the funds losing the ability to invest to support corporate Australia.

Somehow all of this was forgotten by Morrison.

That said, it would not surprise if an industry fund like AustralianSuper provided capital to support a private equity bid for Virgin.

AustralianSuper has a stated policy of owning bigger stakes in fewer companies, which is why it backed BGH’s successful bid for Navitas and unsuccessful bid for Healthscope.

AustralianSuper investment chief Mark Delaney is keen to use the fund’s equity investments to support Australian companies with long-term capital.

This would be most company boards’ dream come true.

It would help if Canberra maintained a more consistent approach to superannuation even amid these extraordinary times.

Why SMSFs need government help too

Australian Financial Review

13 April 2020

Elio D’Amato

There has been an unprecedented spending initiative by the government to prop up the economy and its citizens through a virtual shutdown for the next six to 12 months. But although self-managed superannuation funds (SMSFs) will probably be hit hard through this crisis, we’re not hearing much about help for them.

An SMSF retiree’s asset balance is vital because it is from this that future income is generated to help fund living costs and expenses. Periods such as this can cause great anxiety while doing irreparable damage to future income streams as asset values plummet, particularly if there is a prolonged period of volatility.

Compounding the stress is that many retirees were lured to the sharemarket because there was nowhere else to generate a reliable income stream. But in the recent wave of dividend deferrals and cancellations, dividend-income expectations are being cut significantly.

The Australian Prudential Regulation Authority (APRA) delivered a regulatory mandate to cut dividends as it cautioned banks and insurance companies on paying out too much in dividends. This relief lever was seized quickly by the Bank of Queensland at the time of its half-year result.

Unlike share prices that are subject to sentiment, dividends paid by a company tend to reflect the economic reality a business faces. With declines in profitability and free cash flow expected for the coming six to 12 months, the income reality from the sharemarket for retirees on a risk-adjusted basis is bleak.

The outlook for other asset classes in which SMSFs traditionally invest doesn’t look much better. The property market is at risk of seeing its income dry up, leaving many retirees in the lurch. With the rising call for government-mandated rent deferrals, the SMSF property investor who previously received 4 per cent rental returns is likely to be affected significantly.

Further, investors in property trusts, exchange-traded funds (ETFs) and listed and unlisted funds could face a freeze on their distributions should conditions and asset values deteriorate further.

And let’s not forget those who sought the safety of cash and term deposits in the recent turmoil – $1 million held in cash-like products returns an absolute maximum $15,000 a year, well below the regular JobSeeker payment. With interest rates to remain lower for much longer, there is little in the way of hope.

Huge fall in earnings

Should economic and investment conditions worsen, an SMSF retiree could potentially see earnings fall by well over 60 per cent. For SMSFs on the margin, this could fall well below the age pension and JobSeeker payment level.

According to the SMSF Association, there are 560,000 SMSFs comprised of 1.1 million members. The Australian Taxation Office (ATO), in its last published SMSF quarterly statistical report for the three months ended September 30, showed that 37.1 per cent of all SMSF members were of retirement age, which equates to more than 400,000 individuals.

The federal government’s decision to reduce the minimum SMSF pension withdrawal requirement by 50 per cent is important – particularly as this amount is calculated based on the asset value at the start of the financial year.

But another part of the government’s support package was to drop the deeming rate used in the income test to determine qualification for financial support such as the age pension. Without going into the technicalities, the decrease in deeming rate means a reduction in accessible income that would result in those who receive a part pension being able to receive more and, in theory, potentially help some SMSF members on the margin to be eligible for at least a part pension.

The statistics, however, show that for SMSFs, this will probably not be the case. In the ATO report, while there is no breakdown as to whether the SMSFs are in accumulation or pension phase, the median average balance of all SMSFs per member was $408,237. The reality is that older SMSF members tend to have larger balances and therefore would most likely be disqualified from receiving the age pension as they fail the assets test.

Before this correction, an SMSF retiree couple with $1.2 million between them, who owned their own home and earned an income of 5 per cent on a balanced portfolio of assets, would derive in total $60,000 income for the year ($2307 a fortnight). A 60 per cent drop in future income results in $923 a fortnight, which is more than $370, or 30 per cent, less than the age pension.

Of course, where asset values do fall below the upper asset threshold ($869,500 in the case of a married couple who own their own home), they will qualify for a part pension under the current rules. But it is important to note that asset values in property and unlisted trusts often lag, with revaluations conducted sparingly.

Although the income hit of suspended distributions will probably be felt early, any asset revalue relief from non-shares assets may be some time in coming – supporting the idea of immediate income support in the near term.

SMSF retirees who fail the assets test will have no option but to dip into their savings, rendering the government drop in the minimum pension withdrawal level totally useless. This drawdown will result in a lower asset base for future income generation, making it more difficult for them to be self-sustaining and increasing the future burden on government.

Short-term assistance

For the same duration that JobSeeker, JobKeeper and other spending initiatives are implemented, a possible aid package to SMSF retirees might include the assets test being waived and a regular ongoing payment equal to a minimum of 50 per cent of the current full age pension.

Although this in a few cases may still fall short of past income levels, it would provide urgent short-term income relief. It would reduce the need for excess drawdowns on assets when prices are challenged and/or liquidity dries up.

Further, for those who under normal circumstances pass the assets test, but receive a part pension due to other income generation, for the same period they could automatically be eligible for the full pension to compensate for loss of income.

The main intention would be to deliver some basic support to the large number of forgotten SMSF members whose income even when investments were stable was inadequate.

David Murray says super is busted

Australian Financial Review

2 April 2020

Tony Boyd

Five years after he handed the federal government the final report of the Financial System Inquiry David Murray is convinced the country’s superannuation system is broken.

Murray, who was chief executive of the Commonwealth Bank of Australia for 13 years and is now chairman of wealth manager AMP, says it is actually misleading to call it a retirement income system.

“Ours is not a superannuation system, it’s a tax advantaged savings system,” he says.

Murray says the fact that thousands of Australians have, in recent weeks, rushed to switch out of balanced funds into cash after the stockmarket had fallen by about 38 per cent was an indication the system was not fit for purpose.

He says Australia should mandate the payment of a pension to super fund members upon retirement. This would make the job of super fund trustees easier because they could match long term assets with long term liabilities.

Murray says the final report of the FSI delivered to the federal government in November 2014 recognised the impossibility of politicians agreeing to Australia introducing mandated pension payments upon retirement.

As a simpler and more politically acceptable option, the FSI recommended the introduction of Comprehensive Income Products for Retirement (CIPRs).

Annuity-style pension products

“We made recommendations about an annuity style product called CIPRs, which would try and encourage people through self-selection to focus more on annuity style pension products in retirement,” he says.

“The issues that we discussed around the CIPRs started with the discussion about what does a really good system look like. And apart from having a retirement income objective for the system, a really good system would only pay pensions in the form of annuities. That is a pension should provide a pension.

“That would create a much more predictable environment for trustees to manage risk and asset allocation.

“The reason we didn’t recommend that pensions be mandated was that we’re in a country that if it had been promoted it would have been easily politically defeated. So, we fell back on the simpler recommendation.”

Of course, the federal government has dragged the chain on implementing a comprehensive tax efficient framework for CIPRs. It is not the only area where the FSI recommendations have been half heartedly implemented or ignored.

Murray is disappointed that legislation defining the single objective of super as being for retirement income has not passed through parliament. He thinks independent trustee directors should be on industry fund super boards. But the government has given up on this fight after repeatedly failing to get such measures through the Senate.

The single most important recommendation of the FSI was in relation to the need for the big four banks to be “unquestionably strong”. This was implemented by the Australian Prudential Regulation Authority.

As a result of this measure the big four reduced their leverage and implemented common equity tier 1 capital which Commonwealth Bank of Australia CEO Matt Comyn this week said was the strongest in the world.

Murray says “unquestionably strong” has “worked nicely” but he is concerned that the super system, which should be a force for stability in times of crisis, is in need of emergency liquidity from the Reserve Bank of Australia.

Funds don’t need RBA support

The switching out of growth assets into cash over the past two weeks combined with the federal government’s decision to allow emergency access to $20,000 in super savings has prompted several leading industry super funds to request RBA support.

Superannuation minister Jane Hume has rejected the idea and suggested any fund unable to pay its members must have poor governance of its investment strategy.

Murray, too, is damning in his commentary of any fund that is need of liquidity. He says the root of the problem is funds advertising on the basis of having a higher rate of return

“The discussion about switching does show the flaw in this system where you can keep changing your allocations and it shows some of the systemic risks that arise,” he says.

“I think the more serious issue is that where superannuation is advertised and sold on the basis only of rate of return, then trustees will make assumptions and seek out the highest rate of return in their asset allocations with some risk to stability as they go forward.

“By assuming that default funds will flow in no matter what, that the inflows will keep rising and that therefore funds can take more risks with the illiquid assets means these funds are establishing a higher risk system for their members. And this is what has shown up recently to the point where the funds want liquidity support.

“Now, whether that is simply because the government has allowed some early withdrawals or not, only each fund knows, but on the amounts that the government has mentioned, it seems to me to be not quite credible that a well-managed fund should need support for those amounts of withdrawals.

“If we have funds that have taken aggressive asset allocation positions, have sold those on the basis of rate of return for their default fund and attracted money from other funds as a result, then the funds that have taken a more cautious approach are penalised and their own members could well be penalised.

Take cue from Singapore

“Now, we can’t solve that now because the role of the government and the Reserve Bank is to manage the crisis we’ve got. But it does demonstrate that this system we have is not right. And I think we have to face into some more sensible arrangements for the future than we have today.”

Murray warns against the RBA stepping in to provide liquidity to super funds because of the moral hazard. But he says if emergency support is required then we could copy Singapore’s Temasek-style sovereign wealth fund.

He says this fund could acquire assets from a fund needing liquidity but in doing so the fund would have to accept a price in alignment with the prices prevailing in the sharemarket.

The government owned entity could purchase assets from the super fund in return for liquidity and this would allow the fund to restore its asset allocation back to the level which prevailed before the COVID-19 sell-off.

Murray says this would be fair to all members of a fund because the illiquid assets would have to be sold at a discount to face value. The alternative is inequity for members in the fund not switching to cash because they would be stuck with overvalued assets.

Murray says that by matching the price of assets to the general movement in equities in the market plus a further discount for illiquidity would mean the government entity buying the assets would pay fair value.

The assets could be sold later and the taxpayer would make a profit. The concept of a Temasek style sovereign wealth fund would suit the times given the need for the government to bail out Virgin Australia.

Temasek, which owns 55 per cent of Singapore Airlines (which in turn owns 23 per cent of Virgin), last week underwrote a $S5.3 billion ($6.1 billion) equity raising by Singapore Airlines. The airline also raised $S9.7 billion through the issue of 10-year bonds.

Murray says he is inclined to think the banking system is fine given it has no systemic prudential issues.

“On the other hand, there are some fundamental issues in superannuation that we can get through with some support if it can be designed the right way and we don’t create this moral hazard for the future,” he says.

“But then we have to open up the way this damn thing works and fix it.”

Industry funds’ pathetic plea shows the jig is up

The Australian

31 March 2020

Janet Albrechtsen

Many people are recycling ­Warren Buffett’s famous quote that it’s only when the tide goes out that we discover who has been swimming naked. And for good reason: one Australian industry is looking pretty ugly right now, its mismanagement and hubris expose­d by this current crisis. The naked swimmers are the trustees of the biggest industry superannuation funds and their directors.

This sector rode so high and mighty in the good times that it demanded that the corporate sector­, especially the banks, take money from their owners and give it to causes deemed worthy by these industry super funds.

In the midst of this crisis, while the banks are honourably bailing out their customers, these sanctimonious industry super funds demand­ that ordinary Aust­ralians rescue them and their members from the consequences of the sector’s arrogance.

The biggest question is how this group has been protected from scrutiny and sensible regul­ation for so long, and what can be done to end its immunity from the kind of critical examination the rest of the financial sector has alwa­ys faced.

Consider the causes of the arroganc­e and power of large industry­ super funds. They have been coddled by an industrial relation­s club that mandates that it be showered with never-ending torrents of new money. Of the 530 super funds listed in modern­ industrial awards, 96.6 per cent are industry super funds. That’s some gravy train.

With that guaranteed inflow of cash, it’s hardly surprising that industr­y super funds have grown fat and lazy about risk. They made two critical assumptions. First, that these vast inflows would alway­s exceed the outflows they had to pay pensioners and superannuants. And second, they could keep less of their assets in cash or liquid assets to meet redemp­tions.

In fact, they doubled down on this bet by plunging members’ money into illiquid assets — they filled their portfolios with infrastructure, real estate, private equity­ and other forms of long-term assets that can’t be easily and quickly sold to meet redemptions.

These assets can’t be easily valued­ either — experts will tell you that the valuation of illiquid assets is essentially guesswork. If you don’t have a deep and liquid market into which to sell an asset, you really have no idea what that asset would fetch if and when the time came to sell.

The fact the valuation of illiquid assets is open to huge ­variation was a terrific advantage in so many ways for industry ­insiders during the good times.

Industry super funds could use boomtime assumptions to prod­uce inflated valuations to prop up their performance relative to retai­l funds that don’t have the same guaranteed gravy train of inflows to invest in unlisted long-term asset classes.

That gives the industry funds one heck of a competitive edge and those inflated performance figures make for handsome ­bonuse­s for employees of industry funds and asset managers such as IFM.

This apparent outperformance by industry super funds seems to have anaesthetised the Australian Prudential Regulation Authority and many others. They have been able to resist sensible regulation by pointing to their “healthy” performance, and they have received exemptions from the kind of stock-standard rules that govern other trustees of public money.

The upshot is that many industry super funds have ridiculously large boards stuffed full of union or industry association nominees who obligingly pass their directors’ fees back to their nominating union (where, lo and behold, it might find its way to the ALP) or industry association.

But now the music has stopped. What these big industry funds have sold to members as “balanced” funds doesn’t look so balanced any more.

The current crisis has exposed illiquidity issues. Many of their members have lost their jobs or lost hours of work, drying up the guaranteed flow of new super­annuation contributions.

And the Morrison government has announced an emergency and temporary exemption allowing members in financial trouble to withdraw up to $10,000 a year from superannuation for each of the next two years.

The liquidity problem facing industry super funds has been compounded by the fact many members have been switching from what the industry funds call “balanced” options into cash options, requiring funds to liquid­ate long-term assets in the “balanced­” options.

This new environment has forced industry funds to slash questionable valuations of illiquid assets in their “balanced” funds to avoid redeeming member­s or members who switch out of balanced funds into cash options getting a windfall at the expense of members who remain in the “balanced” funds.

So the jig is up. When comparisons between industry super funds and retail funds are adjusted for risk — as they should be — industry super funds don’t look so healthy after all.

Now that the tide has gone out, we can see two issues with greater clarity. First, trustees of industry super funds haven’t done a stellar job of managing risk through the full economic cycle, through good times and bad.

There was too much compla­c­ency from more than two decades of uninterrupted economic growth. And maybe some naivety too: Australian industry funds are relatively new, emerging only in the 1980s after the introduction of compulsory superannuation payments.

Second, APRA stands condemned for letting industry super funds get away with second-rate governance and poor management of risk through the full econo­mic cycle.

Consider the hypocrisy of these super funds now wanting a bailout to deal with a liquidity problem of their own making during­ the boom times. For years, noisy industry funds have sanctimoniously demanded that company boards give up some profit to benefit society.

Now their mismanagement has exposed risks that their members­ may not have been told about. And the same industry funds want the Reserve Bank of Australia (aka the taxpayer) to bail out their members to protect their boards from claims of mismanagement. The industry funds no doubt will point to the help the government is giving the banks as a preceden­t for a bailout.

However, they should remember that the quid pro quo for banks getting government help is the banks meeting a stringent set of capital and liquidity rules, not to mention governance requirements such as a majority of independent directors. Do these funds want a similar regime instead of the namby-pamby one that applies­ now?

To date, and to its credit, the Morrison government has resisted their calls. Scott Morrison and Josh Frydenberg should stand even stronger, demanding APRA lift its game. How did the industry fund sector escape scrutiny of its dirty little secrets for so long?

Part of the reason is sheer thuggery. Industry Super ­Aust­ralia, the representative body for industry super funds, tried to silenc­e Andrew Bragg a few years ago when he was at the Business Council of Australia for exposing the unholy links between unions and industry fund. Bragg, now a senator, is leading the push to reform­ industry super.

The voting power, and buying power, of huge industry funds is another part of the answer. Their special pleading and scare tactics to ensure they can keep feasting on members’ funds by having the super guarantee charge contribution increased from 9.5 per cent to 12 per cent is the rest of the answer.

The pathetic plea for a taxpayer­-funded bailout from mismanaged industry super funds is compelling evidence that ­workers should be allowed to keep more, not less, of their hard-earned money rather than be forced to shovel more into industry funds and their mates.

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