Category: Newspaper/Blog Articles/Hansard

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.

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.”

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.

The Australian

30 March 2020

Adam Creighton

The young and poor have little say in society but they are incurring the bulk of the costs from the shutdown.

Whether it’s their incomes, their schooling or their ability to enjoy life, the sacrifices that students and so-called generations X and Y are making for the over-75s are very significant. Unlike the Spanish flu 90 years ago, it seems coronavirus is of little threat to the vast majority.

The $320bn the government and Reserve Bank have allocated so far to staunch the self-imposed economic carnage will have to be paid for. The plunge in tax revenues could well be as significant as the increase in outlays, leaving a gap that will test governments’ ability to borrow. There’s already $400 trillion of debt sloshing around the world.

And the bill will come long after those whom the younger generations have tried to protect have died. It’s reasonable to give some thought now to how the costs will be shared.

Policies that were thought fair and reasonable only months ago will start to look unfair, even absurd. The government will face stark choices about how to allocate the burden. Will it crush the productive sector of the economy with even more income tax?

Everyone will suffer in degrees during this crisis, but it’s only fair that those who are being saved, ­especially if they are financially equipped, pay a disproportionate burden of the cost.

(It’s true retirees have seen huge falls in their superannuation balances, but once a vaccine is found in a year or two, their accounts are likely to roar back to life.)

The Commonwealth Seniors Health Card, which is a benefit for retirees who are too well-off to quality for the Age Pension, should be immediately dumped.

How can we have people ­queuing up for soup in Sydney’s Martin Place (as was the case on Sunday night), while taxpayers fork out hundreds of millions of dollars a year to ensure cheap medicines and transport for those who can easily afford them anyway?

Scrapping the seniors and pensions tax offset, which provides a tax-free threshold of about $33,000 for over-65s and about $58,000 for couples, is also a no-brainer. Naturally, these two changes will cause some discomfort for those affected, but nothing compared with the chaos ­recently foisted on millions.

It’s obvious the superannuation guarantee should be suspended for the rest of the year, as I’ve argued repeatedly. The government is forgoing almost $20bn a year in tax by keeping it when it needs the revenue urgently.

Coronavirus: Economic bailouts

As of March 31, 2020

Rather than taxing younger generations or workers to oblivion, it’s best to ­curtail generous arrangements, at least temporarily. These tax increase would have relatively little or no impact on disposable incomes; indeed, in the case of suspending the super guarantee, take-home pay would increase for millions of workers.

Other options might include a significant inheritance tax imposed, say, for the next 20 years to help defray the gargantuan tax burden that has just been put on everyone who is not going to die in that period.

Tax-free earnings on superannuation in the retirement phase should cease, at least temporarily. Currently, the earnings of superannuation funds for retirees face zero taxation.

Everyone else pays 15 per cent tax. It should be the same for everyone (as the Henry tax review recommended, by the way). Fifteen per cent is still a lot more generous than marginal income tax rates.

Cancelling the refundability of franking credits — for everyone, not just self-funded retirees — is another option.

To be sure, this would cause real pain, given some retirees quite reasonably have structured their affairs around them. But this is a crisis.

There are some economic bright sides for younger people. If a house price crash eventuates, those with jobs and to obtain credit will be more easily able to afford a home.

Whether house prices fall for long remains to be seen, though. In times of uncertainty, gold and property tend to be relatively attractive assets and immune from inflation.

And significant inflation may well be on the horizon. The borrowing lobby in society is much more politically powerful than the lending lobby. That is, the constituency that benefits from inflation (anyone with debt) is greater than those who wouldn’t.

What’s more, a niche group of economists reckons the central bank can give us all money directly — say, $10,000 each straight into our bank accounts — without undermining the economic system.

It’s known as Modern Monetary Theory and, understandably, it is becoming popular.

“There’s no such thing as a free lunch” was branded into me through years of economics study. It’s hard to imagine that we can just make new money out of thin air without serious long-term costs to the economic system, or certainly respect for it.

Why would anyone bother working or saving?

The fiscal situation is looking so dire a future government might well give MMT a try. It’s so ­seductive. They should be wary, though. A great inflation has unpredictable consequences, which history suggests can be terrible.

Nevertheless, if inflation does break out, the burden of the economic shutdown would play out very differently. It would remove the government and private debt burden, obviating the need for the various tax increases suggested above. Anyone with significant cash or deposit holdings would be wiped out.

For now, however, this is all academic.

As in an ordinary war, the young are doing the heavy lifting and face a massive tax burden. It could be a bit less burdensome if reasonable, temporary tax increases were imposed for the over-65s to help defray the costs.

It’s important to keep perspective. Roughly 165,000 people die in Australia each year; about 3000 from influenza.

Meanwhile, the economy is being destroyed — real and permanent damage — for uncertain benefit.

If we totally shut down the economy, as many are advocating, when does it reopen? And if it reopens and the virus emerges again, is it shut down once more?

It’s patently not possible to keep turning an economy on and off every few months without ­destroying civilisation.