Australian Financial Review
2 April 2020
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.”