Super too complex: Costello

The Australian

6 November 2016

Damon Kitney | Victorian Business Editor | Melbourne | @DamonKitney

Future Fund chairman and former federal treasurer Peter Costello says Australians are right to baulk at making voluntary contributions to their superannuation because of the extreme complexity that now plagues the nation’s retirement savings system.

Almost two months after the government released its revised super reform package for public consultation, Mr Costello said he was worried about the complexity of the system.

“With growing complexity, extreme complexity, people will shy away from (the super system). And I think they are right to shy away from it because you never know what the rules will be,’’ he said.

In an interview with The Australian following a private breakfast address in Melbourne hosted by Hamilton Wealth Management, Mr Costello also warned about the dangers for global trade of a Trump or Clinton presidency in the US and played down the move by the Future Fund to reduce its property exposure during the September quarter.

Mr Costello, who also chairs Nine Network owner Nine Entertainment, said the opposition of both Donald Trump and Hillary Clinton to the Trans-Pacific Partnership — the latter despite her huge support for the trade pact when she was previously US secretary of state — was concerning for Australia.

He reiterated that the prospect of Australia being downgraded by global credit ratings agencies because of the commonwealth budget deficit should “galvanise’’ the nation to change its ways.

“I think the prospect of a downgrade can and should be used to galvanise public opinion to know that international people outside Australia are registering concern about our financial position,” he said. “This should be taken as a message to the public that we need to change our ways.”

In July, two of the three global ratings agencies warned that the prospect of a deadlocked parliament stymieing budget savings put the nation’s AAA credit rating in danger.

Australia’s credit rating was downgraded twice in the 1980s, before being restored to AAA again by Moody’s in 2002 and Standard & Poor’s in 2003 on the back of a string of budget surpluses during the Howard government when Mr Costello was treasurer.

In an effort to reduce the budget deficit, the government has cracked down on super tax concessions to ensure they are not used to build tax-incentivised ­estate planning vehicles for wealthy Australians.

Instead it wants to support more Australians maximising their super balances in retirement.

On the complexity in the super system and voluntary contributions, he said: “In the voluntary sector … I think people will take the view that you should be much, much more cautious … This might be what the government wants, we don’t know.”

In August the nation’s biggest wealth manager AMP claimed the government’s proposed super shake-up was a major factor in weak retail and corporate super platform cashflows.

The government has moved to water down the proposed changes in its latest reform package with the contribution caps and the reforms to the non-concessional cap less comprehensive than the changes put forward in the May budget.

But Treasurer Scott Morrison has claimed the revised package would save the budget $180 million over the next four years and $670m in the medium-term.

During the three months to September 30, the Future Fund scaled back its exposure to property as it recorded a 1.5 per cent return, pushing its funds above $124bn.

The breakdown of its asset allocation at the end of the quarter showed the Future Fund’s share of property assets fell 0.5 percentage points to 6.5 per cent.

But Mr Costello cautioned against reading too much into the change. “Its gone from 7 per cent to 6.5 per cent. It is true it has moved but I wouldn’t read too much into it,’’ he said. “I wouldn’t see that as a major tilt.’’

The Future Fund has asked the government to consider lowering the inaugural CPI plus 4.5 per cent to 5.5 per cent real investment target for the fund, given bond markets have been signalling prolonged subdued returns.

Mr Costello declined to comment on the progress of negotiations with the government, but noted that for several years the risk-free rate (of bonds) had been closer to 2 per cent.

“The fact that 10-year bonds are closer to that number and have been for several years, and around the world there are other sovereigns that are even less,” he said.

“It tells you that 7 per cent nominal historically has changed.

“The government has just started issuing 30-year bonds at close to 3 per cent. The long-term risk-free rate of return is different now to what it was historically. There is no reason to think it is going to go back to the historic number any time soon.’’

After the Future Fund was a key player in the $9.7bn purchase of a lease of the Port of Melbourne in a consortium with QIC and Chinese sovereign wealth fund CIC Capital, Mr Costello said infrastructure was “a good asset’’.

“If we can find an asset which will give us a reliable return, we are very interested,’’ he said. But he rejected suggestions the Future Fund should be investing more in rural property amid a push by Chinese and other offshore investors to acquire local farming land.

Earlier this year Mr Morrison rejected a Chinese bid for the Kidman family’s cattle assets.

They were subsequently snapped up by mining magnate Gina Rinehart.

“The Future Fund is told by the government that it has to get a return 5 per cent real, 7 per cent nominal. If investment opportunities can’t give us those returns, we can’t invest in them,’’ Mr Costello said.