Asia Pacific Edge, Cerulli Associates, July 2009
The Australian government’s announcement of a review into the country’s superannuation industry is billed as the first examination of the super system in its 21 years of operation. One obvious quibble with that grand statement is that the super system has been under constant review from the word go, with tweaks and revisions coming and going with every federal budget. But what does this mean for investors, trustees and fund managers?
At the end of May Nick Sherry, the minister for superannuation and corporate law (although not any more – we’ll come to that later) announced the terms of reference for – to give it its full title – the Review into the governance, efficiency, structure and operation of Austrlaia’s superannuation system. It also announced the expert panel who will chair it.
From this, we know that the review will make recommendations to the government by June 30 2010 on the following issues. Governance, covering the legal and regulatory framework, trustee knowledge and skills, and the risks involved in debt and leverage; efficiency, which will include removing unnecessary complexities from the system and ensuring it operates in the most cost effective manner; structure, meaning the promotion of competition to put downward pressure on system costs; and operation, which again refers to reducing costs to ensure the maximum returns to members, and also mentions “conflicts of interest that may inhibit advice being in the best interests of members.” Crucially, it doesn’t cover tax.
This is a wide remit, but in the time since the initial announcement of the review in April the focus of industry, government and media has been very much on one thing: fees. Sherry has spoken in a number of interviews, notably those with state broadcaster ABC who produce verbatim transcripts for public consumption, about trying to reduce the fees in the system from the 1.25% he says has been typical over the years. The talk in the super industry is that the goal is to reduce it to 1%.
This is partly about fee pressure which will be felt most keenly by underlying managers, but also intended to improve methods of reducing system costs overall, which might include technology, clearing systems or even adapting super funds’ use of brokerage. But it’s mainly about fees.
Another key, and related, part of this review will clearly be about commission structures. Industry funds, which are run on a not-for-profit basis, want a ban on all commissions on super contributions, which would hit for-profit retail (or commercial) super funds. The government is refusing to prejudge what it will conclude on this, but it’s clearly part of the scope of the review, and the specific reference to “conflicts of interest” in the terms of reference should be a warning flag to those funds and financial planners who use commission structures.
These issues have been debated in Australia for years, and particularly the commission structures. Australia has an enormously intermediated investment industry, in that financial planners and investment platforms generally come between the investor and the end product; the fee models used to facilitate that structure raise questions about impartiality of advice, conflicts of interest and ultimately whether people end up in the best products for them or for somebody else.
But there are crucial things missing from the review, and one in particular: tax.
Sherry is of course right to say that costs are a big issue. The difference between 1% a year and 1.25% a year doesn’t sound much but if that comes out of a long term return of 5%, and is then multiplied over a 45 year working life, then it does indeed make a big difference to the end sum that people have to retire with.
But what makes a dramatically bigger difference to that final figure is the tax that’s been charged along the way. While the last government did simplify super considerably by reducing some of the taxes that apply when people take their money out of super, there has been no reduction to the 15% contributions tax that applies when putting money in in the first place. Many feel that the only way to ensure greater voluntary contribution to superannuation is to cut that tax.
But tax is the preserve of a completely different inquiry, called the Henry Review. And this brings us to the long-standing problem with Australian superannuation: so many different voices, not always working in tandem.
So, for example, at the same time the government is launching a comprehensive review of superannuation, it is still tweaking it at the same time, announcing changes in the most recent federal budget. It reduced the co-contribution scheme – through which low income earners can get the government to match their super contributions, up to a certain level – and also reduces some incentives for high earners to contribute, although both measures are supposedly temporary.
It is also engaged in a debate, apparently separate to the review, about increasing the preservation age – the age at which people can get full access to their super – to 67. Sherry says no changes will be considered until after the Henry review is completed.
At the same time, the Commissioner of Taxation, Michael D’Ascenzo, is announcing greater scrutiny of superannuation by the Australian Taxation Office; the Association of Superannuation Funds of Australia is reviewing its best practice papers, including papers on risk management frameworks and governance; the Australian Accounting Standards Board has released an exposure draft which may make significant changes to the way superannuation funds are required to report their financial results; and others are calling for a review of language used in the superannuation industry.
Others argue that their voices aren’t sufficiently represented. The expert panel for the super review, which will be chaired by Jeremy Cooper, the deputy chairman of the Australian Securities & Investment Commission, does not include any representative of the self-managed superannuation industry – which is by some measures the single largest component of the super system.
On top of all that, Sherry, the man who instigated the review and who was regarded as such a specialist in superannuation that he covered the portfolio even when the Australian Labor Party was in opposition, is now not going to be around to see it through. Instead, in June, the Rudd government announced a new Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen. The reshuffle arguably has some positive elements – it creates a new portfolio within the inner Cabinet, putting financial services “in the cabinet room where the vital decision-making is made”, as one industry group lobbyist puts it – put again it reduces continuity and brings somebody else in who may have different ideas.
In principle it’s clearly a good idea for an all-encompassing review of superannuation, but it is increasingly difficult to get any sort of harmonious view on the development of the system with so much noise and meddling going on around the edges. Sherry said, before his portfolio was changed, that the review would work in tandem with the tax review; it is absolutely vital that he’s right, because no sensible appraisal of the future of superannuation can take place without consideration of the tax issues at the absolute forefront.
One can see the super review as a product of the times, too. For the first time in many years, almost all Australians have seen their superannuation balance go backwards, and significantly backwards, in the last 18 months. Scrutiny of fees is never more strident than in such an environment and it would not be unreasonable to imagine that the review wouldn’t be happening if stock markets were still booming. Sherry has a point when he says that fees as a percentage ought to have come down as the system has grown so dramatically, from a few tens of billions to over A$1 trillion, and that the fact that they’ve instead stayed stable deserves scrutiny. But screwing managers isn’t necessarily the best way to encourage Australians to save: simplifying the system, and reducing the tax taken out of it, will do far more.