SMSF Association National Conference 2020 at the Gold Coast Convention and Exhibition Centre
I acknowledge the traditional owners of the land and pay my respects to their elders past, present and emerging. Thank you to the association and John Maroney for the opportunity to speak with you today.
A politician walked into a room of accountants and actuaries. Sounds like the beginning of a really average joke.
Celebrating a World Beating System
We’ve come a long way in a relatively short period of time.
It was through the 1985 Accord Negotiations between the Hawke / Keating government and the ACTU that superannuation was 3% super, a 2% wage rise and a 1% tax cut.
When the Australian Industrial Relations Commission incorporated the agreement into all Awards it meant that the coverage of Superannuation went from 35% to 65% of the Workforce.
Within 5 years Australian workers had amassed over $123bn in retirement savings.
A World Class System
As so often is the case with Australian innovations, our world class system has greater recognition abroad than it does at home. The Mercer Global Pension Index is an annual assessment of private pension (superannuation systems) around the world. Its annual analysis of the adequacy, sustainability and integrity of global pension schemes sees Australia consistently ranked highly. Last year it was ranked 3 of nearly 40 countries.
There are now $2.8 trillion in assets. This is the fourth largest pool of superannuation retirement savings in the world.
The SMSF sector is a significant and growing part of this story: there are 590,000 SMSFs holding assets of more than $690 billion – this is nearly 30% of all funds held in Australian superannuation accounts.
Australian workers own retirement savings equal to 140% of GDP. As a proportion of GDP this is greater than the United States whose pension funds amount to 135% of GDP, the United Kingdom at 104.5% and Canada at 85% of GDP. This is an incredible achievement. We are the 16 largest economy in the world with a workforce of just 13 million people and yet we have created pool of funds available for local investment and a stream of foreign earnings on overseas investments.
Over the last decade the average rate of return has been between 6-8%. Last year it grew by 9.2% and was among only a handful of countries that saw pension fund growth: most went backwards.
It is hard to overestimate the way it has transformed the Australian economy. For 200 years we have been a nation that borrows from the savings accounts of other countries. The capacity of our businesses to get a loan for investing in new plant and equipment, the capacity of Governments to build infrastructure was dependant on the savings habits of other people in other countries. In a few short decades we have changed this.
Superannuation has made a significant contribution to converting Australia from a Nation that borrows to a nation that lends.
What it means for workers
When we started on this journey the superannuation savings for 68% of Australians and 85% of all women was zero.
Today the average retirement balance is around $160,000 for women and $280,000 for men. Under current policy settings, the median balance on retirement for full-time workers will be $310,819 for women and $628,634 for men.
Providing Dignity in Retirement
Last week a group of women came to the parliament and visited politicians to tell them how important super is to women like them. Women who have very modest super account balances, but who rely on these funds for independence and dignity in retirement.
I was taken by Gai’s story. She could have been my mum. Gai lives in Bowral in my electorate and is a shop assistant at a supermarket chain. Gai is lucky enough to own her own home. When she retired from full time work she used some of her $110k of super to buy a new Kia to replace her rundown Suburu that was on its last legs. She can visit friends, family and get into the one shift of work she does each week to top up her pension payment. It is the first new car Gai has ever owned.
Because of super, Gai’s quality of life is much better. It is not a large sum, but she is independent and uses her super to top up the small earning she makes each week from her shift work to live off. In a few years she hopes to be able to stop work and use her super to top up her pension payments. Gai and her friends shared that they worry what would happen to women in regional towns who were shop assistants like them if they didn’t have super to help make ends meet in retirement.
Investing in Economic Infrastructure
Here in Queensland, Australians super savings are investing in national infrastructure like the Port of Brisbane. This $158 million investment scheduled for completion next year has created 245 jobs during the construction phase and created an additional 49 operational jobs. The new terminal is estimated to add up to $1.3 billion to the Queensland economy and cater for some 750 000+ visitors a year.
Some in our community are arguing that we must renege on the promise that we have made to the Australian people to maintain and improve their superannuation nest egg. Labor is implacably opposed to this.
If the Government does renege on the superannuation promise to Australians succeed there will be far reaching consequences.
Workers have already lost $60K – $100K because of the Abbott Government freeze in 2014. Those losses will be magnified. Australians will be more reliant on the pension with less money of their own to supplement it. The self reliance principle, on which superannuation is based, will be junked. This is acknowledged by the anti-super consortium. They argue that sometime in the future pensions, rent assistance, health and aged care spending should be increased to compensate for superannuation cuts. At best this is a hope against all experience, that future governments and future tax payers will be more generous than they have in the past.
What the Government should focus on
While the heavy lifting on getting the accumulation settings right has been done by Labor, there are still some equity gaps that need to be addressed: for women, who retire with half the superannuation balances of men – we need specific policy interventions. This involves addressing the gender pay gap which is a root cause of the super gap. It also means addressing super during maternity leave.
Financial Literacy and Advice
There is another issue – the real sleeper – one that the Governments have been warned about since the Henry Review, but has not been addressed. It is the issue of financial literacy and access to quality and affordable financial advice.
I have already outlined how through deliberate policy decisions Australians are retiring with more savings than at any time in our nation’s history. We must place a renewed focus on the retirement phase to deal with the challenge.
In its 2019 Report, the Productivity Commission identified low levels of financial literacy and engagement as a system-wide risk. While noting that this was an international phenomenon and that it was unrealistic for all members to be highly informed and engaged at all times – the PC said that it was critical for members to be engaged as they neared retirement.
The Productivity Commission estimated that 30% of fund members had low levels of financial literacy – mostly lacking the understanding necessary for formal engagement.
It would be tempting to assume that these levels of literacy are the exclusive domain of the APRA regulated sector. It should follow that a person who has made the decision to set up an SMSF is both engaged and in possession of the financial literacy to manage those affairs. This is not a sound assumption.
In a survey of SMSF members ASIC found:
- 33% of member did not know that an SMSF must have an investment strategy
- 30% had no arrangements in place if something happened to them
- 29% thought they were entitled to compensation in the event of theft or fraud
- 19% did not consider their insurance needs when establishing an SMSF.
SMSFs provide an attractive vehicle for informed investors who have the time and the expertise to manage their own superannuation affairs.
They are not appropriate for all investors.
Both the ATO and the ASIC have expressed that some of the phenomenal growth in the sector may not have been well advised. The ATO has expressed concerns about Limited Recourse Borrowing in funds with few assets. The recent review of files by the ASIC has revealed that many investors were “advised” into SMSFs against their best interest.
ASIC found 10% of clients risked being significantly worse off in retirement as a result of the advice to establish the SMSF and a further 19% of cases indicated a significant risk of suffering financial detriment.
High relative fees and low returns on low value accounts, the inappropriate use of Limited Recourse Borrowing were identified as key issues and ASIC concluded:
“… costs for low-balance SMSFs are particularly high and significantly more so than APRA-regulated funds. These high costs are the primary cause of the poor net returns experienced by small SMSFs on average. The quality of financial advice provided to some members – including those with SMSFs – is questionable…”
This study points to two problems. The first is that despite the reforms flowing from FOFA and the Royal Commission there are still advisers who have not acted in the best interest of their clients when providing advice. I know that everyone in this room would share the concern that everyone of these examples brings down the reputation of the whole industry as it works hard to re-build its standing around an ethos of ethical professional.
The Productivity Commission has identified $500 000 as the threshold below which a fund member is better off in an APRA regulated fund. They have reached this conclusion on the basis of scale and the capacity to generate sufficient returns. ASIC have reached a similar conclusion SMSF but from a different perspective. Their research shows that the cost / return ratio for SMSFs over $1m was broadly similar to those of APRA regulated funds, but below this level the cost ratio’s start to be a material impairment on fund performance.
This leads me to my second problem: how we can get the right advice and the right sort of investment products to retirees who have – small to medium accounts. An account balance of $100,000 may not seem like a lot of money for many people in this room, but for many retirees like Gai from Bowral, it is more money than they have ever had in their life and they need to be empowered to make informed decisions about how best to use it for retirement purposes.
There is a significant gap which the “market” has failed to adequately meet.
Business models for the provision of advice remain unsettled due to the Government’s roller-coaster reform ride.
More than 4,000 advisers have left the sector since the end of 2018, when FASEA’s standards were finally published – mere days before they were due to come into effect.
More will leave in the years to come. I have had plenty of harsh words to say about the implementation of the FASEA reforms.
Harsh words which I’m sure would resonate with most in this room.
You have seen the results of these failures for yourself. The net consequence of this is that at the very time when access to professional, quality advice is most needed, it is becoming harder to get. Labor has a different view.
We want to see a better advice industry. We want to engage with industry and with regulators on how we can address the current advice gap.
We want to see all Australians able to access high-quality financial advice – about their retirements, about their investment needs, about their insurance.
This needs to be guided by some high level principles:
1. There is a role for government and the industry in providing financial literacy programs which empower individuals to make informed choices about their savings.
2. Impartial and affordable retirement income advice should be available to all Australians – including low and middle income earners with modest retirement savings.
3. The provision of advice must be decoupled from the sales process which means the prohibition of commissions (however so described) from product manufacturers to advisers.
With those broad principles in place – I am keen to hear your views as to how we can build a better future for your industry. And I am keen to work with you over the next few years to shape that future.
Stephen Jones MP Shadow Assistant Treasurer Shadow Minister for Financial Services