Category: Superannuation

More Are Retiring With High Mortgage Debts

From The Conversation.

The number of mature age Australians carrying mortgage debt into retirement is soaring.

And on average each mature age Australian with a mortgage debt owes much more relative to their income than 25 years ago.

Microdata from the Bureau of Statistics survey of income and housing shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015. The sharpest increase is among homeowners approaching retirement.

More mortgaged for longer

For home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14% to 47%.

Among home owners aged 45 to 54 years, it has doubled.

Source: Authors’ own calculations from the Surveys of Income and Housing

Meanwhile, the average mortgage debt-to-income ratio among those with mortgages has pretty much doubled across every home-owning age group.

In the 45-54 age group the mortgage debt-to-income ratio has blown out from 82% to 169%.

For those aged 55-64 it has blown out from 72% to 132%.

Among mortgage holders. Source: Authors’ own calculations from the Surveys of Income and Housing

Three reasons why

The soaring rates of mortgage indebtedness among older Australians have been driven by three distinct factors.

First, property prices have surged ahead of incomes.

Since 1970 the national dwelling price to income ratio has doubled.

Prices and wages in 1970 are assigned an index of 100. Sources: Treasury, ABS, Committee for Economic Development of Australia

Despite weaker property prices, the ratio remains historically high. This means households have to borrow more to buy a home. It also delays the transition into home ownership, potentially shortening the the remaining working life available to repay the loan.

Second, today’s home owners frequently use flexible mortgage products to draw down on their housing equity as needed for other purposes. During the first decade of this century, one in five home owners aged 45-64 years increased their mortgage debt even though they did not move house.

Third, older home owners appear to be taking on bigger mortgages or delaying paying them off in the knowledge that they can work longer than their parents did, or draw down their superannuation account balances.

Super could be changing our behaviour

For mortgage holders aged 55-64 years, there is evidence to suggest that larger debts prolong working lives.

In 2017 around 29% of lump sum superannuation withdrawals were used to pay down mortgages or purchase new homes or pay for home improvements, up from 25% four years earlier.

In the Netherlands, where a mandatory occupational pension scheme along the lines of Australia’s super scheme has been in place for much longer, over one-half of home owners aged 65 and over are still paying off mortgages.

The base is the total number of uses of lump sums rather than the number of people taking lump sums. ABS 6238.0 Retirement and Retirement Intentions

The implications are huge

Internationally, studies have found that indebtedness adds to psychological distress. The impacts on wellbeing are more profound for older debtors, without the ability to recover from financial shocks.

Debt-free home ownership in old age used to be known as the fourth pillar of the retirement incomes system because of its role in reducing poverty in old age. It allowed the Australian government to set the age pension at relatively low levels.

Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to boost the age pension.

Mortgage debt burdens late in working life will also expose home owners to unwelcome risks, as health or employment shocks can ruin plans to pay off their mortgages.

During the first decade of this century, around half a million Australians aged 50 years and over lost their homes.

Taxpayers will be under pressure to help

Those losing home ownership are often forced to rely on rental housing assistance. Moreover, as older tenants they are unlikely to ever leave housing assistance. This will put pressure on the government to boost spending on housing assistance, which is likely to further boost demand for housing assistance.

Super and government housing assistance could become the safety nets that allow retirees to escape their mortgages.

It wasn’t the intended purpose of superannuation, and wasn’t the intended purpose of housing assistance. It is a development that ought to be front and centre of the inquiry into the retirement incomes system announced by Treasurer Josh Frydenberg.

It is a change we’ll have to come to grips with.

Authors: Rachel Ong ViforJ, Professor of Economics, School of Economics, Finance and Property, Curtin University; Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University

Fund managers slammed for paying ratings agencies and platforms

A damning new report recommending extensive reform in the financial sector has taken aim at fund managers that pay a sponsorship fee to have their product offered on wraps and platforms, via InvestorDaily.

In its 60-page report entitled Professionalising Financial Advice, the CFA Institute and CFA Societies Australia detailed their concerns over the practice where some platforms or adviser groups place ‘wraps’ around existing funds and then market their own ‘products’ to clients as a way to access certain funds or investment managers. 

“This allows the adviser to charge higher fees than would apply if the client was given direct access to the underlying investment product,” the report noted. 

While the royal commission final report did not cover platform fees in detail, Hayne’s interim report stated: 

Licensees may and often do include third party manufacturers of products on their approved product lists (including the approved product lists maintained by platforms) but, much more often than not, advisers recommend that clients use products that are manufactured by entities associated with the advice licensee with which the adviser works.

Related to this practice is the issue of fund managers paying a ‘sponsorship fee’ or ‘shelf space fee’ to have their products offered on platforms, the CFA Institute said. 

“This means that even if a firm claims to be independent and use ‘open architecture’ (offering access to all products), the best products are not necessarily those that are put in front of a client seeking advice.”

In its comments on platforms, the interim report of the Hayne royal commission noted that the charging of platform fees evoked comparisons with “fees for no service” because the default setting seemed too often to be “set and forget”. 

“Charging platform fees evoked comparison with inappropriate advice because, very often, the platform that an adviser recommended the client use was a platform provided by an entity associated with the licensee with which the adviser was aligned or by which the adviser was employed and the arrangements were allowed to stay in operation despite the platform not remaining cost-competitive” said Mr Hayne in his interim report. 

“Both the practice of ‘set and forget’ and the ways in which fees for, and services provided by, platforms could remain unaltered over time show that customers using platform services exert little or no effective competitive pressure on platform operators.”

The CFA Institute argues that, just as when recommending investment products, financial advisers should have the client’s best interest in mind when recommending an investment platform. 

“This is consistent with the financial services regime which treats platforms as financial products and hence best interest must be observed when one is recommended.”

The CFA Institute also warned about fund managers paying to have their products rated by rating agencies.

“The conflict is obvious – an agency is being paid by a fund manager to rate that manager’s fund offerings. [A] fund manager also may shop around to find an agency that will provide them with a better rating. They then pay this rating firm and advertise the resulting rating of their funds in their marketing material,” the report said.

APRA Report Identifies Superannuation Failings

APRA has identified a number of areas where superannuation providers are falling short of their regulatory obligations, particularly when it comes to managing conflicts of interest, via Investor Daily.

A review of APRA’s 2013 superannuation prudential framework has found it met its original objectives but must keep evolving to ensure members’ interests are protected.

APRA commenced a post-implementation review of the framework introduced as part of 2013’s Stronger Super reforms in May last year, to assess how it had performed in the five years since it was introduced. Until the package of 13 prudential standards, supporting guidance and reporting standards came into force, registrable superannuation entity (RSE) licensees were not subject to legally binding prudential standards in the same way as other APRA-regulated entities.

The review found the prudential framework had materially lifted industry practices in key areas as governance, risk management and outsourcing. But it also highlighted the need for APRA to continue strengthening prudential requirements in several areas, including board appointment processes, management of conflicts of interest and life insurance in superannuation.

APRA’s review stated that appropriately managing conflicts of duty and interest is critical to ensuring that RSE licensees comply with their overarching obligation to act in the best interests of members.

“However, the Royal Commission noted a number of areas where RSE licensees appeared not to have managed their conflicts of interest appropriately, particularly with respect to related party arrangements,” the regulator said. 

While APRA’s review found that the key procedural requirements of its conflcits management framework (SPS 521) have “generally been met at an industry-wide level”, the regulator said it is not clear that the importance of effectively managing all potential conflicts of interest through a members’ best interests’ lens is embedded within the culture of all RSE licensees.

APRA’s proposed enhancements to mitigate conflicts of interest in superannuation include requiring RSE licensees to explicitly assess the impact of conflicts of interest on member outcomes and introducing a two-stage process for the consideration of conflicts of interest. 

“First establish interests held, then establish whether those interests give rise to a conflict,” the regulator said. 

APRA’s thematic review noted that policies underlying the conflicts management framework were in some instances too narrowly focused on conflicts arising in relation to responsible persons and did not cover conflicts arising for the RSE licensee as a whole. 

“This narrow approach undertaken by some RSE licensees tended to be characterised by a lack of consideration of how these conflicts might be perceived by external stakeholders,” the regulator said. 

“The thematic review also noted that, in many cases, the conflict identification process relied solely on self-identification by directors or responsible persons, with no independent review undertaken. It also found a lack of consistency across the industry in the identification and management of conflicts when dealing with intra-group services and product providers and other related parties. These inconsistencies arose, in part, due to inadequacies in the conflicts management framework for these types of RSE licensees.”

APRA Deputy Chair Helen Rowell said it was important that the prudential framework continued to evolve as the industry developed and regulatory priorities changed.

“The Stronger Super reforms deliberately focused on ensuring superannuation trustees that often manage billions of dollars on behalf of members had the necessary frameworks in place to effectively administer the fundamentals of operating their business,” Mrs Rowell said.

“As the industry has matured and lifted its practices, we have shifted our emphasis to ensuring trustees are focused on enhancing member outcomes, especially with last December’s package of reforms.

“We are already taking steps to strengthen the prudential framework in many of the areas highlighted by the review, and we will look to make further changes to incorporate its findings as we progress our superannuation policy priorities. This will include consideration of measures to address relevant recommendations in the financial services Royal Commission report and the report on the Productivity Commission’s superannuation review.”

Retiree home ownership is about to plummet

From The Conversation.

Australia’s retirement incomes system has been built on the assumption that most retirees would own their home outright. But new Grattan Institute modelling shows the share of over 65s who own their home will fall from 76% today to 57% by 2056 – and it’s likely that less than half of low-income retirees will own their homes in future, down from more than 70% today.

Home ownership provides retirees with big benefits: they have somewhere to live without paying rent, and they are insulated from rising housing costs. Retirees who have paid off their mortgage spend much less of their income on housing (on average 5%) than working homeowners or retired renters (25% to 30%). These benefits – which economists call imputed rents – are worth more than A$23,000 a year to the average household aged 65 or over, roughly as much again as the maximum pension.

You’ll be OK if you own

Our 2018 report Money in Retirement showed that while Australia’s retirement income system is working well for the vast majority of retirees, it’s at risk of failing those who rent. They are more than twice as likely as homeowners to suffer financial stress, as indicated by things such as skipping meals, or failing to pay bills.

This is not surprising – renters typically have lower incomes. But the rising deposit hurdle and greater mortgage burden risks means rates of home ownership are falling fast among the presently young and the poor.

The share of 25 to 34 year olds who own their home has fallen from more than 60% in 1981 to 45% in 2016. For 35 to 44 year olds it has fallen from 75% to about 62%.

And home ownership now depends on income much more than in the past: among 25-34 year olds, home ownership among the poorest 20% has fallen from 63% to 23%.

But fewer will

Home ownership is likely to fall further in coming years. Using Grattan Institute modelling, we find that on current trends, the share of over 65s who own their home will fall from 76% today to 74% in 2026, to 70% by 2036, 64% by 2046, and 57% by 2056.

And while we don’t project home ownership rates for different income groups due to data limitations (we have the necessary Census data on home ownership rates by age and income only for 1981 and 2016), it is more than likely that less than half of low income retirees will own their homes in future, down from more than 70% today.

Today’s younger Australians will become tomorrow’s retirees.

Worsening housing affordability means renting will become more widespread among retirees. As a result, more retirees will be at risk of poverty and financial stress, particularly if rent assistance does not keep pace with future increases in rents paid by low-income renters.

And rent assistance won’t much help

The maximum rent assistance payment is indexed in line with the consumer price index, but rents have been growing faster than the consumer price index for a long time. Between June 2003 and June 2017, the consumer price index climbed by 41%, while average rents climbed by 64%.

That’s why our Money in Retirement report recommended boosting Commonwealth Rent Assistance by 40%, at a cost of $300 million a year in today’s dollars. That would restore it to the buying power it had 15 years ago. It should be indexed in future to changes in the rents typically paid by the people who get it, so its value is maintained, as recommended by the Henry Tax Review.

There’s another important implication. Retirement incomes are likely to become more unequal in future. Money in Retirement found that in general future retirees will have adequate retirement incomes. Most workers today can expect a retirement income of at least 89% of their pre-retirement income, well above the 70% benchmark used by the Organisation for Economic Co-operation and Development, and more than enough to maintain pre-retirement living standards.

But a retirees who rent will have much less for living on.

There will be ‘haves’ and more ‘have nots’

Among home-owners, an increasing proportion will be still paying off their mortgages when they retire – the proportion of 55 to 64 year olds who own their home outright fell from 72% in 1995-96 to 42% in 2015-16. Some will (quite rationally) use some or all of their super to pay off their mortgage.

And rising housing costs will in time force retirees to draw down on more of the value of their home to fund their retirement.

Currently, few retirees downsize or borrow against the equity of their home while continuing to live in it. But that will have to change.

House prices have outstripped growth in incomes. Median prices have increased from around four times median incomes in the early 1990s to more than seven times median incomes today (and more than eight times in Sydney).

Government policy should continue to encourage these retirees to draw down on the increasingly valuable equity of their homes to help fund their retirement. They are not the ones who will need government help. The government’s recent expansion of the Pension Loans Scheme that allows all retirees to borrow against the value of their homes is a step in that direction.

Retirement is going to change in the years ahead. Most retirees will be far from poor, many of them better able to support themselves than ever before. But an increasing number will not. They are the ones who will need our help.

Authors: Brendan Coates, Fellow, Grattan Institute; Tony Chen, Researcher, Grattan Institute

Westpac denies offering ‘bundled services’ to win BT customers

Westpac chief executive Brian Hartzer has denied claims that Australian employers are offered special deals from the bank if BT becomes the default superannuation provider for employees, via InvestorDaily.

Appearing at the House of Representatives Standing Committee on Friday, Mr Hartzer was questioned about the major bank’s superannuation offering through BT Financial.

Labor MP Matt Thistlethwaite asked the Westpac CEO about reports that employers could be prosecuted for the underperforming retail super funds that manage staff retirement savings. 

Mr Thistlewaite referred specifically to a 21 January news article in The Australian that noted Westpac’s BT super fund was one of the worst performing super funds in the last seven years. 

“The article points to ‘bundled services’ for the business behaving employees in your BT retail fund. What are those bundled services?” the MP asked. 

Mr Hartzer said he was not familiar with the news article. 

“I’m assuming that bundled services means you provide concessions to the employer on other banking products for bringing them into BT’s fund?” Mr Thistlethwaite said. 

Mr Hartzer replied: “We checked quite closely and that is not our practice. The corporate super that is offered up is meant to be on a competitive basis for the services provided. We don’t provide inducements in terms of banking.”

Concerns over the relationship between retail super funds and employers were raised by the Productivity Commission in its report into the superannuation sector. Released in January, the report recommended the creation of a ‘best in show’ list of funds for employees to choose from. 

In December last year, The Australian reported that ASIC commissioner Danielle Press said the regulator would crack down on employers who placed employees in poor-performing funds in exchange for “bundled services” that were provided to them by the banks and finance companies that owned the funds.

“We’ve got to look at the role of employers in the default system and how they are making their decisions on what funds are their default funds,” Ms Press told The Australian.

“At the end of the day, consumers are disengaged. There’s no obligation on employers to make that default choice in the best interest of their employees.”

It’s Time For A Broader Review Of Super

From The Conversation.

There’s a lot in the Productivity Commission’s landmark 722-page table-thumper of a report into Australia’s superannuation system, completed after nearly three years of invesigation. For now, I’ll make three comments.

The Commission gets the industry

First, it’s a very valuable report. The Productivity Commission (PC) has undertaken a deep analysis of the superannuation industry and collected a range of information that was previously unavailable. The research has been conducted with considerable care and diligence, backed by insight. I am confident the PC understands the industry. The report is a great resource that will probably be cited for years to come.

Yet sets itself against the industry…

My second comment relates to the gusto by which the PC has called out shortcomings of the system, and advocated for key changes. While the PC is aiming to be constructive, the report reads as quite critical.

It seems guilty of overstatement for dramatic effect, which I fear may inhibit moving forward. Many report headings read as if they are brickbats. It headlined two of its diagrams: “the character of member harm”. It sets the tone on page five:

The system delivers good outcomes for many members, but not all. The industry’s peak body submitted that “the Australian superannuation system is not broken, and is in fact a world class private pension system”. The evidence suggests otherwise.

In my view, the system is better described as being very good with room for improvement.

The PC has raised the ire of the industry, which will create a barrier to change as the advocacy ramps up.

While most of its recommendations are sensible, the idea of a panel selecting a “best-in-show” shortlist of 10 default funds is controversial.

The recommendation is being attacked on its potential shortcomings, when the debate ought to be around whether it is the best option among a set of imperfect alternatives. The simpler question of whether the PC’s recommendation is better than the current system is not being debated.

We are travelling down an adversarial path unlikely to build consensus around what needs to happen.

…and raises more important questions

Third, the PC has recommended further investigations going beyond its terms of reference. I will finish by focusing on Recommendation 30: an independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system, including the net impact of compulsory super on private and public savings.

Surprising, there is no established position on how effective superannuation has been in working toward Australians supporting themselves in retirement. It is an open question whether the costly tax concessions attached to super provide an overall benefit to Australian society.

The Commission also wants the inquiry to examine who is hurt and who is helped by compulsory superannuation, both over time and at any point in time.

Recommendation 30. Superannuation: Assessing Efficiency and Competitiveness. Productivity Commission, December 2018

The PC is calling for an examination into the amounts being contributed into super, given that it called for the inquiry to be completed ahead of the the next scheduled increase in the compulsory contribution rate from 9.5% of salary to 10% in June 2021.

The PC was limited to examining the efficiency of the system under current policy settings. But the settings themselves are arguably the greatest barrier to the efficiency of the system, and its ability to serve the public. An inquiry into super’s place within the broader retirement income system would be an opportunity to work out how it can serve us best.

Too often the discussion is framed as if superannuation is the only resource supporting members through retirement. The call to lift the compulsory levy from 9.5% to 12% – some have argued for 15% or even 20% – epitomises this myopic perspective.

The reaction to a recent Grattan Institute report (Money in retirement: more than enough, November 2018) addressing various aspects of system design and questioning the need to increase the levy was revealing.

Grattan was lambasted for their stance, unfairly in my opinion. Much of the criticism came from those with a stake in seeing the levy increased, and mostly danced around the fringes of the argument. All this is indicative of an inability to have a thoughtful discussion over important policy issues.

Superannuation interacts with many other aspects of retirement support, including the social security system (specifically the aged pension), the tax system, other assets held by individuals, in particular whether they own a home, and personal circumstances.

Money siphoned off into super to support spending in retirement comes at the cost of lower spending power during the working years.

Placing more in superannuation might be entirely right for some, but might come at a cost for others.

They are good questions

The first interrelation between super and other features of the system needs to be better understood. There are various flags pointing to inconsistencies.

Claims that people are not saving enough for retirement do not gel with many retirees taking money out of super at the minimum rates.

Meanwhile the social safety net is substantial. The (single) aged pension of A$24,824 is 86% of the Association of Superannuation Funds “modest” living standard up to age 85, and 91% of it after age 91. And Australians have access to affordable health care.

Home ownership is a key determinant of capacity to support oneself through retirement, and it is only heightened by it being excluded from the pension means test. There can be a huge gap between retirees who own their home and those who do not.

Many low income earners struggle to establish themselves in life, yet are forced to invest in super, on which they may be taxed at greater rate than their current income tax rate.

The super system is designed around individuals, yet most people operate within households.

The PC is right to call for an inquiry into the entire system design. It would be an opportunity to examine the interaction of super with everything else, whether it is doing what it should, and whether it is treating different types of Australians in the way we would want.

Author: Geoff Warren, Associate Professor, College of Business and Economics, Australian National University

Productivity Commission finds super a bad deal

From The Conversation.

… And yes, it comes out of wages. 

Want more to retire on?

In its long-awaited final report on the efficiency and competitiveness of Australia’s leaky superannuation system, Australia’s Productivity Commission provides a roadmap.

Weeding out scores of persistently underperforming funds, clamping down on unwanted multiple accounts and insurance policies, and letting workers choose funds from a simple list of top performers would give the typical worker entering the workforce today an extra A$533,000 in retirement.

Even Australians at present in their mid fifties would gain an extra A$79,000.

If this government or the next cares about the welfare of Australians rather than looking after the superannuation industry it’ll use the recommendations to drive retirement incomes higher.

So why the continued talk (from Labor) about lifting compulsory super contributions from the present 9.5% of salary to 12%, and then perhaps an unprecedented 15%?

It’s probably because (and Paul Keating, the former treasurer and prime minister who is the father of Australia’s compulsory superannuation system says this) they think the contributions don’t come from workers, but from employers.

To date, they’ve been dead wrong. And with workers’ bargaining power arguably weaker than in the past, there’s no reason whatsoever to think they’ll be right from here on.

Past super increases have come out of wages

Australia’s superannuation system requires employers to make the compulsory contributions on behalf of their workers. Right now that contribution is set at 9.5% of wages and is scheduled to increase incrementally to 12% by July 2025.

So, for workers, what’s not to like?

It’s that while employers hand over the cheque, workers pay for almost all of it via lower wages. Bill Shorten, then assistant treasurer, made this point in a speech in 2010:

Because it’s wages, not profits, that will fund super increases in the next few years. Wages are the seedbed of the whole operation. An increase in super is not, absolutely not, a tax on business. Essentially, both employers and employees would consider the Superannuation Guarantee increases to be a different way of receiving a wage increase.

The Henry Tax Review and other investigations have found this is exactly what happens. Increases in the compulsory super contributions have led to wages being lower than they otherwise would have been.

Even Paul Keating, speaking in 2007, made this point. Compulsory super contributions come out of wages, not from the pockets of employers:

The cost of superannuation was never borne by employers. It was absorbed into the overall wage cost […] In other words, had employers not paid nine percentage points of wages, as superannuation contributions, they would have paid it in cash as wages.

This is more than mere theory. Compulsory super was designed to forestall wage rises. Concerned about a wages breakout in 1985, then Treasurer Paul Keating and ACTU President Bill Kelty struck a deal to defer wage rises in exchange for super contributions.

When the Super Guarantee climbed from 9% to 9.25% in 2013, the Fair Work Commission stated in its minimum wage decision of that year that the increase was “lower than it otherwise would have been in the absence of the super guarantee increase”.

The pay of 40% of Australian workers is based on an award or the National Minimum Wage and is therefore affected by the Commission’s decisions. For these people, there is no question: their wages are lower than they would’ve been if super hadn’t increased.

Where’s the evidence employers pay for super?

If wage rises came from the pockets of employers then we should see a spike in wages plus super when compulsory super was introduced, and again when it was increased. But there wasn’t one when compulsory super was introduced – a point Bill Shorten has made in the past.

When compulsory super was introduced via awards in 1986, workers’ total remuneration (excluding super) made up 63.3% of national income. By 2002, when the phase-in was complete, it made up 60.1%.

Out of the 26 countries for which the Organisation for Economic Co-operation and Development has data, Australia recorded the tenth largest slide in the labour share of national income during the period compulsory super contributions were ramped up.

Of course, changes in super aren’t the only thing that affects workers’ share of national income.

But the size of the fall in the labour share in Australia over the period when the super guarantee was increasing isn’t consistent with the idea that employers picked up the tab for super.

Would it be different this time?

Paul Keating argues that while in the past lifting compulsory super to 9.5% was paid for from wages, a future increase to 12% today would not be:

Workers are not getting real wage increases anywhere, and can’t get them. The Reserve Bank governor makes the point every week. So the award of an extra 2.5% of super to employees via the super guarantee will give them a share of productivity they will not get in the market – without any loss to their cash wages.

But such claims are difficult to square with concerns that workers’ weak bargaining power is one of the reasons current wage growth is so weak.. If employers don’t feel pressed to give wage rises, why would they feel pressed to absorb an increase in the compulsory Super Guarantee?

And while real wages (wages adjusted for inflation) haven’t grown particularly quickly, the dollar value of wages continues to grow: by 2.2% a year over the past five years. It would be easy for employers to simply reduce those increases to offset any increase in compulsory super – as they have in the past.

And no, more contributions won’t help workers

The Grattan Institute’s recent report, Money in Retirement, showed increasing the compulsory super would primarily benefit the top 20% of Australians. It would hurt the bottom half during working life a lot more than it helps them once retired.

Their higher super contributions would not improve their retirement outcomes: their extra super income would be largely offset by lower part-pensions. What’s more, the age pension is indexed to wages. If wages grew by less (as they would as compulsory super contributions were increased) pensions would grow by less too.

Lifting compulsory super would also cost the budget A$2 billion a year in extra tax breaks, largely for high-income earners, because it is lightly taxed.

That would mean higher taxes elsewhere, or fewer services.

For low-income Australians, increasing compulsory super contributions would be a thoroughly bad deal. It means giving up wage increases in return for no boost in their retirement incomes.

A government that wanted to boost the living standards of working Australians both now and in retirement would consider carefully all of the Productivity Commission’s suggestions including this one: an independent inquiry into the whole idea and effectiveness of Australia’s regime of compulsory contributions, to be completed ahead of any increase in the Superannuation Guarantee rate .

Author: Brendan Coates, Fellow, Grattan Institute

Super Reform On The Cards, Perhaps

The Productive Commission released their latest report today. We discuss the findings and consider the implications. Many people are not getting the maximum returns from their savings, thanks to poor fund choice, high fees, multiple accounts and insurance premiums.

In addition, APRA and ASIC have been asleep at the wheel, with more of a focus on the institutions compared with the interests of members.

Finally, industry funds often out perform retail funds.

The Productive Commission summary says:

  • Australia’s super system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees. Structural flaws — unintended multiple accounts and entrenched underperformers — are harming millions of members, and regressively so.
  • Fixing these twin problems could benefit members to the tune of $3.8 billion each year. Even a 55 year old today could gain $79 000 by retirement. A new job entrant today would have $533 000 more when they retire in 2064.
  • Our unique assessment of the super system reveals mixed performance.
    • While some funds consistently achieve high net returns, a significant number of products underperform, even after adjusting for differences in investment strategy. Underperformers span both default and choice, and most (but not all) affected members are in retail funds.
    • Evidence abounds of excessive and unwarranted fees in the super system. Reported fees have trended down but a tail of high‑fee products remains entrenched, mostly in retail funds.
    • Compelling cost savings from realised scale have not been systematically passed on to members as lower fees or higher returns. Much scale remains elusive with too few mergers.
    • A third of accounts (about 10 million) are unintended multiple accounts. These erode members’ balances by $2.6 billion a year in unnecessary fees and insurance.
    • The system offers products that meet most members’ needs, but members lack simple and salient information and impartial advice to help them find the best products.
    • Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50 000 — by duplicate or unsuitable (even ‘zombie’) policies.
  • Inadequate competition, governance and regulation have led to these outcomes.
    • Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including product proliferation). Many funds lack scale, with 93 APRA‑regulated funds — half the total — having assets under $1 billion.
    • The default segment outperforms the system on average, but the way members are allocated to default products has meant many (at least 1.6 million member accounts) have ended up in an underperforming product, eroding nearly half their balance by retirement.
    • Regulations (and regulators) focus too much on the interests of funds and not members. Subpar data and disclosure inhibit accountability to members and government.
  • Policy initiatives have chipped away at some problems, but architectural change is needed.
    • Default should be the system exemplar. Members should only be defaulted once, and move to a new fund only when they choose. Members should also be empowered to choose their own super product from a ‘best in show’ shortlist, set by a competitive and independent process. This will bring benefits above and beyond simply removing underperformers.
    • All MySuper and choice products should have to earn the ‘right to remain’ in the system under elevated outcomes tests. Weeding out persistent underperformers will make choosing a product safer for members.
    • All trustee boards need to steadfastly appoint skilled board members, better manage unavoidable conflicts of interest, and promote member outcomes without fear or favour.
    • Regulators need clearer roles, accountability and powers to confidently monitor trustee conduct and enforce the law when it is transgressed. A strong member voice is also needed.
  • Implementation can start now, carefully phased to protect member (not fund) interests.

APRA announces super reforms

In an effort to “maintain industry momentum”, the APRA, prudential regulator has finalised new superannuation requirements before they have been legislated; via InvestorDaily.

The Australian Prudential Regulation Authority (APRA) has today released a package of new and enhanced prudential requirements designed to strengthen the focus of registrable superannuation entity (RSE) licensees on the delivery of quality outcomes for their members.

A central component of APRA’s new framework is the introduction of an outcomes assessment that will require RSE licensees to annually benchmark and evaluate their performance in delivering sound, value-for-money outcomes to all members – covering both MySuper and choice products.

APRA deputy chairman Helen Rowell said APRA was committed to lifting standards across the industry for the long-term benefit of superannuation members.

“As the prudential regulator, APRA’s primary focus is on the sound and prudent management of the $1.8 trillion APRA-regulated segment of the superannuation industry; that includes seeking to ensure that RSE licensees meet their obligations to put their members’ interests first,” Mrs Rowell said.

“These changes to the prudential framework set a higher bar for RSE licensees by requiring a robust assessment of the outcomes delivered for members to be reflected in their strategic and business planning.”

In addition to the outcomes assessment, APRA’s final package requires RSE licensees to meet strengthened requirements for strategic and business planning, including management and oversight of fund expenditure and reserves. These requirements are set out in new Prudential Standard SPS 515 Strategic Planning and Member Outcomes.

The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No.1) Bill 2017 (the Bill) that is before Parliament would, if passed, introduce a legislated outcomes assessment.

APRA said its proposals are consistent with the outcomes assessment proposals in the Bill, and are being introduced now to “maintain industry momentum” towards delivering improved outcomes for members. APRA will review whether amendments are needed to the prudential framework requirements if the Bill is passed by Parliament in future.

Mrs Rowell also emphasised APRA’s strong support for the other reforms contained in the Bill and, in particular, the enhanced directions powers for APRA, the strengthened MySuper authorisation and cancellation provisions, and the requirement for APRA to approve changes of ownership of RSE licensees.

“These new policy proposals address weaknesses in the current superannuation regulatory framework and would greatly assist APRA in driving the superannuation industry towards addressing underperformance and improving member outcomes,” she said.

APRA’s finalised package of measures is the culmination of extensive industry engagement that commenced in August 2017, and includes amendments to the original proposals taking into account the feedback received during consultation.

The commencement date for the new measures has been set as 1 January 2020, to provide industry with sufficient time to meet the new requirements.

Home loan fintech raises $25m

A fintech start-up is celebrating a $25million raise as it continues on its pathway to becoming Australia’s “most innovative home loan provider”; via AustralianBroker.

Athena Home Loans, which is still in its pilot phase, has closed its most recent Series B raise led by Square Peg Capital.

Industry super fund Hostplus and venture firm AirTree also joined the round, taking the group’s total capital raised to date to $45m.

The Series B raise comes six months after the company announced a Series A fund raise led by Macquarie Bank and Square Peg Capital and three months after announcing a strategic partnership with Resimac Group.

Powered by Australia’s first cloud native digital mortgage platform, Athena aims to bypass the banks to connect borrowers to superfund backed loans.

The company was founded by two ex-bankers, Nathan Walsh and Michael Starkey, who said they wanted the journey to home ownership to be faster, cheaper and stress free.

Square Peg Capital invested in Athena in Series A and has further solidified its support of the home loan provider by leading the Series B round.

Venture capitalist and co-founder of Square Peg, Paul Bassat, who also sits on the Athena Board, said investing further into Athena proves the potential they see in the business.

He said, “Having worked with Nathan, Michael and the team over the last year I have enormous admiration for the speed at which they have navigated complex financial systems to develop a robust and customer-centric mortgage service.

“Athena is solving a really important problem for home buyers and is certainly one of the most exciting Fintech companies in Australia.

“We are thrilled to back the team again and look forward to supporting them on this extraordinary journey.”

Industry superannuation fund Hostplus has more than 1.1 million members and $37billion in funds under management.

Hostplus has spearheaded investment in the local start-up ecosystem, with more than $1billion of its fully diversified portfolio committed to Australian venture capital managers.

Hostplus chief investment officer, Sam Sicilia, said that “Athena is a great example of disruptive innovation delivering big savings for home loan borrowers”.

Athena COO Michael Starkey said, “We are delighted to have Hostplus and AirTree joining Athena as investors. Athena’s journey has benefited hugely from the insights and support from some of Australia’s smartest investors. It’s clear the timing has never been better to offer a fairer home loan.”

Athena CEO Nathan Walsh said, “During our pilot, we are already seeing the power of the Athena proposition to save money and change lives.

“A single mum who will be able to pay off her home loan 19 months earlier and save $130,000 over the life of the loan.

“A family with three young kids who will save $40,000 on their home loan can now take the family on the first holiday in years. It’s powerful stuff.”

Commenting on the company’s upcoming launch in Q1 2019, Nathan said, “Our key priorities with the investment will be to continue to innovate our platform, invest in talent and scale the business.