The Gratton Institute says compulsory superannuation payments help many middle-income earners to save more for retirement, but super is simply the wrong tool to provide an adequate support for low-income earners. Their analysis shows top-up measures targeted at helping this group save for retirement are poorly targeted and an expensive way to do so.
Australia’s superannuation lobby wants the government to define in law that the purpose of Australia’s A$2 trillion super system is to provide an adequate retirement income for all Australians. The government disagrees: it confirmed instead that the purpose of super is to supplement or substitute for the Age Pension.
The government is right: super can’t do everything. Income from the superannuation of low-income earners will inevitably be small relative to the value of the Age Pension. The government boost to super aimed at low income earners is not tightly targeted. And fees will eat up a material portion of government support provided through superannuation.
With the Age Pension and Rent Assistance, government already has the right tools for assisting lower income Australians.
Government provides two super top-ups for low income earners
The Low Income Superannuation Contribution (LISC), introduced by the Labor government in 2013, puts extra money in the accounts of low-income earners who make pre-tax super contributions. Under the LISC, those earning less than A$37,000 receive a government co-contribution of 15% of their pre-tax super contributions, up to a maximum of A$500 a year.
The Abbott government was set to abolish the LISC, but the Turnbull government now plans to retain it, renaming it the Low Income Superannuation Tax Offset (LISTO), at a budgetary cost of A$800 million a year.
The super co-contribution, introduced by the former Howard government in 2003, puts extra money in the accounts of low-incomes earners who make post-tax super contributions. It boosts voluntary super contributions made by low-income earners out of their post-tax income by up to A$500 a year, at a budgetary cost of A$160 million a year.
Super can’t help many low income earners
Superannuation is a contributory system: you only get out what you put in. And low-income earners don’t put much in.
Their wages, and resulting super guarantee contributions, are small and their means to make large voluntary contributions are even smaller. Their super nest egg will inevitably be small compared to Australia’s relatively generous Age Pension.
For example, a person who works full time at the minimum wage for their entire working life and contributes 9.5% of their income to super would accumulate super of about A$153,000 in today’s money (wage deflated), making standard assumptions about returns and fees. If the balance were drawn down at the minimum rates, this would provide a retirement income of about A$6,500 a year in today’s money.
By contrast, an Age Pension provides a single person with A$22,800 a year. For someone who worked part time on the minimum wage for some or all of their working life, super would be even less, but the Age Pension would be pretty much the same.
Top-ups are not tightly targeted to those that need them
The LISC and the super co-contribution aim to top up the super and thus the retirement incomes of those with low incomes. But our research shows about a quarter of the government’s support leaks out to support the top half of households.
Whereas eligibility for the pension is based on the income and assets of the whole household, including those of a spouse, eligibility for superannuation top ups depends only on the income of the individual making contributions. That means the top ups also benefit low-income earners in high-income households. A far better way to help low-income earners is to increase income support payments such as the Age Pension.
Super top ups provide some help to households in the second to fourth deciles of taxpayers. But they do very little for the bottom 10% of those who file a tax return.
These households, many of which earn little if any income, only receive about 7% of the benefits of top ups. A further set of households file no tax returns – typically because welfare benefits provide most of their income. Very few of them receive any material super top up.
Super fees erode super top ups
Super fees will erode a sizeable share of the funds in the super accounts of low-income households, as a result of super top ups. Our research shows that super fees levied on most workers receiving the LISC erode between 20 and 25% of the value of the extra funds at retirement. This finding is consistent with previous Grattan work on super fees.
But super fees do not usually erode super top ups as much as they erode contributions to super in general. Fees eat up a higher proportion of the super savings of people with low balances because most fees have a fixed component that’s the same whatever the account balance. In effect the personal super contributions of low-income earners absorb that fixed component, which is typically the same whether or not government tops up the account.
However for those with very low super savings and sporadic employment, fixed fees can erode the value of their super top ups. That’s because at some point in their lives, their super balances can drop close enough to zero and fixed administration fees eat into the value generated by the top up.
Many Australians face low incomes and irregular work. They may not be able to contribute enough to their super to make up for fixed fees.Lucy Nicholson/Reuters
Some top up is still needed for low income earners
Superannuation compels people to lock up some of their earnings as savings until retirement. High-income earners are compensated for this delayed access because their contributions are only taxed at 15%, rather than their marginal rate of personal income tax.
Without the LISC, which reduces the tax rate on their compulsory super contributions to zero, those earning between A$20,542 and A$37,000 would receive relatively little compensation for locking up their money in superannuation. The 15% tax on contributions would be only slightly less than their 19% marginal tax rate.
And for those earning less than A$20,542, the absence of a LISC would take them backwards when they made super contributions taxed at 15% rather than keeping the money in their pocket tax free.
Better ways to provide adequate retirement incomes for low-income earners
However super top ups should not be expanded. It is too hard to target them tightly at those most in need, and super fees can eat up their value.
Instead, a targeted boost to the Age Pension would do far more to ensure all Australians have an adequate retirement. But there is an even better way to improve the retirement incomes of those most in need.
As previous Grattan research shows, retirees who do not own their own homes are the group at most risk of being poor in retirement. A A$500 a year boost to rent assistance for eligible seniors would be the most efficient way to boost retirement incomes of the lowest paid, at a cost of A$200 million a year. Only 2% of it would flow to the top half of households, with net wealth of more than A$500,000.
By contrast, a wholesale A$500 boost to all Age Pension recipients would cost A$1.3 billion, with half the benefit going to households with net wealth of more than A$500,000, mainly because the home is exempt from the Age Pension means test.
In defining an objective for Australia’s superannuation system, the government is right that super is not a universal pocket knife. Super top ups are a costly way to ensure that every Australian enjoys an adequate retirement.
Authors: John Daley, Chief Executive Officer, Grattan Institute; Brendan Coates, Fellow, Grattan Institute; William Young, Associate, Grattan Institute
Last week the Australian division of global financial institution Citibank became the first local bank to stop handling cash. The bank’s retail head said it was not a precursor to closing bank branches, but it comes as banks are stepping up their investments in technology, while at the same time looking to reduce costs. But evidence shows customers still want branches or personal interaction with bank staff.
Banks today spend a lot of time talking about technology. Their public documents are littered with terms like “simplification”, “process excellence”, “creating a footprint for a digital world”, “stepping up the pace of innovation”, “cloud based solutions”, “digital transformation”, “unparalleled digital capabilities”, “digital security”, “innovation labs”, “technology for leveraging data analytics” – it goes on and on.
It is clear the banks are highly motivated to ride the technology wave to its full extent. And they cite several compelling reasons. The first is improving the customer experience. The banks argue they can build deep customer relationships through technology improvements.
The way customers want to undertake banking is continually changing, and more and more customers want simplified solutions and to be able to do everything on digital devices. Part of the customer service improvement is heavy investment in data analytics to better understand customer profiles and the ways in which customers transact.
Security is a third factor. Customers want their money to be safe and banks need to invest in secure solutions and the prevention of cybercrime.
But what is the role of the traditional bank branch in all of this? Will increasing digital solutions lead to more branch closures? And do customers still want branch based solutions and interactions?
Branch networks are declining, but at a slower pace
APRA figures show there were 5904 “points of presence” in Australia offering a branch level of service as at June 30, 2016. These figures include non-bank entities such as building societies, but the vast majority relate to bank branches.
From 2012 onwards, the number of branches has shown negative growth each year, and there has been a particularly large slide of 5% in 2016. There has been a greater percentage of closure in rural areas. According to APRA’s branch classifications, there was a reduction of 315 branches, of which 173 (-4%) was in highly accessible areas, 75 (-10%) in accessible areas, 36 (-12%) in moderately accessible areas, 25 (-17%) in moderately accessible areas, 6 (-13%) in very remote areas.
These closures need to be put into context. They are small compared to the many closures that were seen in Australia from the early nineties to the early 2000s, when ATMs and other electronic solutions were being increasingly rolled out by banks. APRA figures show a reduction of more than 2,000 branches over this period.
An Australian parliamentary report at that time put this down to banks seeking increased efficiency and reduced costs in a highly competitive global environment, fuelled by an increase in technology and electronic banking solutions.
The US, like Australia, has also shown a relatively small reduction in branches in recent times. The UK on the other hand has had a comparatively huge number of branch closures. A parliamentary report showed branch numbers have fallen from more than 20,000 in the late eighties to less than 9,000 in recent times. These closures even led to an active group called the Campaign for Community Banking Services. It spent nearly two decades trying to stop the closures but disbanded recently, believing the tide could not be stopped.
Despite bank branch closures, there’s evidence to suggest customers still want branches or some sort of personal interaction with bank staff.
A Canstar Blue 2016 survey showed that in Australia the top three drivers of bank customer satisfaction are enquiry and problem handling, fees and charges, and customer service (branch and call centre). Digital banking (mobile, website and apps) ranks only as the sixth key driver. In the UK, a study by McKinsey (2016) showed that customers still want interaction with branches, especially for more complex transactions.
But do branches still deliver value for the banks themselves? Well yes, not only do they serve to satisfy the needs of those customers who want personal interaction with their banks, these branches are also essential sales outlets for the banks. There is also generally a desire among Australian banks to retain, and even expand, the relationship manager model for business customers, in contrast to a strong move over the last two decades by many global banks towards automated business processes such as credit scoring for small businesses.
The banks in Australia have generally been reluctant to dispel further closures. And it’s clear they wish to move much further into technology-based solutions. However, there appears fairly wide acceptance among the banks that branches and personal contact still have an important role to play. This means branches are likely to keep evolving into smaller outlets focusing on sales and more complex transactions, while banks focus on other technology solutions as they evolve.
Author: Robert Powell, Associate Professor, Edith Cowan University
The market bounced back after Trump’s victory in the US election, despite predictions that his policies could hurt business. This relates as much to the surprise return of a Republican Congress as it does to the election of Trump. It also largely turns on Trump being unable, or unwilling, to act on much of his rhetoric.
However, the US Dow Jones Industrial Average advanced 1.4% on Wednesday, and a further 1.17% on Thursday. Asia-Pacific markets also plummeted initially, as markets realized Trump would win, but recovered later – the Australian ASX 200 index fell 1.9% on Wednesday (Australian time) as Trump’s victory became apparent, but rose 3.3% on Thursday.
This is surprising given the US market generally declines around 1% following a presidential election. For example the market fell on the elections of Obama (5.27% in 2008; 2.37% in 2012), Bush (1.58% in 2000) and Reagan (0.73% in 1984).
The rally implies businesses believe that not only is Trump not harmful, he might be better than Clinton. A benign, conciliatory, and well-received victory speech alone could not achieve that: a passable speech does not erase myriad speeches with heated rhetoric.
Some sectors might benefit from Trump and a Republican Congress
Trump could benefit some sectors. These benefits arise from relaxing prior executive orders through to avoiding onerous regulation, which could otherwise potentially harm some sectors. Here’s a few examples.
Pharmaceutical companies: The Republican Party and Trump are unlikely to restrict drug price increases or to heavily scrutinize such increases. Trump’s health care policy platform is largely silent on drug prices. And due to large donations from the pharmaceutical industry, the Republican House Ways and Means Committee isn’t likely to back Medicare negotiating on drug prices.
By contrast, a simple Clinton tweet criticizing drug price increases before the election coincided with the Nasdaq Biotechnology Index declining by 4.7%.
Post election, pharmaceutical companies were prominent in the Trump Rally – Pfizer alone rose 7.07% on Wednesday and 4.27% on Thursday.
Resources companies: Long term, climate denial could hurt the economy through factors such as decreased agricultural production. Trump has little in the way of plans to combat climate change, with his policy platform also silent on this issue. But Trump and Pence have indicated they will “end the war on coal”, and this is part of the Republican policy platform as well.
Further, Trump has stated he will “rescind all the job-destroying Obama executive actions including the Climate Action Plan”. This highlights that on top of legislation that might be passed by Congress, Trump can himself repeal Obama’s executive orders limiting emissions.
In the short term, some resources industries will gain from these relaxed climate-related restrictions. These range general environment regulations through the reduced likelihood of serious pollution targets. Both Chevron and Exxon Mobile experienced moderate gains, increasing by 0.33% and 1.10%, respectively, on Wednesday.
Despite the rhetoric, Goldman Sachs, rose 5.89% on Wednesday and 4.28% on Thursday, following the election. Morgan Stanley,J.P. Morgan and other banks experienced similar gains.
Growth prospects and infrastructure
On top of these issues affecting individual industries, markets are arguably factoring in some prospect of renewed growth under Trump. This in part comes from promises to reduce taxes and to boost infrastructure spending, which are in turn linked to a potential commodities rally. Indeed, Trump indicates he will spend heavily on infrastructure, which could involve upwards of US$500 billion in infrastructure spending.
The optimism from markets might also be based on the assumption that increased spending will increase employment in the short term, and increase overall economic activity in the long term. And that lower taxes will encourage corporate investment and growth, potentially luring back companies from low tax rivals.
Trump has a personal stake in not harming business and his powers are limited anyway
The last potential factor is that Trump has extensive business affairs, giving him a vested interested in avoiding economic damage. His policy platform actively affects his personal affairs through its impact on the economy and immigration. Assuming he acts in a rational, self-interested, manner, he will avoid damaging protectionist policies that might influence his businesses’ operations.
This assumption is bolstered by his transition website which promotes his brands, giving every indication that he will at least attempt to minimize harm to his companies.
Further, even if he attempts to promote harmful policies, the president has limited powers. He cannot create legislation and is largely limited to approving or vetoing legislation passed through Congress. A president can issue Executive Orders, but their scope is limited. Further, a rational Congress could mitigate, and need not act upon, Trump’s heated campaign rhetoric.
The market appears to have responded positively to Trump’s election in the short term. The hope is that he will generate economic growth, that his policies will moderate his rhetoric, and that he will be unable to unilaterally achieve aspects of his policy platform.
It remains to be seen whether this holds up in the long term. The share market remains relatively volatile, as evidenced by the rapid changes in Asia-Pacific markets. The positive sentiment could easily reverse if the market’s positive expectations do not materialize.
Author: Mark Humphery-Jenner, Associate Professor of Finance, UNSW Australia
The vast majority of Australian companies are privately held. There are many advantages for this. Private companies face fewer regulations and lower requirements than public companies when it comes to reporting to shareholders, for example.
But new sources of funding are starting to blur the lines between public and private companies. As a result, we should consider introducing an intermediary form of corporation that sits between the two.
The difference between public and private
Private companies are not designed to raise funds from a large group of shareholders. In fact, two of their key characteristics are that they cannot raise capital from the public and they are limited to having 50 non-employee shareholders.
Historically, when a company required more funds than 50 non-employees could provide, they would convert into a public company. Counting on a wider base of investors and owners, public companies are more heavily regulated, addressing many of these concerns.
In comes crowd equity funding
A new form of funding has come on the scene – crowd equity funding (CEF). It allows companies to raise funds from a large range of investors through an online portal. Investors receive shares in the company in return for their investment.
Recognising this, in 2015, the government introduced a bill to enshrine CEF in legislation. The bill limited CEF to a select group of public unlisted companies. Ultimately the bill lapsed and a new bill is expected to be introduced this year.
Limiting CEF to public companies does not take into account the important role private companies play in our economy. So the government is also assessing whether CEF should be introduced to these types of companies.
But simply extending CEFs to private companies may not be ideal either.
Why we can’t just extend CEF to private companies
If the introduction of CEF to private companies is accompanied by raising the ceiling for investors and introducing more accountability in the system, the issue of investor protection will be moot. However, this could mean the death of private companies as we know it. With increased regulation, the cost of running a private company will rise. This type of business may no longer meet the need of people who are currently running closely held companies – which form the bulk of private companies.
Further, there is a need to distinguish between two types of private companies – the one that may never be interested in accessing CEF and the one that may in the future. For instance, a private company may be a useful engine to set up new general, social and environmental enterprises as this type of company is cheap and cost effective to run. However, with the growth of such businesses, access to finance may be problematic and conversion to a public company may not be an ideal either. Something in between could be the solution.
A new form of company
Any consideration of CEF should be accompanied with discussion on how to promote small and medium enterprises, and whether to do so may require the establishment of a new form of company. One that allows entrepreneurs to access CEF when they outgrow a private company, while also providing some protection to investors.
Designing such a company form will ensure Australia does not fall behind the rest of the world, and will promote a different type of entrepreneurship.
Author: Marina Nehme, Senior Lecturer, Faculty of Law, UNSW Australia
Despite suggestions that young people are losing interest in the platform, its 1.5 billion users still puts Facebook at the centre of social media. The site was launched in 2004, and so those meeting Facebook’s minimum age requirement of 13 will, in 2017, be the first generation for whom Facebook has always existed.
We are now able to reflect on the long-term use of Facebook, which has enjoyed unrivalled longevity and growth. Those who joined in their early teens are now in their twenties and have “grown up” on Facebook, documenting their life through text, images, videos, and geo-location data such as “check-ins”. We spent two years interviewing these twenty-somethings to explore how they had documented their experiences of growing up on Facebook.
Their Facebook profiles have become effectively an archive of their lives. As our participants scrolled back through their Facebook timelines with us, they recounted the experiences they had posted to the site: exam results, new romantic relationships, breakups, losing a job, travel, and so on. Sometimes seemingly banal disclosures would remind them of more complex stories that were not immediately obvious. A photo of one participant sleeping on her father’s couch, for example, reminded her of a painful breakup with a partner. For another, the gaps in his timeline elicited stories about his gender transition that led him to switch to a new profile.
As our participants delved into their past many reflected on points in their lives where they were making critical decisions about their futures such as graduation, launching their careers and starting their own families. Some were in their final year of university study and were looking for a job. Today, Facebook profiles have become almost as important as a CV. And, much like the preparation and polishing of a CV, young people are cleaning up their Facebook profiles – prioritising stories about travelling or voluntary work and making the embarrassing details about nights out with friends private or erasing them altogether in an attempt to present a more professional, measured, mature identity.
For many, Facebook has shifted from being the site on which to document carefree student days to a space where a more professional identity can play out. Recruiters have for some time examined social media profiles, something that raises important privacy questions. Facebook even now offers its own, work-focused Facebook app, Workplace, showing the company’s desire to expand into more areas of our lives.
Two participants in our study were final year medical students. Coached in a job-seeking seminar, they were told that the recruitment team would carry out web searches on the candidates, including Facebook pages. This was an incentive for them to tidy up their profiles, and reflect on how many years of Facebook posts might be interpreted by potential employers and patients.
The sociologist Anthony Giddens uses the expression “the reflexive project of the self” to explain how personal identity is not fixed in stone, but an ongoing project that we constantly work on. This concept is particularly applicable to social media such as Facebook, Instagram and Twitter because it captures the way these services are embedded into young peoples’ lives, and their professional development.
By polishing their Facebook profiles they can revise their past – removing pictures or posts that no longer play a role in who they are, or who they wish to portray themselves to be. Entire events that once seemed significant can be removed, having since been diminished into the realm of teenage naivety as priorities, networks, and identities change.
Competing versions of identity
These erasures raise important questions. When in decades to come those who have grown up using Facebook are running for public office or moving into positions of power, how might we think differently about what constitutes a professional identity, and its relationship with our younger selves? Will future prime ministers be embarrassed by a love-struck selfie documenting a one month anniversary of their first relationship? Will future CEOs be deemed inappropriate for their jobs because of a flippant post made decades earlier? Should they?
Sports stars and politicians are often shamed and sometimes ruined for things they say on social media. Gymnast Louis Smith and footballer Joey Barton have found themselves in trouble for their questionable social media posts. Cheerleader Caitlin Davies’s career was ruined after a photo of her drawing offensive graffiti on an unconscious man was shared on Facebook.
The issue is that the hundreds or thousands of posts that make up twenty-somethings’ social media profiles are disclosures written and shared in the past, often forgotten and buried – until uncovered by someone scrolling back through them. In another case, the UK’s first youth crime commissioner Paris Brown resigned following the uncovering of apparently racist and homophobic comments posted on Twitter as a younger teenager.
Might this kind of scrutiny intensify as entire lives recorded on social media are dredged up and put under the microscope? Or perhaps our attitudes will change, and they will be appreciated for what they are – moments in time, often from long ago.
For either the carefully edited approach to Facebook or the forgotten posts that come back to haunt their creators, it will be interesting to see the impact on future generations. What, for example, will a child think on scrolling through the Facebook timelines of parents who grew up using social media? Might the edited, polished version of their lives that they have put forward on Facebook stand in place of memory, and so eventually become the recorded story of their lives, however carefully curated and managed?
Authors: Sian Lincol, Senior Lecturer in Media Studies, Liverpool John Moores University; Brady Robards, Lecturer in Sociology, University of Tasmania
When the much anticipated Uber judgment on the self-employed status of two drivers came in, the victory was described by their union, the GMB, as “monumental”. Respected commentators including the lawyers, Leigh Day, and the Guardian newspaper described the judgement as “historic” and “a landmark”.
There is no doubt that the judgement delivered by the London Central Employment Tribunal on October 28 was an advance in the campaign to provide workers’ rights to the hundreds of thousands that are wrongly classified by their de facto employers as “independent contractors” or “self-employed”. But this is no triumph. It is only a small victory in one battle that is part of a much larger and more protracted war. There are five principal reasons for this.
First, Uber will appeal to the Employment Appeal Tribunal, and if unsuccessful there, go to the Court of Appeal and maybe all the way to the Supreme Court. As its business model and, thus, profits, are fundamentally based upon using what the Employment Tribunal regarded as a “bogus” form of self-employment, it will expend a huge amount of energy and resources to overturn the ruling.
Campaign plans
There is a second, more quintessential reason. The nature of the Employment Tribunal decisions means that if many more Uber drivers wish to be availed of workers’ rights – minimum wage, sick pay, holidays, pension enrolment and so on – then they will have to take Employment Tribunal cases as well. Therefore, it was wrong for various commentators such as lawyers and personnel professionals to imply that the rest of Uber’s 40,000 drivers in Britain will be now suddenly be entitled to workers’ rights.
Sure, the Tribunal’s finding does intimate that idea but it is no more than that. The ruling is not binding upon how Uber treats its other drivers – something Uber itself is clearly aware of. The other drivers were not joint plaintiffs in the case. The only way the GMB union can make Uber cave in on all of its drivers is not only to take many, many more ultimately successful cases (as it seem intent upon doing), but also to use various non-legal avenues to pressurise Uber into changing its ways.
Organising consumer boycotts, investor strikes, industrial action of the Deliveroo sort are all viable options. This would be most effective if deployed, along with the legal means, against Uber in a form of pincer movement.
Another important tool available to the GMB at the moment is to use the statements of the prime minister, Theresa May, concerning an economy that “works for all”. If it can get other Employment Tribunals to see which way the political wind is now blowing, this will increase its chances of success.
Will the Prime Minister be an ally?EPA/ANDY RAIN
One case at a time
A third reason to avoid jubilation is that even a final victory after appeal in the Uber case would not automatically mean success for the host of other self-employed workers bringing similar claims against the likes of Addison Lee, Excel, City Sprint and eCourier and backed by their GMB and IWGB unions – or any others that might come in the future elsewhere. This is because each is treated in law as an individual case. Even where there are class actions of multiple plaintiffs in a coordinated series of cases, the judgements only apply in law to them.
So the plaintiffs’ cases against Addison Lee, Excel, City Sprint and eCourier will have to pass the same stringent tests that were applied in the Uber case and show that in different settings that their work – and the organisation of it – was effectively controlled in a conventional managerial method. Moreover, cases take time. The process of gaining the Uber ruling started in the summer of 2015.
Fourth, even if those other cases are successful, Employment Tribunal rulings are no substitute for a legislative solution. Ultimately, case law precedents can be undermined, overturned and superseded by other case law precedents. Legislation – along with robust enforcement – is the only way to outlaw the bogus use of self-employment. Anything else means that the war to do so means fighting on a piecemeal, incomplete basis.
Fifth, and crucially, employers will undoubtedly find new ways to introduce and embed self-employment. We have seen it already in the construction industry. New rules in 2014 sought to stop employment agencies falsely providing workers on a self-employed basis, but all that happened was that workers were shifted over to so-called “umbrella” companies where workers can be employed legally on a temporary basis and many on zero hours contracts. The practice is now spreading elsewhere. As employers have both the means and the motivation, they will develop new methods to get around any legal challenges. Again, this flags up the need for legislation to provide a blanket ban on bogus self-employment.
The two Uber plaintiffs, James Farrar and Yaseen Aslam, along with their union, the GMB, are to be congratulated on pushing open the door to the legal possibility that self-employed workers might gain worker rights. But it will take much more than this to turn the possibility into a probability, let alone an actuality. Political and legislative change is needed to make sure that their victory is neither Pyrrhic nor temporary. Unless that happens, the Uber ruling will not even be the end of the beginning for bogus self-employment.
Author: Gregor Gall, Professor of Industrial Relations, University of Bradford
This week, ANZ, the latest (and now the last) of the big four Australian banks to have ventured far away from the nest, confirmed it was coming home into the arms of the Bank of Mum and Dad (also known as the Australian taxpayer). Though it took considerably less time than NAB’s disastrous forays overseas, ANZ has given up most of its international ambitions.
All of the four pillars have now adopted a “home sweet home” strategy (assuming that we also call New Zealand home), in a cosy cocoa and slippers kind of early retirement.
But now that the four big banks are all concentrating full time on exactly the same markets, where are their world-leading profits going to come from?
With the housing market heading for a hard or soft landing (take your pick), the supposed golden goose of “wealth management” off to the chook raffle, and the mining boom now bust, where are future profits going to be made?
Australia is already seriously over-banked.
Using numbers from the Australian Bureau of Statistics (ABS) and banking industry bodies, there are around 6,000 fully-fledged bank branches in Australia. This means there is roughly one bank branch for every 1,600 households – we should almost be on first name terms with bank staff. There is one ATM per 300 families and if we add in eftpos machines, where one does not even need a purchase anymore to withdraw cash, there is one cash outlet per 10 householders.
It’s almost like having an ATM in your home. Oh wait, we do, it’s called the internet.
Some banks have already smelled the wind. Suncorp, not one of the flabby four, has recently announced it is closing all but one of its branches in Western Australia because customers are moving online. And in the UK, the major banks are closing thousands of branches across the country because customers are no longer visiting them, preferring their smartphones instead.
Our government and prime minister are leading the charge into this new “agile” future and have lectured us that we should not be afraid of the consequences
We have to recognise that the disruption that we see driven by technology, the volatility in change is our friend if we are agile and smart enough to take advantage of it.
But one area that appears to be immune to digital disruption is the four pillars policy, which has been in place now for over 25 years. And, despite the fact that the Wallis Inquiry recommended it be dismantled in 1997, it remains in place, a feather bedded home for lazy bankers.
While Paul Keating, the original architect of the policy, hoped it would promote healthy competition between the original six pillars, it has instead engendered a culture of arrogance and sometimes outright deceit.
Bankers from the big four appear to feel themselves to be above scrutiny and the recent grilling of bank CEOs by parliament to be just a bit of theatre. And this assessment comes from an ex-CEO of ANZ who is walking away with some A$88 million while his legacy is being dismantled by his successor.
If the Treasurer is afraid of taking on one of the most effective lobbying groups in Australia, the Australian Bankers’ Association (ABA), maybe he should consider tossing one of the big four out of the nest, letting them try to fly on their own?
But which one to throw out?
Given the myriad of problems that have been uncovered in all four banks, an argument can be made for any one of them.
Luckily, we have a ready made answer, from the recent Financial Services Inquiry. The chairman of that inquiry, David Murray, ex-CEO of CBA, one of the pillars, argued that the Australian banking system must be made “unquestionably strong”, in particular as regards the capital retained by banks.
Since systemic banking crises are triggered by contagion between banks – the system is only as strong as the weakest link – then it would make sense for the taxpayer to rely on three stronger banks rather than four weaker ones. In fact, there is nothing magic about the number “four”, it would be even better if there were 5, 6 or 7 undeniably strong banks, but that’s not going to happen (at least before the next banking crisis).
So, the weakest one, the runt, should be tossed out.
And we could leave it to the market to decide.
Let’s pick a hypothetical date, say June 2021, end of financial year 2000, and declare that on that date the weakest bank would lose its four pillar status. Note that would not be end of the world for the loser, as there are many banks not feather-bedded, such as Suncorp and Macquarie Bank. The ex-Pillar, which would still be a substantial bank, would just have to make its own way in the world without the protection of the four pillars cachet, but still with a sizeable deposit guarantee from the government.
In order to satisfy Basel III rules, Australian banks need to get more capital, and the best type of capital is equity. If investors had to put their money where their profits are likely to come from in future, the strongest banks would emerge, and with a healthy capital base.
Depositors would also benefit. Under Basel III, banks are required to improve what is called their Net Stable Funding Ratio (NSFR) or basically they need to increase their reliance on local depositors rather than overseas money markets. APRA is currently in the middle of a consultation process about NSFR and, as usual, banks are whinging that the sky is about to fall down (again), but APRA appears to be holding firm(ish).
Since NSFR is one measure of unquestionable strength, then depositors could also choose the strongest banks and get better rates at the same time.
If people could not stomach losing the totemic number four, then one could consider replacing the weakest bank by another pillar – a sort of relegation and promotion. And in the spirit of innovation one could look elsewhere outside of the banking sector, such as the Australian Stock Exchange (ASX).
It is arguable that losing the ASX could be at least as disastrous as losing one of the four big banks, so dependent is the local superannuation market on local equities. Incidentally so is the measurement of NSFR, as local banks have been given a local dispensation for holding equities.
The fact that the four pillars are also four of the five the largest companies by market capitalisation on the ASX 200 would mean that the ASX is absolutely essential in any global liquidity crisis. ASX also operates Austraclear, the main clearing and settlement depository in Australia which holds more than A$1.4 trillion worth of securities, such as government bonds. Pretty important, eh?
And if the relegation worked, maybe we could try it again in five or ten years. The thought would surely help keep the bankers honest in the meantime?
Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University
Although we currently live in the “Information Age” what we actually generate, and most of the time fail to make meaningful use of, is data. The Australian Government’s Productivity Commission has released a report that highlights the economic, health and social costs of Australia’s failure to make effective use of the increasing data produced within Australia. Currently, it estimates that companies, governments and researchers are only making use of just 5% of the useful data that is currently available.
Getting access to data in order to carry out research and analysis is often a long and tortuous process.
In the health sector for example, a request for de-identified data about CT scans and cancer notifications took 5 years to reach researchers at the University of Melbourne. Medical guidelines about CT use in young people were changed after the researchers showed a relationship between CT scans and an increased risk of cancer. This link could have been identified much earlier, possibly preventing many young patients from being put at risk.
The Commission rightly makes the point that the ongoing use of data for the assessment of medical procedures and drug treatments in particular should be the norm, not the subject of occasional research.
There are a wide range of reasons why data is not being used more effectively. In the case of health data, there are concerns by hospitals and health authorities relating to the privacy and confidentiality of patient data. There is perhaps a more practical block however which is that sharing data, or making use of it for analysis, is not seen as a priority by many organisations and consequently, they are unwilling to devote much money to those activities. Certainly, they are even less willing to spend money on preparing data to share with other organisations, especially those that they regard as competitors.
Another issue is that CEOs and managers are often not highly numerate, and consequently don’t see the value in the information and knowledge to be gained from data analytics.
What the Commission is proposing however is legislative changes to force the increased availability of data from the public and private sector. It also wants to give individuals ultimate control over what data is held about them and control over what organisations and government can do with that data. It pushes for a more radical culture of data use than is currently the case and will face an uphill struggle to change that culture.
One of the recommendations for example suggests that linked data, including statistical linkage keys, that is used for research should not have to be destroyed at the completion of the project. This was one of the issues raised through public concern about the Australian Bureau of Statistics retaining names and addresses from the 2016 census for a longer period. In fact, the Commission is arguing for more widespread use of identified data.
What this means is that if the recommendations are accepted and become law, private and public organisations will have to do more to catalogue and publish what data is held, share it more widely and in particular allow individuals with access and more direct control.
For international companies, this may not be anything new. Legislation in other countries, especially the European Union has meant that companies like Google for example already have mechanisms by which individuals can access the data that is held about them.
For a strategy of justifying the increased use of data to work, the public will need to be convinced that the data is going to be used in the their interest and not as just another way to justify increased surveillance and recording of private information, especially by the Government. The benefits of data availability and analysis need to be clearly communicated to the public. It will be important to give clear examples of cases where there has been a direct association between using data and better health outcomes. Of course, this is harder to do if the benefits of analysis of data are in the future and depend on the changes to data use being implemented successfully.
Perhaps a bigger challenge however is the lack of people with the right skills to handle and analyse data. Universities are only recently starting to focus on data science and related degrees and even then, the focus is on the analysis part and not on the other skills required for making use of information produced from these activities in an organisation or in government.
Those companies that understand the benefits of data are already struggling to get trained staff to work on these problems. Many organisations however, just don’t understand how the collection and analysis of data will help them. Consequently, they are unwilling to make it a priority in their budgets or activities. Ironically enough, this includes universities themselves.
Author: David Glance, Director of UWA Centre for Software Practice, University of Western Australia
The numbers and size of cyber security attacks are increasing and Australia is one of the world’s largest targets. The Federal government noted the current impact of cyber attacks on the Australian economy is A$17 billion annually.
The reasons are many and include a lack of direction and commitment to understanding information security at the strategic level. Research from the Australian National University shows executive/board knowledge of cyber risks among medium sized businesses is inadequate and board-level governance of cyber security risks varies wildly between organisations. This is troubling given the ultimate accountability of board directors.
The report found that only 58% of cyber security professionals thought their board had a sufficient understanding of cyber risks. Less than half (46%) said their board discusses cyber security rarely or never. Almost a third (30%) even said their board does not receive reports of cyber threats to the company.
Research from Cambridge University and retail bank Lloyds, also shows this level of uncertainty is causing boards to realise they have no idea what they are dealing with and giving up. Boards are doing this by simply outsourcing the risk of a cyber attack through the purchase of cyber insurance. The report comments:
“The amount of cyber insurance being purchased in Australia [has] increased 168-fold (16,828%) in the last two years, as more and more businesses seek to protect their balance sheets from this emerging threat.”
The problem with this approach to cyber risk is that too little effort is being made to understand the value, control and cost of the information that an organisation holds.
Cyber insurance is a product that covers businesses for the risk of data breaches, employee errors in mishandling data and computer hacking attacks. It covers liabilities and the expense involved in responding to a cyber attack. For example, Sony estimated that it spent US$171 million in cleaning up after its PlayStation Network was famously hacked in 2011.
Simply outsourcing the risk of an attack by purchasing cyber insurance fails to protect an organisation’s reputation from repeated and sustained cyber attacks. Another problem is that the erosion of an organisation’s competitive advantage through the loss of trade secrets through cyber attacks, is difficult to measure and insure.
My research shows executives should be identifying the value and sensitivity of the information in their organisations. Only then can they make sensible decisions about what IT infrastructure should be used and whether to seek expert help by outsourcing.
However identifying all the information that an organisation holds is not as easy as it first sounds. For example, some business conversations take place on social media platforms such as LinkedIn. Businesses need to consider whether those conversations are within the realms of responsibility for employers and therefore if employees should be admonished or supported for holding these electronic conversations.
Organisations can sometimes hold vast pools of information that are secret. However holding sensitive, secret information that is non-strategic is costly and may be pointless. Consider for example a retail organisation that has an online ordering website. This sort of organisation shouldn’t be recording and holding the credit card details of customers, if it can be helped.
Outsourcing the payment for goods or services to finance service intermediaries makes good business sense. By not holding credit card details and effectively outsourcing that function, an organisation has made itself safer because it simply can’t end up on the front page of a newspaper for leaking credit card details.
Sometimes sensitive information is necessary for conducting business operations. If this is unavoidable, then organisations might need to ask whether the security controls they have in place to protect their sensitive information are enough. This might also extend to information being used by suppliers or customers.
If the assessment reveals that security controls are not enough, then a business case needs to be made for increased budget to the board. This may be costly, but if sensitive information is necessary for conducting business operations, then it must be protected and the security budget should be approved.
Retailer Target was affected by a point of sale cyber attack in 2013.Paul Miller/AAP
Organisations routinely fail to fully assess and protect against the risks introduced by storing or sharing information with other organisations. Examples include sharing with suppliers, customers, regulators and contract staff.
High profile cyber bungles from supplier-side attacks include the Target attack in December 2013, where the point-of-sale machines, supplied and operated by a third-party supplier, were infected with a virus that siphoned off all the credit card details of customers.
Board directors not taking the time to understand information security strategy can lead to a blanket approach of mitigating all risk of a cyber security attack by simply purchasing cyber insurance. This clumsy approach is not sustainable and consumers should be demanding more from our business leaders.
Author: Craig Horne, PhD candidate, Chairman of the Australian Computer Society in Victoria, University of Melbourne
Great cities and neighbourhoods always have a particular kind of urban intensity – what we might call the “character”, “buzz” or “atmosphere” that emerges over time. While unique in many ways, great cities also have certain things in common. One way to understand these properties is to think about a city’s “urban DMA” – its density, mix and access.
We’re still in the early days of understanding how cities work. But we do know that creative, healthy, low-carbon and productive cities all depend on intensive synergies of density, mix and access.
When we talk about “urban DMA”, we’re talking about the density of a city’s buildings, the way people and activities are mixed together, and the access, or transport networks that we use to navigate through them.
Like biological DNA, urban DMA doesn’t determine outcomes, but establishes what is possible. A low density, largely mono-functional cul-de-sac (such as a shopping mall or a gated enclave) is an anti-urban form. Minimum levels of concentration, co-functioning and connectivity are necessary for any kind of urban life.
The concept of urban DMA can be traced to the work of the late Jane Jacobs, whose book “The Death and Life of Great American Cities” was written in the mid-20th century, when many great cities were being surrendered to cars and poor urban design.
Jacobs wrote of the need for “concentration”, “mixed primary uses”, “old buildings” and “short blocks”. We recognise this as urban DMA – “concentration” is density; “mixed use” and “old buildings” are the conditions for a formal, functional and social mix; and “short blocks” means “walkability” at a neighbourhood scale.
Jacobs’ key contribution was to focus on the city as a set of interconnections and synergies rather than things in themselves – a focus on the city as an assemblage, rather than a set of parts. While the language has evolved, our understanding of these vital synergies needs to be taken much further.
Access
Access is about how we get around in the city. How do we make connections between where we are and where we want or need to be? What are the access routes – are they organised in closed or open networks? How fast are they at different scales and for different modes of transport? How far can we get with a given time frame and with what mix of walking, cycling, car, bus, tram or train?
At a neighbourhood scale access is primarily about “walkability”; at larger scales we depend on a mix of cars, cycling and public transport. But access means nothing if there is nowhere to go – the synergy with density and mix is everything.
Kim Dovey, Author provided
Mix
Mix is about the differences and juxtapositions between activities, attractions and people. It’s not about diversity as spectacle, but a means of enabling encounters and flows between different categories of people, buildings and functions. Mix is about the alliances and synergies between home, work and play; between production, exchange and consumption.
Like density, mix can be uncomfortable; it means proximity to different kinds of people and practices. It means a layering of old and new buildings, of large and small buildings, and of large and small organisations.
Mix is not an unmitigated benefit. Urban planning was largely invented to stop mixing – to prevent living with noise, smells and activities we don’t like. It means keeping where we live away from where we work and shop.
But that separation ceases to be helpful when the result is people living in suburbs with no shops, or working in suburbs with no transport. Great cities will have many different kinds of mix – a “mix of mixes” – each geared in turn to density and access.
There are dangers in an excess of some kinds of density, like the overcrowding of populations and the loss of light and air that comes with excessive building. There are many different kinds of densities – of residents, jobs, buildings, houses and street life. They interconnect, and they all matter.
The big question about density is: how much activity, how many people and how many buildings can be concentrated into one urban area? How close can we live to where we work or need to be? How many urban amenities, places and jobs can we walk or commute to?
Density is not one thing but many and it is the mix that matters.Elek Pafka, Author provided
Urbanity
What is at stake here is the future of this great cauldron of productivity and creativity we call urban life. The 19th century British economist Alfred Marshall famously suggested that there was “something in the air” of a city that made it more economically productive – a phrase that is suggestive of an “atmosphere” and a “buzz” of urban intensity.
Much more than a simple clustering of people and buildings, urbanity is a concentration of intensive encounters and interconnections. And its benefits are much more than economic – they’re social, environmental and aesthetic.
If we want to build great cities, we shouldn’t develop formulae or copies of “best practice” from other cities. We should turn to our existing cities and ask three simple questions:
How dense can we get yet remain liveable?
How mixed can we get while remaining safe and civil? And,
How easily can we get around in a healthy and sustainable way?
Urban planning enables and constrains these dimensions of urban life. And unlike human DNA, urban DMA can be redesigned. If we want a healthy, creative, productive and low-carbon city – if we want “the buzz” – we need to reshape the urban DMA.
Authors: Kim Dove, Professor of Architecture and Urban Design, University of Melbourne; Elek Pafk, Lecturer in Urban Planning and Urban Design, University of Melbourne
