A Financial System Inquiry roundtable hosted by Finsia and King & Wood Mallesons was recently held in Sydney.
The roundtable focussed on Australia’s superannuation system in response to the FSI Interim Report and was attended by some of the biggest players in the industry to discuss the challenges and opportunities that are facing the industry today.
In assessing the FSI Interim Report’s positioning on superannuation and retirement products, the group gave the Interim Report scores which ranged from 4 to 7 (out of 10). The overarching recommendation was that the industry has been through significant change over a relatively short period and that it needs stability going forward, particularly if the industry is to have capacity to innovate.
Ruth Stringer and Nathan Hodge (KWM) both gave high marks to the retirement incomes chapter of the Interim Report. However, Nathan felt the superannuation chapter was let down by focussing on a range of disparate immediate issues. He was disappointed that the FSI did not look to position the super system in a way which enables it to respond to future challenges.
Key topics for discussion included:
Objectives of superannuation
The view from many in the group was that the FSI had gone some way in addressing some of the key issues with the superannuation system today.
However, Nathan felt what is first needed is to stand back and consider what the objectives of superannuation should be. A coherent set of objectives should be identified, as this will help determine the success or otherwise of future policy proposals. While the Interim Report repeats the superannuation objectives previously proposed by the Australia’s Future Tax System review, it makes no observations, and seeks no submissions, on their adoption.
The roundtable touched on the retirement incomes chapter of the FSI Interim Report. The general view of the group was that the chapter did a good job of covering this topic. One of the big issues in this sector is that the market is currently prevented from offering sufficient choice for consumers by limits on product features and a lack of assets to support longevity products.
Ruth Stringer pointed out that the elephant in the room in terms of retirement incomes is tax. Given that tax and superannuation are so intertwined, tax is conspicuous by its absence in the Interim Report. While recognising this is due to limits in the terms of reference, taxation of retirement incomes needs to be addressed or else significant barriers will remain.
Taxation and superannuation
One particular topic of discussion at the roundtable was the current model of taxing people as their money goes in, as opposed to when it is taken out. Some expressed the view that this is the wrong way around if people are to be encouraged to keep their money in the fund for as long as possible.
It was agreed that the current debate around adviser education is good and relevant, and that adviser training standards should be improved.
However, some in the group raised the point that Australia has much fewer restrictions on the introduction of new products in comparison to other OECD countries. This raises the question as to whether all products that are currently on the market are fit for purpose and whether the problem is bigger than adviser competency and knowledge. Some, however, expressed reservations in granting ASIC specific product banning powers on the basis of moral hazard (and liability).
There was a great deal of debate around current disclosure requirements with the common view being that an opportunity was missed around the time of the most recent PDS revamp. The general view was that PDSs are too inflexible to be of use to the member. In addition, while few funds have had disclosure documents banned, the fear of brand damage arising from non-compliance was great, which results in the preparation of PDSs being a very laborious task for funds.
The suggestion from the group was that this could partially explain the lack of consumer engagement in this area. Consumer disengagement was seen as being a huge risk to the industry and the group agreed that challenges for the industry are consumer engagement and financial literacy. It was suggested that a big step towards achieving this would be for funds to be able to put more information online, with a particular focus on electronic disclosure as a first step.
The debate around fees has received a lot of interest; however many at the roundtable thought that this was too narrow a debate and does not help with the issue of customer disengagement and the lack of financial literacy. The sense was that the conversation needs to move to a discussion around fees in relation to product make up and resulting performance.
Nathan Hodge suggested that there is benefit in reframing the discussion away from fees or even investment performance, and moving towards retirement adequacy. Fees and returns represent short to medium term issues, and they obscure the real (long term) question for superannuation which should be whether the member will have enough super to live on in their retirement years.
It was clear from the roundtable that many people have strong views about the superannuation system. All agree that one of the most important benefits of the FSI’s Interim Report is that it has kick started a healthy conversation about the financial system in Australia. Given that the Financial System Inquiry has received over 6,300 submissions in response to its Interim Report, it seems that there are many who wish to weigh into the debate.