(03) 9020 2905PORTFOLIO POINT: We can only hope large parts of Cooper’s Super System Review are treated just like most of Ripoll and Henry – vastly ignored.
There’s something fundamentally wrong with Jeremy Cooper’s review and recommendations into Australia’s superannuation system. And it’s something that every reader of Eureka Report (but particularly this column) should understand.
The underlying philosophy of the report is wrong. Horribly, horribly wrong.
Cooper has based his major recommendation of MySuper on the fact that the vast majority of Australians “aren’t engaged” with their super. But that’s not the bit that’s wrong. That’s sadly accurate.
Cooper thinks that Australians should have access to cheap super. No issue there. That’s a fact also.
What is completely arse-about is that Cooper thinks that we should give up on educating Australians about the importance of their super. Without ever even having tried to teach them anything!
Cooper’s MySuper proposal starts with this assumption. It’s right there on page one. “Members should not have to be interested, financially literate, or investment experts to get the most out of their super.” (My underlining.)
He argues that because super is compulsory – for everyone but the self-employed – that we should give up on getting those who can’t be bothered to take an interest in their super.
Just for a second, let’s put Cooper in charge of other “compulsory” aspects of society and see how dumb it sounds. Let’s start with education: “Students shouldn’t have to be interested, reading literate or learning experts to get the most out of their schooling”. Ummmm …
Okay, let’s try healthy eating: “People shouldn’t have to be interested, nutritionally literate, or sustenance experts to get the most out of their food”. Errr …
How about compulsory voting: “Voters shouldn’t have to be interested, politically literate or democracy experts to get the most out of their elected politicians.”
On a personal note, I shouldn’t have to be a lawyer to protect my intellectual property, an accountant to pay the least tax, or a psychic to know why I’m in trouble with my wife this time.
Governments spend millions on making sure our education, health and elections are taken reasonably seriously by Australians. But there has never been a public education campaign about the underlying importance of super. Kids aren’t taught about super in school. Adults aren’t taught about it. They should be.
But at the point when most people retire, super is likely to be their second largest financial asset, but their largest income-producing asset. Why doesn’t the government educate people about super? They’ve never done so. It’s been left to industry funds to educate about the cost of fees. But the government has done little to nothing (apart from constantly fiddle with it to reduce confidence in the system).
The problem is that the importance of super springs up on people when they’re in their 50s. By which time they’ve missed three decades of getting their super right.
It’s not that MySuper is a bad idea. Low-cost super options are a good idea. But the reason for doing so is wrong at the core. Let’s think about raising interest in super, rather than accepting that people don’t need to be “interested, financially literate, or investment experts”. That’s giving up without ever having tried.
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Cooper’s review is big on recommendations. Something a little short of 200. There’s plenty in there to like and plenty in there to fear. Predictably, industry funds have largely embraced the change – given that they are low-cost providers anyway, it is actually a massive tick to their business model.
John Brogden at the Investment and Financial Services Association is understandably less impressed. There is a huge threat to the profitabilities of the financial services businesses, so there’s a certain amount of self interest there.
It wasn’t bought out in the day one reaction, but the recommendations in regards to insurance in superannuation are one place where private enterprise will not be keen to cop a fat lip. Don’t be surprised if they fight back hard.
Cooper wants to ban commission on insurance in managed fund super and SMSFs. And he wants to ban trauma insurance cover being offered inside any super fund.
Let’s make this clear, if you remove commissions on insurance for anything related to super, you will only worsen Australia’s massive insurance problem.
What Cooper is recommending (no commission and funds setting minimum, opt-out, insurance levels for clients) is essentially what industry funds have been in charge of doing for about 25 years. And they’ve been miserable failures at ensuring their members are provided with adequate insurance protection (I see this on a daily basis.)
Corporate super funds tend to do a slightly better job, but it’s a one-size-fits-all policy.
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So, what has Cooper recommended specifically about SMSFs?
His big picture comments, like Mr Grace from Are You Being Served, are “You’re all doing very well!” But the detail suggests that he doesn’t trust them to do the right thing and make the “right” choices.
In total, there are 29 recommendations relating directly to SMSFs. A bunch of them are trying to make it easier to crack down on illegal early release schemes.
Another group relate to SMSF service providers. Accountants should lose their exemption to provide early advice to start up a SMSF and everyone involved in providing advice to SMSFs and their trustees should have a minimum standard of education or credentials. These are not detailed.
Several relate to Cooper wanting the ATO to have more powers to be able to report on SMSF performance, for the ATO to have more discretion in handing out fines and to be able to exercise more discretion in handing out fines to trustees. On that front, the penalties should come from the individuals, not the SMSF’s own cash.
The ATO should also be able to impose mandatory education on wayward trustees and be able to issue binding rulings to SMSFs. Also well flagged was the independence of auditors, which Cooper would like to enshrine.
Cooper has also recommended the government ban “in-house assets” from SMSFs and give funds five years to rid themselves of their current holdings. In house assets are, essentially, loans or leases to, or investments in, related parties or trusts to the fund.
The ban would be immediate – no further investment in IHAs. But SMSFs would have to exit existing assets within that five year cut off also.
However, in my opinion, there are two branches of “interesting” recommendations, both of which we’ve covered here in recent months.
The first one is in regards to super gearing. Cooper wants the government to “review” the 2007 changes to gearing in super and the recent consumer protection measures within two years “to ensure that borrowing has not become, and does not look like becoming, a signficant focus of superannuation funds”.
What?
It sounds like the board wanted to ban gearing in super, but realised there was no point, as the Super Minister Chris Bowen had only recently confirmed their place. See my column from March 17 on super gearing being here to stay and my June 2 column about the ATO going to the trouble of rewriting the gearing rules. Both suggest Cooper would have been wasting his time recommending an end to gearing.
But what is a “significant focus”? For most super funds that borrow for investment, it will be a significant focus of their super fund. And so what if half of all super funds end up gearing? If the trustees have put enough thought into it and have experience with gearing outside of super, does it matter how many of them are geared?
Lastly, as outlined earlier this year and dealt with in my column of two weeks ago, Cooper has recommended a ban on SMSFs owning “exotic assets”. This is investment in items such as artwork, antique cars, coins, stamps,memorabilia, etc.
However, he’s gone harder than initially outlined. Earlier this year, he wanted to make the transition period 10 years. He’s now saying give trustees just five years.
He has left an out. If SMSFs want to convert to being a Small APRA Fund (SAF), which invites an approved external trustee on board, the could continue to own exotic assets.
I won’t harp on it again. Read the June 23 column for my full comments on this topic. Suffice to say that all SMSF trustees should take an interest in this issue – and fight it – because there’s no particularly great reason for further encroachment on what SMSFs can and can’t invest in.
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Just finally, while new PM Julia Gillard is in the move for reintroducing junked policies of the former Howard Government with herEast Timor solution, could we please ask that she do a similar about-face on her predecessor’s short-sighted reductions to the concessional contribution limits?
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.