Financial planners struggle to keep up with superannuation changes

With constant regulatory change impacting on the superannuation sector, financial planners are finding it difficult to focus on clients’ retirement needs, writes Bela Moore.

‘Change is the only constant’ according to an ancient Chinese proverb, and many in the Australian finance industry would say this was true of superannuation right now.

The global financial crisis (GFC), Future of Financial Advice (FOFA) reforms, Stronger Super, MySuper – amidst a series of long-term structural changes many in the industry are insisting that the Government stop changing super.

 “When will it ever end?” Mercer’s head of financial advice Jo-Anne Bloch asked.

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“That really does impact a financial adviser’s capacity to work with clients on their retirement strategies because the obvious point is – ‘shouldn’t I just wait as it’s all going to be changed?’” she said.

No matter where people were positioned in the industry, the Government’s proposed changes elicited the same response – “oh no, not again” – which was a reflection of clients’ thoughts, according to Bloch.

“We’re just starting to get some better and consistent returns; we’re just putting some distance between the GFC; people are now starting to think about retirement (although clearly not enough); people’s financial literacy is improving; we’re delivering more focused advice; and once again the Government starts tinkering with super,” she said.

Changes to tax and contributions caps are a critical issue for planners because of their impact on client confidence, according to Colonial First State’s general manager of products and investments, Peter Chun. 

“Their (financial planners’) main concern right now is consumer confidence and in particular a lot around the tinkering of tax and potential changes to tax rules.

“Some positive consumer sentiment helps, but the main issue will be around some stability on a bipartisan level around no short-term changes to superannuation – particularly to contributions caps,” he said.

The Financial Services Council (FSC) in its submission to the 2013-14 Federal Budget said the $14 billion concession on contributions was only an 18 per cent concession on the $82.5 billion in total mandatory contributions collected in 2011-12. 

It said current tax concessions were sustainable: tax revenue from super funds would be $18 billion by 2020.

Challenger’s Jeremy Cooper said that in a perfect world, the system wouldn’t be changed, but the world was not perfect – the GFC had shown that.

“It would be a good thing not to change the superannuation system, but it would be a good thing to have these programs that people want money spent on – how do you balance those two things together?” he asked.

“Once you take all of the public policy and fiscal things into consideration, it becomes more of a nuanced and complex thing than just ‘don’t change super’,” he said.

First State Super chief executive Michael Dwyer agreed. 

He said as a practitioner of the industry he would like a period of stability but believed changes were ultimately designed to benefit members. 

“I think it’s incumbent on regulators and Government when you’ve had a period of upheaval like the GFC, to really review the system and make sure it’s as robust as it should be,” he said.

But NAB Wealth’s executive general manager of investment platforms, Michael Clancy, said the cost of changes was ultimately worn by providers and members. 

“If the Government introduces continuous change, whether it’s small or large, it all costs money to stay compliant, and in the end the cost of that is worn both by providers like us but also by members of the funds,” he said. 

Making it hard on financial advisers

“The real crux of the issue is – how do we restore confidence in helping financial planners encourage people to put money in super?” Chun said.

“We’ve already seen voluntary contributions have been falling in recent years, and right now one of the critical issues for planners is that inherent confidence in the system,” Chun said.

According to the FSC’s latest Bond Report, discretionary contributions for the 12 months to September 2012 fell by 6.3 per cent to $1 billion.

BT’s latest Australian Financial Wellbeing Index found that 58 per cent of people did not contribute anything to a super plan. While more than half wanted to save more, most lived pay cheque to pay cheque, with only a third having a plan in place to reach their financial goals.

Chun said one of planners’ key value-adds was around adequacy. The superannuation guarantee (SG) was not going to provide that for many Australians because the system was immature – compulsory 9 per cent SG had only been in place for 10 years, Chun said.

“If you boil that down, for every person over the age of 30, they actually don’t have enough just relying on SG,” he said.

“So people who are under age 30, they’ve had 10 years in the system receiving the 9 per cent SG and if you contribute for 45 years to age 65, that’s not a bad retirement outcome,” he said.

Although a fully matured system may provide until 65 for people who invested for their lifetime, Chun said Paul Keating’s intent with super was to get someone to age 80. 

BT Financial Group’s senior manager of technical consulting, Bryan Ashenden said super was still a tax-effective vehicle, pointing to tax on earnings and the tax benefits for over 60s. He said the rules on after-tax contributions had not changed.

“There are some changes to the rules about how much you can get in – but superannuation as a tax structure, it’s still a great way to invest,” he said.

“Superannuation is essentially a tax vehicle, so don’t look at super as the bad thing.

“If you’re only going to pay 15 per cent on money going in, even at a lower amount, isn’t that better than potentially what you would get in your own hands?” he asked.  

Dwyer agreed, and says the argument has been too single-focused on the concessional cap.

“People should not discount the value of the non-concessional cap,” he says.

“While we have a $25,000 concessional cap, there are still significant advantages to people making contributions under the $150,000 a year non-concessional cap and also the ability to move that forward three years so if you’re moving into retirement and want to dispose of a property or some business asset, then that could be very useful and an advantageous way of going about it as well,” he said.

According to research Mercer released earlier this month, Australia’s super tax concessions are not very generous on a global stage and are lower than five of the eight “best” pension systems in the world.

The research found the average British worker received 16.4 per cent higher net retirement benefits than the average Australian worker, while an American worker was 11 per cent better off.

Mercer senior partner Dr David Knox said Mercer had found evidence that superannuation was losing its shine as a tax-effective vehicle. Only 20 per cent viewed super as a tax-effective vehicle in 2010 compared with 34 per cent in 2008, he said.

Dwyer said the current super debate might cause people to look for investment opportunities outside of super.

It allowed an element of regulatory risk, he said.

The flexibility of alternatives such as property and negative gearing started to look more attractive compared to locking money away with indeterminate tax consequences, Dwyer said.

“People in Australia are very conscious of their other options and the constant change does give those naysayers who might have been cautious of super or critical of super for some time plenty of ammunition to say, ‘wouldn’t you be better off in an alternative investment option where there is little change to the regulatory environment?’,” he said.

Bloch agreed. She said changes were driving a need for complex advice on alternative investments.

“Clients have to go outside super as well because going back to tinkering, we now have caps on concessional contributions at $25,000, we’ve got uncertainty with tax changes. 


“People aren’t going to put buckets of money into super anymore – they can’t! 

“I mean you can put more than $25,000 if you want to pay marginal tax rates, but people are looking for alternatives,” she said.

Knox said Australia had the lowest contributions caps of all of the nine countries surveyed in its global pension research.

It should be a priority to increase caps for over 45s rather than reduce super tax concessions, Mercer said.

“Higher superannuation benefits due to increased contributions, improved investment returns or lower taxation will lead to less pressure from the ageing population in future budgets,” said Knox.

Increasing the need for advice 

“I think what’s really changed is our capacity to respond to consumers’ needs rather than push the adviser’s needs,” Bloch said.

FOFA and Regulatory Guide 244 would increase demand for advice, Bloch said, particularly for the two extreme ends of the spectrum: simple and complex.

Mercer has doubled its advisers in the workplace as well as increased phone-based advice, she said.

“A few years ago we had a one-size-fits-all approach and we felt compelled to do the full fact-find and to give comprehensive and strategic advice even though the individual might have just said ‘which investment option should I go in?’” Bloch said.

Retail funds had always had advice channels but it was now a major distribution tool for public and corporate sector funds, she said.

Super funds were helping to bridge the gaps in creating a seamless advice process while regulations were enforcing the integrity of advice for consumers, according to Bloch.

“I think very few people seek independent advisers and many more seek help and then land up in advice because it’s a regulated environment – but those gaps will close. 

“There will come a time when people will seek help and they won’t mind whether it comes from a brochure or adviser or a website because they will know that there’s different types of help you can get.

“Being able to give people the right information at the right time at the right price is really important in making that whole process quite seamless,” she said.

Association of Superannuation Funds of Australia (ASFA) chair and Sunsuper chief executive Tony Lally said 70 per cent of its phone-based staff had been trained to give general advice. Intrafund advice was industry jargon for information which could be better delivered with advice, he said.

“All of those queries are best handled when you can give advice to somebody. 

“When they’re licensed to give general advice they can actually get into a meaningful conversation and actually resolve the issues and take action on the spot,” he said.

Dwyer said that while all forms of advice had seen an upswing, it was strongest for simple and face-to-face advice.

“It’s probably their largest asset outside the family home, so it stands to reason that they might do a certain amount of telephone and online work ultimately before they do sign the paperwork for an allocated pension or an income stream. 

“They want to sit down with a face-to-face planner and have that discussion,” he said. 

First State Super adopted a full financial planning service when it merged with Health Super last year. Dwyer said that just having the service available drove an increase in demand for advice.

Cooper said there had been a revolution in advice because of a growing understanding that retirement was distinctly different to accumulation.

Chun said the spectrum of super advice had opened up with the reforms, but FOFA’s ban on conflicted remuneration may make it difficult for planners to attract younger, smaller-balance ‘clients-for-life’.

“Commissions are not a bad thing,” Chun said. 

“Advisers would find it hard to recoup their costs because they have to charge a fee that is percentage-based, so generally what they need to have is an efficient way to service smaller clients.

“In the past the value of commissions helped with that because accumulation clients or smaller balance clients – they’re not prepared to pay for financial advice – and having commissions was a way to subsidise that advice,” he said.

But FOFA could have a positive effect on some planners’ ability to gain new clients this year, according to Clancy.

“If you are a financial planner that has already moved to fee-for-service or you’re already genuinely providing advice to 100-200 clients, then in many regards this year is a year of great opportunity because a lot of other advisers aren’t in that position and it’s a great year to go after new clients,” he said.

Although FOFA had provided planners with certainty around remuneration and best interest duty, licensees still needed confirmation on a number of administrative issues including the professional code and tertiary qualifications, ongoing service, opt-ins and annual disclosure according to Bloch.

“Bedding down the legislative reform – whether it’s Stronger Super, whether it’s FOFA, whatever it is – this is the year of getting all of that done,” Bloch said.

“There is some certainty in some areas and to-ing and fro-ing in other areas but really – wouldn’t it be nice if it’s all up and running this year so we can actually get on with things and move forward?” she said.

Still more reforms?

Although the industry has called for an end to short-term changes to superannuation, some debates continue to raise the possibility of future structural reforms.  

Chun said he hoped to see the Government work on its approach to the selection of defaults under modern awards.

“The government has spent all this time and effort on reforming the superannuation industry and yet it’s not prepared to revisit the award structure,” Chun said.

He said any MySuper-approved product should be able to be offered to all employers.

“With MySuper being introduced, the award system is definitely archaic and you don’t need to have a list of funds on an award,” he said.

“There should be the ability of employers, based on who their employers are and what makes sense for them, to have that option to choose something different,” Ashenden agreed.

Clancy said the superannuation industry was very competitive, particularly in a heavily-regulated post-MySuper world.

He said the Government should allow competition and market forces to deliver the best results for employers and the members of their superannuation fund. 

“What the Government is proposing at the moment is the opposite of that. 

“It’s closed. There are some choices but not many choices; the choices are very restrictive and no doubt heavily loaded with industry funds, and not too many non-industry funds,” he said.

Cooper said that the original MySuper idea was a MySuper licence qualified a product as a default fund, but the system had to address the practical question of choosing someone to limit the list to prevent constant switching.

“The fundamental principles are fairly clear: that choice and competition are good things subject to common sense. You don’t want to be changing your superannuation fund every fortnight like they had in Chile there for a while, where funds were offering things like free bicycles and whisky,” he said.

Dwyer said he believed the current default system had served the nation well.

“As for how broad the church should be or [how far] the list of default funds goes, that will depend on which sector you’re in,” he added.

He said employers and member representatives should decide which fund offered the best offer for members. 

Whether retail or not-for-profit, the product should stack up against the key criteria for MySuper, which would give Fair Work Australia the best suite of offerings for members, according to Dwyer.

Forecasting the future

As almost five-and-a-half million baby boomers prepare to enter retirement over the next 15 years, many in the industry have pointed out that the system has been fitted for a cohort of people with different demographics.

Cooper said Australia’s superannuation system was never designed as a retirement system, but as a retirement savings system.

“The superannuation industry was basically, and still is, just a defined contribution compulsory savings mechanism that handed you a lump sum at retirement – people never thought about that 25-year period after retirement where you still have all these monetary needs,” he said.

“That’s where the industry is right now, struggling with the realisation that the system that we built 20-25 years ago is starting to mature but we haven’t really got the retirement bit right,” he said.

Challenger is one of a number of industry voices that have called on the Government for reforms in order to develop a competitive annuity market in Australia. 

In September last year the Actuaries Institute released a white paper that lobbied to remove legislative barriers to developing post-retirement income stream products.

Cooper said the industry was currently trying to resolve retirement issues with asset allocation.

“When it comes to effectively insuring or outsourcing your longevity risk to somebody, unless you’ve got a mountain of money, you’re kidding yourself if you think you can self-insure that,” he said.

Chun said that a capital-protected product could address issues of income and inflation in the 60-80 year-old ‘lifestyle’ bucket but beyond 80, the only product solution for longevity risk was a deferred annuity.

Choice chair Jenni Mack said the Consumer Super Centre which is to be launched in July was already working with the Coalition on reforming the system’s retirement structure.

Although there appear to be many loose ends by way of reforming the superannuation system, a basic framework could go a fair way to ensuring the current level of political debate was quashed, according to Lally.

He said implementing a set of systemic principles for the superannuation system would end the current political stoush. 

In his work as chair of ASFA Lally is working with the organisation to present a set of super principles to Treasury.

He said it would first seek to deal with post-retirement challenges such as enshrining how much could be taken out as a lump sum and implementing tax concessions to compel pension streams. 

“We want a holistic look at this, we don’t want a knee-jerk reaction of ‘lets do that and get money out of this’,” he said. 

“We don’t want to be in the middle of this battle between both sides of politics. 

“We’re going to have to design a system that this country can afford that will preserve the integrity of superannuation for a generation,” he said. MM