Super returns make good start to 2020

BY MIKE TAYLOR

Superannuation funds have hit the ground running in terms of investment returns in 2020, with the median growth fund returning 1.9% in January, according to research house, Chant West.

It said this was on the back of the median growth fund returning 14.7% in 2019, and with the momentum appearing to be continuing in February.

The major drivers for the January returns were Australian shares which were up 4.9%, while even a decline in international shares was offset by the depreciation of the Australian dollar and listed property was up.

Commenting on the investment results, Chant West senior investment research manager, Mano Mohankumar said that while the domestic share market was strong, global share markets slowed amid mounting fears over the spread of the coronavirus.

“This resulted in a flight to safely, pushing domestic and global bonds up 2.3% and 1.8%, respectively,” he said. “Global investors seem to have regained their confidence in February, with both Australian and global share markets recording gains so far.

“So, the year has started positively despite some lingering uncertainties. The biggest unknown is the potential spread of the coronavirus and what that might mean in economic terms. Travel and tourism-related businesses are already feeling the effects, as are others with strong trade links to China such as health food exporters.

“Investors are now weighing up which other sectors may suffer if the contagion continues. Australia is in the forefront here, because not only is China a major export market, it also supplies many parts and finished goods that Australian businesses rely on.”

Opt-in insurance in super irresponsible

BY JASSMYN GOH

The arguments calling for the removal of insurance from superannuation are baseless, according to Maurice Blackburn.

In a submission to the Government’s Retirement Income Review, the law firm said these calls were flawed assumptions.

The calls were: • That people do not derive value from insurances in superannuation; • T hat insurances in superannuation merely discourage people from seeking tailored insurance cover on the open market; and • That Workers’ Compensation systems provide a sufficient safety net to cover the income foregone through injury . “There is a growing body of evidence that the disengagement of consumers with their financial situation in general makes them less likely to opt into insurance, even if it is entirely appropriate for their circumstances (for example, if they have dependants),” the submission said.

The firm pointed to a Rice Warner analysis that found if group life insurance were to become opt-in, many individual’s only recourse would be to seek retail type insurance and would act to reduce their access to insurance or make it only available at unaffordable premium rates. “This shows that disparity in workers’ access to insurance is not restricted to availability. The premium cost impact of functionally removing insurances from superannuation has the potential to be profound for some,” Maurice Blackburn said. “The underinsurance problem in Australia has been well documented. Member disengagement data would indicate that worryingly few consumers consider their insurance arrangements at all.

“Further, for those who do decide to seek their own coverage, it cannot be assumed that the product they end up with will be in their best interests.”

The law firm said insurance in super had a critical role in helping the underinsurance problem by providing a safety net of affordable default group cover. “It would be irresponsible, from a retirement savings perspective, to simply leave it to individuals to proactively obtain their own insurance. The consequences of doing so would be to the detriment of retirement comfort and security,” it said. On Workers’ Compensation systems, Maurice Blackburn said it could not take the place of insurances providing for retirement income, should a working aged person become injured. It said this was because: • In some jurisdictions, Workers’ Compensation will only cover a worker if their employment is a significant contributing factor to the injury. Total and permanent disability (TPD) coverage has no such requirement. In our experience, more than half of all TPD claims we assist with have nothing to do with the work environment, so would not be covered by any state or federal workers’ compensation scheme; • Workcover is focused on wage replacement while the injured worker is engaged in rehabilitation and return to work programs. TPD and Death coverage are focused on circumstances where the worker cannot return to any suitable work due to injury or illness or death; • Workers’ compensation schemes vary greatly from state to state, and many are inadequate in their long-term support for injured workers; and • The Fair Work website tells us that: “Some awards and registered agreements may give employees an entitlement to superannuation while they’re away from work on workers compensation”. Obviously, from this we can conclude that some don’t.

Universal Age Pension will incentivise Aussies to save

BY JASSMYN GOH

A universal Age Pension would reduce the cost of the projected superannuation tax concession, increase the level of take-home pay, and increase tax revenue, according to Mercer.

In its submission to Treasury for the Retirement Income Review, Mercer said the universal Age Penson was means-tested and the superannuation guarantee (SG) would need to increase to 12%.

The firm called for a universal Age Pension to be considered, to scrap the means test, and simplify the Australian retirement system. Mercer senior partner, Dr David Knox, said a universal Age Pension with the right tax structure would be feasible without a substantial impact to the budget.

Knox said it would also give Australians an incentive to save for retirement as this “isn’t the case today”.

“While the Age Pension would be taxable, there would be a clear benefit to the individual for every extra dollar contributed into super, ensuring the three pillars of the system – the Age Pension, compulsory super and voluntary contributions – are complementing each other,” he said.

The submission noted funding costs that needed to be considered were: • Taxing the Age Pension for all those who receive it, w hich could be achieved by basing the Age Pension tax rate on the balance of an individual’s tax-exempt pension accounts; • Given every eligible aged Australian would receive the Age Pension, modifying the tax arrangements for super, such as introducing a limited tax on the investment income generated in the pension phase; and • Drawing on some of the fiscal headroom expected since the projected cost of public pensions in Australia will be one of the lowest of any OECD country by 2050. The submission said the universal Age Pension would: • Ensure financial decisions made by retirees were not informed by how to best maximise their access to the Age Pension; • Provide retirees with greater security of income with the knowledge of longevity protection, leading to a better quality of life; • Provide stronger incentives to downsize from the family home, improving housing affordability for younger families; and • Enable a simpler, more efficient system with reduced administration costs incurred by the Government from the means-tested Age Pension. NEWS

Deducting financial advice fees from member accounts gets thumbs-up

BY MIKE TAYLOR

The Government should consider reviewing the delivery of financial advice within superannuation as well as single-issue advice outside of superannuation, in circumstances where there is a lack of good data about how well the system is working and the quality of financial advice varies between funds.

Actuarial research house, Rice Warner has used its submission to the Government’s Retirement Income Review to point to the lack of good data and to cite the “obscurity of current legislation” which makes it difficult to deliver advice efficiently.

However, on the question of how that advice is paid for, and contrary to the recommendations of the Royal Commission, Rice Warner is arguing that it is reasonable to deduct adviser fees from member accounts, provided the advice pertain to the member’s superannuation.

“Many funds allow members to authorise them to deduct fees for services from a financial planner relating to superannuation. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended prohibiting such fees being made from MySuper accounts,” it said.

“The logic appears to be that a member in a default structure does not need advice. However, there are many members in MySuper products who have chosen to join them either directly or based on financial advice. Even those in their employer’s default MySuper might still want advice on their total financial affairs including monitoring of their superannuation,” the submission said.

The Rice Warner submission also recommended simplifying the processes around the delivery of advice in retirement with the goal of reducing costs and increasing member usage.

“As members approach retirement, it becomes more difficult for superannuation funds to assist members. As there is no default retirement product, each member needs to be placed in an investment strategy which is ideally determined only after provision of a comprehensive financial plan. The cost of delivering such a plan (usually $2,500 to $5,000) is more than most members will pay,” it said.

“Within the retirement phase, most regular advice is about budgeting and appropriate levels of withdrawals. This retirement counselling is valuable, and all funds should provide this as part of their account-based pension product.

“Like the work of money or finance coaches outside superannuation, this activity does not fall under the financial advice regime. Consequently, it should be possible to deliver the service cost-efficiently using technology and retirement counsellors within call centres. “Funds could then offer event-based advice to their account-based pensioners periodically based on the need of each retiree. Such events would include the death or divorce of a partner, the need for a late life annuity or home equity release, and the need for Aged Care services. This advice could be delivered for a flat fee by a financial adviser (not necessarily related to the fund).”