Superannuation Guarantee Compliance Reforms Ahead

Despite not being able to estimate the true amount of superannuation guarantee non-compliance, the Government is proposing a number of reforms to protect employees and strength compliance.  They say it is mostly small businesses who are non-compliant, and this is often caused by cash-flow issues. We have summarised their recommendations.

On 31 March 2017, the Superannuation Guarantee Cross-Agency Working Group provided its report on Superannuation Guarantee Non-Compliance to the Minister for Revenue and Financial Services. This Working Group, established in December 2016– comprised officials from the Australian Taxation Office (Chair), the Treasury, the Department of Employment, the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority.

There are currently no robust estimates of superannuation guarantee non-compliance.

In December 2016, Industry Super Australia (ISA) estimated non-compliance in 2013-14 to be $2.8 billion (affecting an estimated 2.15 million employees). In March 2017 this estimate increased to $5.6 billion (affecting an estimated 3 million employees).

The Working Group believes this estimate should be considered in the context of the $89.6 billion in total employer contributions made in 2015-16. From the analysis of ISA’s methodology, the Working Group considers that the $5.6 billion estimate is likely to substantially overstate the actual size of the superannuation guarantee gap. The data is inconsistent with experiences and observations from the ATO’s
compliance program.

A review of ATO case data indicates that small businesses account for around 70 per cent of reported superannuation guarantee non-compliance. Cash flow problems are often the major reason small business employers provide as to why they did not pay their employees’ superannuation guarantee contributions.

The Working Group recognises that while there is, overall, a high level of voluntary compliance by the majority of employers there is scope to improve compliance to better safeguard employee entitlements.

The Working Group has identified two key barriers to maintaining or improving superannuation guarantee compliance.

The first barrier is that the ATO does not currently have any visibility over an employer’s superannuation guarantee obligations to their employees. The second barrier is that the ATO only receives information on superannuation guarantee payments received by superannuation funds on an annual basis so there can be a lag of up to 14 months in the reporting of contributions that employers have paid. This delay further reduces the effectiveness of the ATO’s compliance work.

The Working Group proposed changes that would improve substantially the ATO’s capacity to monitor superannuation guarantee compliance:

  • All employers should report superannuation guarantee obligation information to the ATO in a more timely manner. One way this will be achieved is to leverage the Government’s introduction of Single Touch Payroll legislation. Single Touch Payroll will commence for businesses with 20 or more employees from 1 July 2018. The Working Group considers that Single Touch Payroll should be extended to businesses with 19 or fewer employees as soon as practicable. Subject to more detailed design and consultation, it is believed that this change may be able to be implemented from 1 July 2018.
  • The regime should be more flexible so that penalties can be tailored to reflect different levels of employer behaviour and culpability. The current penalty regime within which the ATO operates is not consistent with the settings of other areas of taxation administration. The superannuation guarantee charge regime operates largely on a one-size-fits-all basis and does not distinguish between deliberate or repeated non-compliance and inadvertent mistakes.
  • Employers display to avoid superannuation guarantee obligations are closely related to characteristics that are seen in phoenix activity – the Phoenix Taskforce, which may recommend widening the manner in which the ATO is able to use Security Bonds and more readily securing outstanding superannuation guarantee charge debts through Director Penalty Notices.
  • The Government should clarify the law on how salary sacrifice agreements affect an employer’s superannuation guarantee obligations. In particular to, firstly, ensure that employers cannot use an amount an employee salary sacrifices to superannuation to satisfy the employer’s superannuation guarantee obligation; and secondly, to ensure that the ordinary time earnings base used to calculate an employer’s superannuation guarantee obligation includes those salary or wages sacrificed to superannuation. This will ensure that employees receive the full benefit of voluntary contributions.
  • At present, superannuation guarantee is required to be paid by employers within 28 days of the end of each quarter. The Working Group considers that improvements to data visibility are the main priority after which payment frequency could be reviewed.
  • There is merit in departments working more closely to promote conformance with, and performance of, the superannuation guarantee system drawing from the respective roles and expertise of each agency. So some information sharing arrangements will be changed.

 

One Third of Super Fees Flow To The Big Banks – Report

Research commissioned by Industry Super Australia (ISA) suggests that the big four banks took a third of the estimated $30 billion in fees generated out of the nation’s $2 trillion superannuation sector in the 2014-15 financial year.

According to Fairfax Media, the report, by consultants at Rainmaker said not-for-profit funds generated 25 per cent of the fees but held 41 per cent of funds under management, while retail funds claimed 50 per cent of fees despite holding only 30 per cent of all funds under management.

ISA chief executive David Whiteley said that the fees directed to the larger entities lacked transparency, arguing the current regulatory focus on industry funds was misplaced.

“You’ve got a $2 trillion super industry generating $30 billion in fees and $10 billion of that goes to four banks, and these are the banks campaigning to dismantle the superior not-for-profit model,” he said, according to Fairfax.

Five reasons the Turnbull government shouldn’t let us spend super on a home

From The Conversation.

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Like the nine-headed Hydra, which replaced each severed head with two more, each time the idea is cut down it seems to return even stronger.

Both sides of federal politics took proposals to the 1993 election to let Australians draw down their super. After re-election, then Prime Minister Paul Keating scrapped it amid widespread criticism. Former Treasurer Joe Hockey raised the idea again in March and was roundly criticised by academics and the media. This month the Committee for Economic Development of Australia (CEDA) has again resurrected the idea.

House prices have skyrocketed again over the past two years, particularly in Sydney. So politicians are attracted to any policy that appears to help first homebuyers to build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But the change would worsen housing affordability, leave many people with less to retire on, and cost taxpayers in the long run.

It is a bad idea for five reasons.

First, measures to boost demand for housing, without addressing the well-documented restrictions on supply, do not make housing more affordable. Giving prospective first homebuyers access to their superannuation will help them build a house deposit, but it would worsen affordability for buyers overall. Unless supply increases, more people with deposits would simply bid up the price of existing homes, and the biggest winners would be the people who own them already.

Second, the proposal fails the test of superannuation being used solely to fund an adequate living standard in retirement. The government puts tax concessions on super to help workers provide their own retirement incomes. In return, workers can’t access their superannuation until they reach a certain age without incurring tax penalties.

While paying down a home is an investment, owner-occupiers also benefit from having somewhere to live without paying rent. These benefits that a house provides to the owner-occupier – which economists call housing services – are big, accounting for a sixth of total household consumption in Australia. Using super to buy a home they live in would allow people to consume a significant portion of the value of their superannuation savings as housing services well before they reach retirement.

Third, most first homebuyers who cash out their super would end up with lower overall retirement savings, even after accounting for any extra housing assets. Owner-occupiers give up the rent on their investment. With average gross rental yields sitting between 3% and 5% across major Australian cities, the impact on end retirement savings can be very large. Consequently, owner-occupiers will tend to have lower overall lifetime retirement savings than if the funds were left to compound in a superannuation fund

Frugal homebuyers might maintain the value of their retirement savings if they save all the income they no longer have to pay as rent. In reality, few will have such self-discipline. Compulsory savings through superannuation have led many people to save more than they would otherwise. A recent Reserve Bank study found that each dollar of compulsory super savings added between 70 and 90 cents to total household wealth. If first homebuyers can cash out their super savings early to buy a home that they would have saved for anyway, then many will save less overall.

Fourth, the proposal would hurt government budgets in the long run. Superannuation fund balances are included in the Age Pension assets test. The family home is not. If people funnel some of their super savings into the family home, gaining more home equity but reducing their super fund balance, the government will pay more in pensions in the long-term.

Government would be spared this cost if any home purchased using super were included in the Age Pension assets test, but that would be very hard to implement. For example, do you only include the proportion of the home financed by superannuation? Or would the whole home, including principal repayments made from post-tax income, be included in the assets test? The problems go away if all housing were included in the pension assets test, but this would be a very difficult political reform.

Fifth, early access to super for first homebuyers could make the superannuation system even more unequal than it is today. Many first homebuyers are high-income earners. Allowing them to fund home purchases from concessionally-taxed super would simply add to the many tax mitigation strategies that already abound.

Consider the case of a prospective homebuyer earning A$200,000. Their concessional super contributions are taxed at 15%, rather than at their marginal tax rate of 47%. Once they buy a home, any capital gains that accrue as it appreciates are tax-free, as are the stream of housing services that it provides. Such attractive tax treatment of an investment – more generous than the already highly concessional tax treatment of either superannuation or owner occupied housing – would be prone to massive rorting by high-income earners keen to lower their income tax bills.

What, then, should the federal government do to make housing more affordable?

Prime Minister Malcolm Turnbull has tasked Jamie Briggs with rethinking policy for Australia’s cities. Mick Tsikas/AAP

Helping fix our cities

Above all, new federal Minister for Cities Jamie Briggs should support policies to boost housing supply, especially in the inner and middle ring suburbs of major cities where most people want to live, and which have much better access to the centre of cities where most of the new jobs are being created. The federal government has little control over planning rules, which are administered by state and local governments. But it can use transparent performance reporting, rewards and incentives to stimulate state government action, using the same model as the National Competition Policy reforms of the 1990s.

Other reforms, such as reducing the 50% discount on capital gains tax and tightening negative gearing, would also reduce pressure on house prices and could be implemented straight away. Such favourable tax treatment drives up house prices because it increases the after-tax returns to housing investors. The number of negatively geared individuals doubled in the 10 years after the capital gains tax discount was introduced in 1999. More than 1.2 million Australian taxpayers own a negatively geared property, and they claimed A$14 billion in net rental losses in 2011-12.

There are no quick fixes to housing affordability in Australia. Yet any government that can solve the problem by boosting housing supply in inner and middle suburbs, while refraining from further measures to boost demand, will almost certainly find itself rewarded, by voters and by history.

 

Authors: Brendan Coates, Senior Associate, Grattan Institute;  John Dale, John Daley is a Friend of The Conversation, Chief Executive Officer , Grattan Institute.

 

Property Investment Via SMSF Still On The Rise

As we round out the household segmentation analysis contained in the recently released Property Imperative report, today we look at residential property investment via a self managed superannuation fund.

APRA reports that Self-Managed Superannuation funds held assets were $589 billion at June 2015, a fall from $600 billion in March 2015.

Throughout the survey we noted an interest in investing in residential property via a self-managed superannuation funds (SMSFs). It is feasible to invest if the property meets certain specific criteria. In August the Government said such leveraged investments had their support, although the FSI inquiry had suggested such leverage should be banned. The rationale for this earlier recommendation was to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly and fulfill the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle. Is this something which the Turnbull government might revisit?

Overall our survey showed that around 3.35% of households were holding residential property in SMSF, and a further 3% were actively considering it . Of these, 33% were motivated by the tax efficient nature of the investment, others were attracted by the prospect of appreciating prices (26%), the attractive finance offers available (15%), the potential for leverage (12%) and the prospect of better returns than from bank deposits (10%).

DFA-Sept-SMSF-1We explored where SMSF Trustees sourced advice to invest in property, 21% used a mortgage broker, 23% online information, 11% a Real Estate Agent, 14% Accountant, and 7% a Financial Planner. Financial Planners are significantly out of favour in the light of recent bank disclosures and ASIC publicity on poor advice.

DFA-Sept-SMSF-2The proportion of SMSF in property was on average 34%.

DFA-Sept-SMSF-3
According to the fund level performance from APRA to June 2015, and DFA’s own research, Superannuation has become big business, with total assets now worth over $2 trillion (compare this with the $5.5 trillion in residential property in Australia), an increase of 9.9 % from last year.

Why Pensioners are Cruising Their Way Around Budget Changes – The Conversation

As reported in The Conversation: Age pensioners have always gone on cruises. But since the budget, we have seen stories emerge of age pensioners changing their behaviour in response to the proposed rebalancing of the age pension asset tests.

Sydney housewife Noelene has bought a holiday cruise to Alaska. Seemingly contradicting sensible living strategies for many older people, financial advisers are now proposing part-pensioners upsize and buy a more expensive house.

It’s surprising behaviour, especially in light of new research from CePAR using government data that demonstrates many age pensioners actually live very frugally. Many pensioners live below even the “modest” retirement standard proposed by ASFA ($23,469 for a single and $33,766 for a couple, who own their own home). Indeed, many pensioners are cautious and keep a cushion of assets, whether because of concern about risk, to pay for age care when frail, or to leave a bequest to children or grandchildren.

What’s changed

Why would age pensioners choose to spend big now? Well, it’s a rational response by part-pensioners to the proposed budget asset tests. If the anecdotal behaviour is writ large, a lot of the potential revenue gains (estimated at A$2.4 billion over 5 years) from the asset test changes may disappear.

Apart from the home, the financial and other assets of age pensioners are tested above a limit, so as to target the pension. The age pension is also subject to an income test. At the moment pensioners are assessed under both the income test and the asset test: whichever test gives the lower pension rate is applied. This allows considerable scope for sophisticated pension planning.

The 2015 budget includes changes to the age pension asset tests which deliver benefits at the low end but which are quite draconian for those who have accumulated some assets.

For homeowners, the asset free areas are to rise from $202,000 to $250,000 for single home owners and from $286,500 to $375,000 for couple home owners, but the asset test taper rate will double, from $1.50 per fortnight ($38 a year) per $1,000 to $3 per fortnight ($78 per year) per $1,000.

Pensioners who do not own their own home – and who are much less well off than those who own a home – will benefit from an increase in their threshold to $200,000 more than homeowner pensioners.

On a superficial view, these seem like reasonable changes. But they may have significant behavioural effects and there could be a better way to achieve the government’s policy goals.

Savings taxed: how the government is changing behaviour

The age pension can be thought of as a universal payment combined with an in-built income tax (the income test, which has a 50% tax rate up to the cut out point) and an in-built wealth tax (the asset test).

The effect of the change in policy is to reduce the asset cut-out point where the age pension ceases. Under current asset taper rules, the effective wealth tax rate in the asset test is 3.9% above the threshold. The budget proposal of a taper of $3 per fortnight per $1,000 implies a wealth tax rate of 7.8% ($78 per year per $1,000) above the new thresholds. With real returns of around 5% on many investments currently, the wealth tax effectively confiscates the whole of the real return above the thresholds.

A home-owner couple will see their pension cease at assets of $823,000 compared to over $1.1 million currently. But this home-owner couple with $823,000 in savings would not necessarily have a higher living standard than a home-owner couple with $375,000 in savings; indeed, it could well be lower.

Overall, under the proposed new system, income from savings would be very heavily taxed. Assuming a return to savings of 5%, the effective marginal tax rate could be as much as 160% (the wealth tax rate of 7.8% divided by a 5% return). This creates a disincentive to save. For the conservative investor the situation is even worse, as products like term deposits offer rates only slightly higher than inflation.

An alternative approach: deeming an income return

The Henry Tax Review and the Shepherd National Committee of Audit both recommended that the separate age pension asset test should be replaced by a comprehensive means test that deems income from assets.

A deeming approach disregards actual income from an asset. Only deemed income is included, based on a sensible choice of rate of return, such as the return on bank interest. At 1.75% and 3.25% rates, this is quite a conservative rate of return.

In fact, we already deem income returns in the current pension system, for assets including bank accounts, term deposits, shares, managed funds, loans to family members and superannuation funds (if you are age pension age).

Widening the deeming rules would return us to the “merged means test” which operated in Australia up to the 1970s. Under the test, all assets apart from the home were deemed to yield 10% per annum and actual income from assets was disregarded. The assumed yield on an annuity purchased at age 65 was 10%. Currently an indexed annuity at that age would yield around a third of that in real terms, and even a “growth” investment strategy will yield only 5% to 6%, so a deeming rate around 6% could be justified.

Deeming rates can be set to achieve the sort of budget savings sought by the government with fewer issues for fairness and perverse incentives. A deeming rate of, say, 6% combines with a pension taper of 50% to give an effective marginal wealth tax rate of 3%. This is much less than the effective 7.8% wealth tax rate in the budget measure.

Deeming allows a pensioner to have either modest income or modest assets but not both. It does not unfairly advantage those who maximise their entitlements by planning under both income and asset tests, as the current system allows. A wider deemed base could save as much at a lower effective wealth tax rate than that proposed by the government.

The bigger picture

Australia has highly generous tax concessions for retirement saving, but quite harsh treatment on the pension side. Why incentivise savings through super tax breaks and then penalise savers under the means test?

Home owner retirees are much better off than those who do not own their home and the age pension means test does not touch the top cohort of superannuation savers who receive a hugely disproportionate share of superannuation tax breaks. In contrast to most middle income savers who eventually need some level of age pension with its implicit wealth tax, the top cohort who don’t need the age pension are never subject to any wealth or bequests tax.

Super Tops $2 Trillion

APRA released their quarterly superannuation stats today. Superannuation assets totalled $2.0 trillion at the end of the March 2015 quarter, up by $115 billion from December. Self Managed Super Funds continued to power ahead, both in number of funds (up by 5,911 funds) and value (up $26.6 billion), though relative share fell slightly.

Over the 12 months from March 2014 there was a 14.3 per cent increase in total superannuation assets. The total value lifted $115 billion in the last 3 months.

Total assets in MySuper products totalled $420.2 billion at the end of the March 2015 quarter. Over the 12 months from March 2014 there was a 23.1 per cent increase in total assets in MySuper products.

There were $23.7 billion of contributions in the March 2015 quarter, up 4.4 per cent from the March 2014 quarter ($22.7 billion). Total contributions for the year ending March 2015 were $101.6 billion.

Outward benefit transfers exceeded inward benefit transfers by $641 million in the March 2015 quarter.

There were $14.4 billion in total benefit payments in the March 2015 quarter, an increase of 9.2 per cent from the March 2014 quarter ($13.2 billion). Total benefit payments for the year ending March 2015 were $57.5 billion.

Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $8.7 billion in the March 2015 quarter, a decrease of 1.4 per cent from the March 2014 quarter ($8.8 billion). Net contribution flows for the year ending March 2015 were $39.3 billion.

Looking at the splits, the trend growth was strong in industry, retail and SMSF.

SuperByTrendTypeMar2015Looking at SMSF, both asset values and number of funds show a steady rise.

SMSFa-Mar-2015However whilst 27% of all superannuation funds are now held in SMSF, this decreased by 1% from a year ago.

SuperSplitsMar2015The annual industry-wide rate of return (ROR) for entities with more than four members for the year ending March 2015 was 13.0 per cent. The five year average annualised ROR to March 2015 was 8.0 per cent.

As at the end of the March 2015 quarter, 52 per cent of the $1.35 trillion investments for entities with at least four members were invested in equities; with 24 per cent in Australian listed equities, 22 per cent in international listed equities and 5 per cent in unlisted equities. Fixed income and cash investments accounted for 32 per cent of investments; 19 per cent in fixed income and 13 per cent in cash. Property and infrastructure accounted for 12 per cent of investments and 4 per cent were invested in other assets, including hedge funds and commodities.

High Super Fees Erode Returns By 5% – Grattan Institute

The latest report from the Grattan Institute – an independent think tank dedicated to developing high quality public policy for Australia’s future – is on superannuation. It reconfirms fees are too high, savers are getting lower returns than they should, and further reforms are needed urgently. We concur. You can read DFA analysis on super here.  As the balances on super accounts grow ever bigger, the imperative for significant reform builds.

Grattan Institute’s 2014 report, Super Sting, found that Australians are paying far too much for superannuation. We pay about $21 billion a year in fees. That report proposed that government reduce fees by running a tender to select funds to operate the default accounts used by most working Australians.

The Murray Financial System Inquiry came to similar conclusions to those in Super Sting. Its 2014 report finds there is not strong competition based on fees in the superannuation sector. It recommends a “competitive mechanism”, or tender, to select default products, unless a review held by 2020 shows the sector has become much more efficient.

This report analyses superannuation fees and costs in depth. It shows that there are excess costs in both administration and investment management. It evaluates recent policy initiatives to lower fees and recommends further reforms. Our new analysis confirms the conclusions of our previous report. In both default and choice funds, administration fees are too high, and take a toll on net returns. There is little evidence that funds that charge higher fees provide better member services. There are too many accounts, too many funds, and too many of them incur high administrative costs. We pay $4 billion a year above what would be charged by lean funds. Investment fees are also too high. Many funds do not deliver returns that justify their fees. Cutting fees to what high-performing, lean funds charge could save more than $2 billion a year. In sum, superannuation could be run for much less than the $16 billion currently charged by large funds (self-managed super costs another $5 billion).

The superannuation industry argues that its $21 billion costs are not excessive, and will fall over time. It opposes a tender for default accounts based on fees, claiming that it would reduce investment quality and net returns. But current initiatives to reduce costs are not enough. The Stronger Super reforms to reduce administration costs and make default products transparent will cut total default fees by about $1 billion. The Future of Financial Advice reforms could yield benefits for choice account holders. But even if regulators pursue these initiatives with zeal, they will leave billions on the table. If remaining excess costs are not removed, they will drain well over 5 per cent – or $40,000 – out of the average default account holder’s fund by retirement. Excess costs in choice superannuation are even larger.

Government must act to close accounts, merge funds and run a tender to select default products. The tender would save account holders a further $1 billion a year, and create a benchmark to force other funds to lift their game. A high performing superannuation system will take the pressure off taxpayers and give Australians greater confidence in their retirement.

Early Access To Super Is On The Rise

The Department of Human Services released their 2013-14 Annual Report. One topic of note is the rise in the early release of superannuation savings.

According to the DHS, Superannuation cannot generally be accessed before a person reaches their preservation age. In some limited circumstances the law allows for early access to superannuation. Most of the grounds under which early access is permitted are administered directly by the superannuation funds. These include:

  • severe financial hardship
  • terminal illness
  • permanent incapacity
  • balances of $200 or less
  • permanent departure from Australia

The DHS is responsible for assessing applications for the early release of superannuation on compassionate grounds. These include payments for:

  • medical or dental treatment for you or your dependent
  • transport for medical or dental treatment for you or your dependent
  • arrears on your mortgage to prevent your home being sold by your lender
  • modification to your home or vehicle to accommodate a severe disability for you or your dependent
  • palliative care for a terminal illness for you or your dependent
  • expenses associated with your dependent’s death, funeral or burial

The regulations of compassionate grounds are set out in Australian law. While early access to superannuation is possible it is always subject to strict legal criteria. Applications must be supported by evidence. You must not be able to meet the costs by other means, such as savings

There was 7% uplift in withdraws, from last year, but the increase in applications was not matched by a rise in approvals by the department. Two-thirds of all applications were approved in full or part, with the total value of early payouts rising only 3.8%, or $5.4 million, to $151 million. The average payment approved by the department rose only two per cent to $12,874 from $12,643 in 2012/13. This is small beer relative to the $1.85 billion in super held by Australians and will reduce the chatter about the rising hardship levels amongst households. The main motivation is to pay down the mortgage, and this is confirmed by our household surveys.

DHS Chart

ASIC Says Life Insurance Industry Needs Higher Standards

ASIC today released their review of activity in the Life Insurance Industry, and finds that consumers interests are not always given priority. The $44bn industry touches superannuation, annuities, and other elements, as shown in a diagram reproduced from the report. We have previously highlighted the issues around annuities. They found that high upfront commissions are more strongly correlated with non-compliant advice, and we think that it is another case, like FOFA of product sales being dressed up as advice.

ASICLifeInsuranceOct2014

An ASIC review of life insurance advice has found that the industry needs to improve the quality of advice and ensure that the interests of consumers are given priority. ASIC’s review of more than 200 advice files from large, medium and small Australian financial services (AFS) licensees found that 63% were compliant. However, more than one third (37%) of the advice consumers received failed to comply with the laws relating to appropriate advice and prioritising the needs of the client. ‘This is an unacceptable level of failure, and the life insurance industry is now on notice to lift standards and professionalism. Both insurers and advice firms need to work on delivering a consistently better service for consumers’, ASIC Deputy Chairman Peter Kell said.

‘Life insurance is a key product through which consumers manage risk for themselves and their families. It is therefore important that both the products and the advice meet the consumer’s requirements. ‘There is both a need and a demand for quality life insurance advice, and our report provides examples of advisers delivering a service that meets the needs of their clients. However, this result must be achieved on a more consistent basis’, Mr Kell said. ASIC’s report sets out the various commission models that are used to remunerate advisers in the life insurance sector. The report found that high upfront commissions are more strongly correlated with non-compliant advice, including in situations where the recommendation is to switch products.

‘The industry as a whole needs to consider how remuneration and compliance practices can better support good quality outcomes for consumers’, Mr Kell said. Affordability of insurance is an important issue for consumers, and ASIC’s report includes cases where clients were recommended insurance cover that was likely to be very difficult to afford given their financial circumstances. ASIC’s report confirmed that the high rate at which life insurance policies are lapsing warrants consideration by the life insurance industry to ensure that industry practices are sustainable.

ASIC has made a number of recommendations for insurers, AFS licensees, advisers and their professional associations, including a focus on how to ensure client interests are met and balancing the issue of affordability versus cover. Mr Kell said, ‘ASIC is committed to working with the industry to address the problems we’ve identified and to improve outcomes for consumers.’ Following the surveillance work and the conduct that has been uncovered ASIC has commenced follow-up investigations in certain cases which are ongoing. ‘Where inappropriate advice was provided we are considering enforcement action or other regulatory action’, Mr Kell said.

However, DFA believes that this is part of a wider issue with consumer advice in Financial Services. The problem is the various elements within a consumer’s financial portfolio will fall under different regulatory environments, which are just not consistent. If its mortgage related, then the advice is centred on whether the loan is suitable or not (no best client interest here) and commissions are rife ; if its financial planning related, the FOFA, offers some safeguards, and also significant gaps around general advice, as we discussed recently. Now life insurance is another problematic area. It is time for some joined up thinking. A consumer will require financial service advice across multiple products including loans and investments, but all part of a single financial portfolio. There should be consist consumer-centric processes, irrespective of the products being touted. We applaud ASIC for again championing the interests of the consumer, but there is so much more to be done.

The solution is simple. Separate advice from product sales (a.k.a general advice). Exclude any incentive payments for those providing advice. Clearly disclose any product fees (including trading and transaction fees). Job done.

 

Super Balances Now Up To $1.85 trillion – APRA

APRA just published their Quarterly Superannuation Performance data to June 2014. Superannuation assets totalled $1.85 trillion at the end of the June 2014 quarter. Over the 12 months to June 2014 there was a 15.3 per cent increase in total superannuation assets. Over the June 2014 quarter, total superannuation assets increased by 2.6 per cent.

SuperJune2014 There were $27.6 billion of contributions in the June 2014 quarter, up 5.9 per cent from the June 2013 quarter ($26.1 billion). Total contributions for the year ending June 2014 were $95.0 billion. Outward rollovers exceeded inward rollovers by $531 million in the June quarter. There were $14.7 billion in total benefit payments in the June 2014 quarter, an increase of 8.3 per cent from the June 2013 quarter ($13.6 billion). Total benefit payments for the year ending June 2014 were $55.3 billion. Net contribution flows (contributions plus net rollovers less benefit payments) totalled $12.4 billion in the June 2014 quarter, an increase of 15.1 per cent from the June 2013 quarter ($10.8 billion). Net contribution flows for the year ending June 2014 were $37.3 billion.

The number of entities with assets of more than $50m fell by 3 in the last 12 months, from 213, to 210.

The self managed super fund sector, according to the ATO, accounted for 30.05% of all assets.

SuperSplitJune2014The value of assets in SMSF continues to grow, standing at $557 billion (the red area), although the absolute percentage has fallen in the past year, from 30.8% to 30.05% (the blue line).

SuperSMSFSummaryJune2014