Financial Services Supervision Costs Set To Fall

The Treasury has released a paper to seek industry views on the proposed Financial Institutions Supervisory Levies (‘the levies’ or FISLs) that will apply for the 2017-18 financial year.

The paper, prepared by Treasury in conjunction with APRA, sets out information about the total expenses for the activities to be undertaken by APRA and certain other Commonwealth agencies and departments in 2017-18 to be funded through the commensurate levies revenue to be collected in 2017-18.

The financial industry levies are set to recover the operational costs of APRA and other specific costs incurred by certain Commonwealth agencies and departments, including the Australian Securities and Investments Commission, the Australian Taxation Office, and the Department of Human Services.

The total funding required under the levies in 2017-18 for all relevant Commonwealth agencies and departments is $244.5 million. This is a $6.2 million (2.5 per cent) decrease from the 2016-17 requirement. The components of the levies are outlined below:

Doing more with less then?

Inquiry into the State of Competition in the Financial System Announced

Following reports over the weekend, the Treasurer has confirmed that the Productivity Commission will examine competition in Australia’s financial system. This includes a consideration of vertical and horizontal integration and access to banking services for small business.

The Government is committed to ensuring that Australia’s financial system is competitive and innovative.

That is why I have tasked the Productivity Commission to hold an inquiry into competition in Australia’s financial system. Competition is central to the Government’s plans to support innovation and economic growth, and deliver better outcomes for consumers and small businesses.

This delivers on the Turnbull Government’s commitment to task the Productivity Commission to review the state of competition in the financial system, made as part of the Government’s response to the Financial System Inquiry.

The Productivity Commission will look at how to improve consumer outcomes, the productivity and international competitiveness of the financial system and economy more broadly, and support financial system innovation, while balancing financial stability objectives.

In doing so it will consider the level of contestability and concentration in key segments of the financial system, including the degree of vertical and horizontal integration. It will also examine competition in the provision of personal deposit accounts and mortgages and services and finance to small and medium businesses.

The Government encourages all parties with an interest in competition in the financial system to consider making a submission to the Commission.

The Inquiry will commence on 1 July 2017 and is due to report to the Government by 1 July 2018.

Further information and the terms of reference will be available on the Commission’s website.

The Customer Owned Banking Association welcomed the news.

The customer owned banking sector welcomes today’s announcement by the Treasurer of a Productivity Commission (PC) inquiry into the state of competition in the financial system.

“The enduring solution to concerns about the banking market is action to promote sustainable competition so that poor conduct is swiftly punished by loss of market share,” said COBA CEO Mark Degotardi.

“Customer owned banking institutions – mutual banks, credit unions and building societies – are eager to build on their 4-million strong customer base, but we need a fairer regulatory framework.

“Fast-tracking this PC inquiry was our top policy priority for the 2017-18 Budget so we are delighted it has been unveiled a day early.

“Consumers stand to gain from a more competitive banking market where all competitors have a fair go.

“Currently, major banks benefit from unfair regulatory capital settings and a free subsidy from taxpayers in the form of an implicit guarantee that significantly lowers their cost of funding.

“These problems can be addressed by the PC as well as measures to empower consumers to more easily find the best deal for them on a savings account, credit card or home loan.

“This PC inquiry was recommended by the Financial System Inquiry because the current regulatory framework suffers from ‘complacency’ about competition.

“COBA believes one way to tackle this problem is to give the powerful banking regulator APRA an explicit ‘secondary competition mandate’ and an obligation to report annually against this mandate.

“We look forward to engaging with the PC inquiry, particularly on removing barriers to innovation and competition.”

How the politics of the budget might play out for a government in trouble

From The Conversation.

Given months of polls that show Labor ahead and damaging internal disunity, the politics of this budget are extremely tricky for the government to manage.

It is not just that Tony Abbott’s sniping is causing political headaches for Prime Minister Malcolm Turnbull. Some of the government’s budget problems go back to the 2013 election.

In that campaign, Abbott suggested the budget deficit problems would be easily fixed by simply getting rid of Labor, and the government could somehow do so painlessly without cutting health, education or pensions.

However, as then-treasurer Wayne Swan had noted, Australian budget deficit problems were very complex and included substantial falls in government revenue due to the global financial crisis and the end of the mining boom. They weren’t just due to government spending.

Opponents criticised the size of the Rudd government’s expenditure, including its economic stimulus package designed to counter the GFC. Nonetheless, Kevin Rudd argued that Australian government debt was in fact relatively small compared with many other Western countries in a post-GFC world.

Once he won office, Abbott had to face the difficult realities involved in reducing the deficit. The substantial 2014 budget cuts, including to areas Abbott said would be protected, infuriated many voters and contributed to his poor polls and political demise.

The Abbott government’s woes went beyond the failure to fix a difficult budget situation. Other than attacking Labor, it wasn’t clear what its positive vision for the Australian economy was in terms of how to transition after the mining boom, and how to develop new jobs and new industries at a time of rapid economic and technological change.

Replacing Abbott with Turnbull was meant to provide us with such a positive economic vision. However, Turnbull’s mantra of living in innovative and “exciting times” failed to convince many voters. As one anonymous Liberal MP noted, it actually made some voters highly nervous about what was going to happen to their jobs.

Hence Turnbull turned to promising “jobs and growth” during the 2016 election campaign.

However, the Coalition’s narrow win suggested many voters still weren’t convinced the government knew how to ensure job security and a good standard of living in challenging times. In particular, many voters remained unconvinced that substantial business tax cuts would drive the economic growth and improved government revenues that were promised.

Given current levels of underemployment, unusually low wages growth and with inequality increasing, they had reason to be concerned. There is also international research suggesting that corporate tax cuts don’t have the beneficial results claimed.

Fast forward to the 2017 budget, and the Liberals are desperately trying to develop a more convincing economic narrative around good economic management, nation-building, and fairness.

Despite their attempts to blame past Labor policy and more recent Labor intransigence at passing budget cuts in the Senate, Liberal ministers are still having trouble explaining how government debt has increased from A$270 billion under Labor to some $480 billion under the Coalition.

Fortunately for them, Treasurer Scott Morrison now argues there is “good debt” and “bad debt”. Good debt covers areas such as infrastructure that assists economic growth. Bad debt apparently covers areas such as welfare.

Morrison is partly belatedly accepting advice on infrastructure-funding debt from bodies such as the International Monetary Fund, while trying to argue that the government’s new debt policies will be very different from past Labor economic stimulus ones.

Needless to say, these areas of “good” and “bad” debt aren’t quite as simple to define as Morrison suggests. Furthermore, so called nation-building infrastructure spending is sometimes more electoral pork barrelling than economic necessity. Doubts have already been raised over the economic, rather than political, benefits of a second Sydney airport and inter-capital city rail links.

The NBN: ‘good debt’ or ‘bad debt’? AAP/Mick Tsikas

Meanwhile, Turnbull struggled to explain whether Labor’s National Broadband Network was good or bad debt in terms of building necessary infrastructure.

Australian businesses that are struggling with Turnbull’s cheaper version, with its continuing use of 19th century derived copper wire technology or 1990s pay-TV-derived hybrid fibre coaxial cable technology may be wondering whether the Coalition should have discovered “good” infrastructure debt earlier and supported Labor’s more expensive fibre-optic to-the-premises model.

After all, under Rudd, the NBN was meant to be the nation-building 21st century equivalent of 19th-century government infrastructural expenditure on building railways.

Consequently, the government faces questions about whether its economic policy positions have been consistent, particularly given past Coalition rhetoric about debts and deficits.

Furthermore, while Morrison apparently characterises it as bad debt, providing temporary welfare benefits for those who lose their jobs because of economic downturns or restructuring helps keep up consumption levels. This in turn means it potentially has flow-on benefits for the private sector, as well as the individuals concerned.

It is a central lesson of the Keynesian economics that Robert Menzies’ Liberal Party embraced at its foundation, but was rejected under John Howard in the 1980s.

Does all of this mean that Turnbull is now acknowledging a lesson of the 2016 election: that neoliberalism is harder to sell than it used to be? Are his backdowns on “small-l” liberal values now being combined with back-downs on some of his long-held free-market values?

That seems to be going too far at present, especially given the government’s continued belief in the “trickle-down” benefits of corporate tax cuts and attacks on welfare expenditure.

However, there is some nuancing taking place as Turnbull tries to throw off the image of “Mr Harbourside Mansion” who loves hobnobbing with bright young technology entrepreneurs, and instead stress he is in touch with the concerns of ordinary voters.

Consequently, and much to Labor’s outrage, the government has now repositioned itself as an advocate of equal opportunity and fairness that supports a Gonski-lite needs-based education funding model.

While the government’s cuts to higher education will still have a negative impact on universities, and particularly students, the measures are less harsh than those in the 2014 budget.

It seems likely there will be some attempt in the budget to assist first home buyers. Various options have been canvassed.

Turnbull has already tried to position himself as taking action on household energy costs by criticising renewable energy costs and ensuring gas reserves. Meanwhile, there are suggestions the government will improve Medicare benefits in an attempt to counter Labor’s controversial “Mediscare” campaign at the last election.

All budgets are about politics, not just economics. But this budget will be even more so. Not all the measures are working out politically. Abbott is already threatening dissension over the impact of the education measures on Catholic schools.

This is a government in trouble. On one side it faces internal disunity and pressure from Labor’s emphasis on reducing inequality and fostering “inclusive growth”. On the other it has One Nation’s mobilisation of race and protectionism to appeal to the economically marginalised.

Then there is Cory Bernardi, the Greens, Nick Xenophon and a host of independents and other groups to consider.

After all, the budget is only the beginning. The next test is getting key measures through the Senate, perhaps even wedging Labor by deals with the Greens, so that the Coalition is in a stronger position to face the next election.

Author: Carol Johnson, Professor of Politics, University of Adelaide

Morrison’s budget switch points at infrastructure boom

From The New Daily.

The government has bent to calls from experts and Labor by clearing away the accounting impediments to a big spend on infrastructure.

In a speech on Thursday, his last before he hands down the May 9 budget, Treasurer Scott Morrison promised to change how the budget reports the deficit.

Instead of reporting the ‘underlying cash balance’ (which counts “good and bad debt”) prominently and burying the ‘net operating balance’ (which only counts “bad debt”), Mr Morrison said he will put them side by side from now on.

“While the net operating balance has been a longstanding feature of our budget papers … it has not been in clear focus. This change will bring us into line with the states and territories, who report on versions of the net operating balance, as well as key international counterparts including New Zealand and Canada.”

In this context, “good debt” is borrowings for economy-boosting capital expenditure, such as roads and trains that reduce the time it takes to get to work, while “bad debt” is borrowing to cover the cost of defence and welfare.

As an example, in the latest MYEFO budget update, the projected underlying cash deficit for 2017-18 was $28.7 billion but the net operating deficit was only $19.2 billion.

Mr Morrison’s pledge was a marked reversal on his comments late last year when he said the government would only take on “so-called good debt” for infrastructure spending once it had brought “bad debt” under control.

The Coalition will soon, perhaps in the next six months, be forced to administratively lift the $500 billion gross debt ceiling to allow the government to keep borrowing. Nevertheless, the government will heed the calls of experts for debt-fuelled stimulus.

Various expert bodies, including the Reserve Bank, have been prodding the government to take advantage of record-low borrowing costs to renew Australia’s public infrastructure.

In his farewell address, former RBA governor Glenn Stevens said the economy would only be pulled out if its malaise if “someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend”.

“Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending,” Mr Stevens said.

“The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.”

Credit ratings agencies, the International Monetary Fund and the OECD have also encouraged infrastructure spending.

And in a discussion paper last year, Labor’s shadow finance minister Jim Chalmers called for consultation on the “optimal budget presentation for intelligent investment in productivity enhancing infrastructure assets” and the idea of splitting out “spending on productive economic assets such as infrastructure from recurrent expenditure”.

Labor took a very different line on Thursday, with Shadow Treasurer Chris Bowen accusing the government of employing accounting “smoke and mirrors” to hide its economic mismanagement.

Anthony Albanese, the opposition’s infrastructure spokesman, welcomed the change but accused the government of wasting the last four years coming to the decision.

“Treasurer Scott Morrison’s declaration today that at a time of record low interest rates it makes sense to borrow for projects that boost economic productivity is precisely what Labor, the Reserve Bank and economists have been saying for years,” Mr Albanese said.

He warned the government’s “ill-advised” decision to create an infrastructure unit within the Department of Prime Minister and Cabinet, rather than relying on the independent Infrastructure Australia, risked pork barrelling.

“Creating another bureaucracy to sideline the independent adviser makes no sense. The government should have already learned that lesson from its creation of the Northern Australia Investment Facility, which was announced two years ago but has not invested in a single project.”

ABC 7:30 Does Good and Bad Debt

So the latest pivot from the Government is a focus on the “good and bad debt” as an apparent key to growth, with housing affordability now becoming more of a side show as the realisation dawns that they cannot solve that equation. This segment discusses the issue, and includes a contribution from DFA.


New Superannuation Income Stream Rules

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has released draft superannuation income stream regulations and a draft explanatory statement for public consultation.

The regulations continue the implementation of the Government’s superannuation reforms and introduce a new set of design rules for lifetime superannuation income stream products that will enable retirees to better manage consumption and longevity risk in retirement. The regulations are intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities and group self-annuitised products.

Closing date for submissions: 12 April 2017

The purpose of Schedule 1 to the Regulations is to introduce a new set of design rules for lifetime superannuation income stream products that will enable retirees to better manage consumption and longevity risk in retirement. The new rules are intended to cover a range of innovative income stream products including deferred products, investment-linked pensions and annuities and group self-annuitised products. The overarching goal of the rules is to provide flexibility in the design of income stream products to meet consumer preferences while ensuring income is provided throughout retirement. Superannuation funds and life insurance companies will receive a tax exemption on income from assets supporting these new income stream products provided they are currently payable, or in the case of deferred products, held for an individual that has reached retirement.

A contract for the provision of an annuity benefit, or the rules for the provision of a pension benefit (the governing conditions) will need to meet four key elements of the standards in subregulation 1.06A(2). These elements are:

  • A requirement that benefit payments not commence until a primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated or has attained the age of 65.
  • A requirement that benefit payments, of at least annual frequency, be made throughout a beneficiary’s lifetime following the cessation of any payment deferral period.
  • A rule ensuring that, after benefit payments start, there is no unreasonable deferral of payments from the income stream.
  • Restrictions on amounts that can be commuted to a lump sum or for rollover purposes based on a declining capital access schedule commencing from the retirement phase.

Item 18 of Schedule 1 inserts a formula that will restrict the maximum commutation amount that can be accessed after 14 days from the retirement phase start day, on a declining straight line basis over the primary beneficiary’s life expectancy. The maximum commutation amount will be worked out by dividing the ‘access amount’ by the primary beneficiary’s life expectancy on the retirement phase start day and then multiplying this by the remaining life expectancy less one year at time of commutation. Life expectancy will be rounded down to a whole number of years. The maximum commutation amount will also be reduced by the sum of all amounts previously commuted from the income stream prior to the time of the commutation.

Item 11 of Schedule 1 will insert a definition to determine the value of the ‘access amount’ on the retirement phase start day for the income stream or at a point in time after the retirement phase start day. The access amount will be the maximum amount payable on commutation of an interest on the retirement phase start day as determined by an annuity contract or pension rules. Any instalment amounts paid for an interest in a deferred superannuation income stream after the retirement phase start day will then be added to the access amount at the point in time that an instalment is paid.

External Dispute Resolution Review Extended

In a statement from the Independent Review Panel: Professor Ian Ramsay (Chair), Julie Abramson and Alan Kirkland, the terms of reference have been extended.

They will now be tasked with the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and also consider the merits and issues involved in providing access to redress for past disputes.

Whilst we think dispute resolution is part of the problem, we think SME banking issues are more systemic, so other steps also need to be taken. Also note the consultation period is passed, so the public are not able to comment on these revised terms!

The Government has released the report of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Inquiry into small business loans, and as a result of this report has expanded the terms of reference for the review of the financial system’s external dispute resolution (EDR) and complaints framework (EDR Review).

The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has today released amended terms of reference to include:

  • the making of recommendations (rather than merely observations) on the establishment, merits and potential design of a compensation scheme of last resort; and
  • consideration of the merits and issues involved in providing access to redress for past disputes.

In order to fully consider the amended terms of reference, the Panel intends to release a separate issues paper on the additional matters and will seek the views of stakeholders.

The Government has provided a three-month extension to the initial reporting date of end March 2017 to enable the Panel to consider and consult on the issues contained in the amended terms of reference. The Panel will provide a separate report on the additional terms of reference by the end of June 2017.

Public consultation on the EDR Review Interim Report, released on 6 December 2016 and available on the Treasury website, closed on Friday, 27 January 2017. The Panel will still provide the Government with a final report on the issues contained in the original terms of reference by the end of March 2017.

There are two big political problems buried in the latest budget update

From The Conversation.

Whether or not we end up in surplus in five years’ time, yesterday’s Mid Year Economic and Fiscal Outlook (MYEFO) exposes nasty political problems for the Turnbull government in the here and now.

Real GDP growth for 2016-17 has been sensibly but shockingly revised down to 2% – the lowest outcome since the global financial crisis, the second lowest in 16 years and the third lowest since the long upswing began in 1991/92. Sensible, because we know, from the third-quarter GDP numbers and other indicators this year, that the upswing in residential investment has peaked before (and perhaps well before) an upswing in business investment has begun.

Shocking, because if labour productivity continues to run a little above 1% – as it has for the last four years – the implied growth in employment of 1% or so will probably not be enough to stop unemployment rising. The MYEFO projects the unemployment rate in the June quarter next year at 5.5% – lower than today and lower than the average of 5.8% over the last four years.

Yet, at 2.6% year average GDP, growth in those four years has been markedly stronger than the 2% MYEFO now projects for 2016-17. Even with the projected decline in the participation rate, the MYEFO unemployment forecast will be a struggle.

Disappointing GDP growth is political problem number one for Malcolm Turnbull and Treasurer Scott Morrison. Problem number two is the implacable persistence of substantial federal deficits.

These deficits limit the government’s response to problem number one. In 2012-2013 government receipts were 23.0% of GDP, payments 24.0% of GDP, and the deficit 1.2% of GDP. Labor lost office a little over nine weeks after the end of that fiscal year.

In these latest projections for the 2016-17 Budget, four years on from 2012-2013, receipts are expected to be 23.3% of GDP, payments 25.2% of GDP and the deficit 2.1% of GDP. Compared to 2012-13, receipts have increased 0.3% of GDP, spending 1.2% of GDP and the deficit 0.9% of GDP. Receipts are up, but spending is up even more and so is the deficit.

There are plenty of reasons for this woeful fiscal performance, mostly to do with modest increases in profits and wages and the tax-minimisation policy of former Treasurer Peter Costello. But these reasons are not ones that square with Treasurer Morrison’s rhetoric, or which can any longer be laid at the door of the previous Labor government.

Nor does the MYEFO give any confidence that the troubles of the Turnbull government will soon be eased. The path to the return to surplus depends completely on increasing tax revenue.

Spending as a share of GDP is now, according to these MYEFO projections, locked in at 25.2% of GDP right through to the end of the forward estimates period (and beyond the next election) in 2019-20. The projected decline of the deficit arises only because tax receipts are expected to increase over that period by 1.6% of GDP.

A slow economy, a rising tax take, perhaps rising unemployment, and not much room to move. 2017 won’t be cheerful for the prime minister or treasurer – or for the rest of us.

Author: John Edwards, Nonresident Fellow at the Lowy Institute for International Policy and Adjunct Professor with the John Curtin Institute of Public Policy, Curtin University

MYEFO – Will Mortgage Rates Rise?

The MYEFO was released today. In essence, it has quite an optimistic tint, but fundamentally growth is too weak, so incomes, business investment and tax takes will be depressed. Whilst there is some chance of a “free-kick” from some commodity prices, the outlook is not great, and net government debt has yet to peak. The cost of debt will rise as shows by the yield curve assumption which has lifted compared with 2016 PEFO.

“The Government’s interest payments and expense over the forward estimates mostly relate to the cost of servicing the stock of Commonwealth Government Securities (CGS) on issue, and are expected to increase over the forward estimates as a result of the projected rise in CGS on issue”.

The key question is how will this translated to the mortgage rate, which we know will be rising through 2017, as global capital markets reprice yields post the Trump election? We think this will help to lift rates higher still.

The big risk is a AAA downgrade. Such a move would lift the costs of funding for the banks, and this would need to be passed on to consumers and small business customers. The probability has firmed for a downgrade, and so the expectation must be that mortgage rates will rise further and faster than previously expected. We still expect rates on average to be 50 basis points higher this time next year. Our mortgage stress analysis shows that some households are already under the gun.

Whilst there is certainly a chance the RBA may want to cut rates to assist next year, we still think this is unlikely, given the housing boom in the eastern states and the clear limitations of monetary policy when rates are this low. In any case the cash rates and mortgage rates have become decoupled.

Here is the ABC’s MYEFO summary:

  1. Budget deficit this financial year has shrunk by $600 million to $36.5 billion
  2. Deficits over the four year forward estimates have grown by more than $10 billion
  3. The Government is still projecting a return to surplus in financial year 2020-21
  4. Net debt as a proportion of economic output will peak at 19 per cent in 2018-19
  5. Real economic growth estimates have been revised down slightly
  6. MYEFO says “commodity prices remain a key uncertainty”
  7. Estimated tax receipts are down by $3.7 billion since the pre-election budget update
  8. Tax receipts are predicted to be $30.7 billion lower over four years
  9. Tax receipts are down despite recent bounces in key commodity prices
  10. Sluggish wage growth and and non-mining company profits are dragging down tax receipts
  11. The Government has confirmed it is scrapping the Green Army program, saving $224 million
  12. MYEFO reveals extra staff for crossbenchers and other politicians will cost $35.8 million over four years
  13. The Government is closing the Asset Recycling Fund
  14. A Commonwealth penalty unit will rise from $180 to $210


More broadly, the MYEFO says:

Household consumption is expected to continue to grow at a moderate rate, supported by further employment growth and low interest rates. The household saving rate is expected to continue to decline over the forecast period as consumption growth outpaces the modest growth in disposable incomes.

Dwelling investment is forecast to grow by 4½ per cent in 2016-17 before easing to ½ per cent in 2017-18, as the current pipeline of construction — which is evident in the data on building approvals and commencements — is completed.

Business investment is forecast to fall by 6 per cent in 2016-17 and to be flat in 2017-18. This reflects further large forecast falls for mining investment of 21 per cent in 2016-17 and 12 per cent in 2017-18. The impact of this decline in mining investment on the economy is expected to diminish over the forecast period.

Employment growth is expected to be supported by continued economic growth and subdued wage growth. Employment is forecast to grow at a slightly more moderate pace of 1¼ per cent through the year to the June quarter 2017, reflecting more subdued employment growth over recent months and slower output growth. Following the recent highs, which saw almost 300,000 jobs created in 2015, employment growth has been slower in 2016. Employment growth is expected to increase to 1½ per cent through the year to the June quarter 2018 as economic growth strengthens.

The unemployment rate has declined since its recent peak of 6.3 per cent in July 2015. The unemployment rate is forecast to remain around 5½ per cent in the June quarters of 2017 and 2018. While the unemployment rate has fallen, the underemployment rate has remained elevated. These developments suggest that spare capacity remains in the labour market. The forecast for the participation rate has been revised down since the 2016 PEFO and it is expected to be 64½ per cent in the June quarters of 2017 and 2018.

Consumer price inflation is low reflecting subdued wage growth and other factors such as heightened competition in the retail sector, slower growth in rents and lower import and petrol prices. There is also a subdued inflationary environment globally.
Consumer prices are expected to grow by 1¾ per cent through the year to the June quarter 2017, before picking up to 2 per cent through the year to the June quarter 2018. This is lower than forecast at the 2016 PEFO.

Wage growth has also softened since the 2016 PEFO, in line with weaker consumer price outcomes and other factors such as spare capacity in the labour market. As with consumer prices, wage growth is expected to increase gradually over the forecast period to be 2¼ per cent through the year to the June quarter 2017
and 2½ per cent through the year to the June quarter 2018.

Nominal GDP growth is forecast to be 5¾ per cent in 2016-17 and 3¾ per cent in 2017-18. The forecast for 2016-17 is stronger than the 2016 PEFO forecast, with higher commodity prices providing an offset to weaker wage growth and domestic price

More Messing With Super?

Yesterday the Treasury released, late in the day, a consultation on the “Development of the framework for Comprehensive Income Products for Retirement“. The framework appears to open the door to new products, which offer significant opportunities for industry players to invent yet more fees and charges. Just remember the biggest killer on superannuation in the accumulation phase is the level of fees and charges. We fear this exercise will open the door to more income flows to industry participants in the income draw-down phase of retirement, and raise more disclosure questions. This could be exacerbated if distributed via Robo-advice platforms.

Bear in mind also that superannuation savings is a relatively small proportion of total household assets – property being the largest element (thanks to the massive rise in value), according to the ABS.

The paper says the CIPRs framework is not intended to encourage annuities over other products; compel retirees to take up a certain retirement income product; or replace the need for financial advice. We shall see.

The Government agreed to support the development of more efficient retirement income products and to facilitate trustees offering these products to members, in response to the Financial System Inquiry.

These products were labelled by the Murray Inquiry (Financial System Inquiry) as ‘Comprehensive Income Products for Retirement’, or CIPRs; however the Government proposes to use ‘MyRetirement products’ as a more consumer‑friendly and meaningful label.

The MyRetirement framework is intended to increase individuals’ standard of living in retirement, increase the range of retirement income products available, and empower trustees to provide members with an easier transition into retirement. Through this framework, the Government is aiming to increase the efficiency of the superannuation system so it can better achieve the proposed objective of superannuation, which is to provide income in retirement to substitute or supplement the Age Pension.

The Government has released, for public consultation, a discussion paper that explores the key issues in developing the framework for Comprehensive Income Products for Retirement, or MyRetirement products. Views are sought from interested stakeholders, in particular on:

  • the structure and minimum requirements of these products;
  • the framework for regulating these products; and
  • the offering of these products.

The Government is committed to consulting extensively with stakeholders on this framework.

A public consultation process will run from 15 December 2016 to 28 April 2017.

The discussion paper covers a lot of ground, in this complex policy area.


It is envisaged that a CIPR would be a mass-customised, composite retirement income product (for example, combining a pooled product with a product that provides flexibility), which trustees could choose to offer to their members at retirement.

The offering of a CIPR would provide an ‘anchor’ to help guide individuals in their retirement income decision-making. Importantly, an individual would have the freedom to choose whether to take up the CIPR or take their retirement income benefits in another way.

Under the CIPRs framework although different product providers (for example, life insurance companies) could administer the underlying component products, trustees would offer a single income stream to their members.

If a trustee designs a product that: meets the proposed minimum product requirements; is in the best interests of the majority of their members; and offers the product in line with the offering requirements, it is proposed that the trustee will receive a safe harbour. The safe harbour would protect the trustee from a claim on the basis that the CIPR was not in the best interest of an individual member. This is intended to provide legal certainty for trustees in undertaking the CIPR offering.


Ensuring all CIPRs meet minimum product requirements is a key way to achieve good outcomes for consumers and to increase comparability between products.

The paper seeks feedback on possible minimum product requirements of this composite product, such as requiring a CIPR to:

  • deliver a minimum level of income that would generally exceed an equivalent amount invested an account-based pension drawn down at minimum rates, with recognition of the benefit of a guaranteed level of income where relevant;
  • deliver a stream of broadly constant real income for life, in expectation (in particular, to manage 2.longevity risk); and
  • include a component to provide flexibility to access a lump sum (for example, via an 3.account-based pension) and/or leave a bequest.


The paper also seeks views on how to regulate both trustees and CIPRs, in addition to regulation of the proposed minimum product requirements outlined above.

Trustees could choose to design a single mass-customised CIPR that would be in the best interests of, and offered to, the majority of their members. However, trustees would not be required to design and/or offer a product that is in the best interests of any particular member. In designing the product, trustees would need to consider whether it is in the best interests of members to outsource the administration of underlying component product(s) where the trustee does not have the necessary skill set or scale to administer the underlying component product(s).

As is currently the case, trustees and other product providers such as life insurers could also create new retirement income products that are tailored to particular member segments or individuals, rather than to the majority of the membership. These products could be offered via personal financial advice (including through robo advice) where the adviser is required to consider the individual’s circumstances and needs. Individuals could also purchase these products via direct channels. If these products are certified to meet the proposed minimum product requirements of a CIPR, it may be appropriate to allow a label to be attached indicating that the product ‘meets the minimum product requirements of a CIPR’.


It is important to debunk some myths about the CIPRs framework. The CIPRs framework is not intended to:

  • encourage annuities over other products;
  • compel retirees to take up a certain retirement income product; or
  • replace the need for financial advice.


Below are three illustrative examples of possible CIPRs: ‘the cut’, ‘the stack’, and ‘the wrap’.

For ‘The cut’ CIPR, the deferred longevity product component could represent as little as 15 to 20 per cent of an individual’s total superannuation balance and still provide a higher and more stable

income than an account-pension drawn down at minimum rates. The large account-based pension component provides a high degree of ‘flexibility’, thereby efficiently managing the concern about dying early and forfeiting an individual’s superannuation savings.superannuation savings.

‘The stack’ CIPR would provide an individual with the flexibility to access ‘lumpy’ income throughout retirement from an account-based pension component drawn down at minimum rates. Compared to ‘The cut’, a larger proportion of the individual’s total superannuation balance would go towards a longevity product component.

‘The wrap’ CIPR represents a combination of ‘The cut’ and ‘The stack’ CIPRs and in doing so, delivers a balance of their benefits. ‘The wrap’ provides longevity risk management (through the deferred longevity product), higher income than an account-based pension drawn down at minimum rates, and provides a degree of flexibility to access ‘lumpy’ income throughout retirement.


Increasing the fees charged on a CIPR, post-commencement
Currently, fees for annuities and defined benefit pensions are essentially ‘locked in’ at the time of purchase due to the guaranteed level of income these products provide. However, for an account-based pension component or a group self-annuitisation component of a CIPR, there is a risk that increases in administration fees would decrease income in retirement. Individuals would not easily be able to change CIPRs in response to an increase in fees.

One option may be to restrict administrative fees from increasing over the life of a CIPR, although there is a risk that if administrative costs increased substantially accumulation members may need to cross-subsidise members in the pension phase.

Another option may be to rely on the income efficiency concept. However, given that administration fees would have a small effect on efficiency as compared with bequests and capital costs, there would need to be a large increase in fees before income efficiency is affected.

An alternative option could be to allow trustees to increase fees so long as there is no differentiation between the fees paid by existing members and new members of the CIPR. This would ensure trustees continue to face competitive fee pressure.

Trustees could lose the right to offer a CIPR to new members if they increased their fees only for existing members.

This paper also seeks alternative ideas on how to protect individuals from significant increases in fees that would erode retirement incomes.


In due course, consultation will also be undertaken on exposure draft legislation and regulations to give effect to the CIPRs framework.

It is envisaged that the CIPRs framework would not commence until trustees and other product providers have had sufficient lead-time to develop appropriate products. Given a commencement date for alternative income stream product rules of 1 July 2017, and the Government is currently reviewing the social security means testing of retirement income streams, the CIPRs framework is not expected to commence any earlier than mid-2018.

The Government could, at a later date, and following an appropriate transition period, consider whether certain trustees should be obliged to offer CIPRs to any of their members. Given this, it will be important for the current proposed CIPRs framework to be sufficiently robust to accommodate a potential change in trustee obligations down the track.