Broad agreement with Financial System Inquiry interim report

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Financial System Inquiry (FSI) / Murray Inquiry - industry responseThe response by the financial, tax and superannuation industries to the release of the Financial System Inquiry (FSI) has been generally positive, though some particular points have received criticism.

KPMG was “disappointed” that the report contained so little consideration of tax issues, as “just 14 pages out of 460 are devoted to tax” with most issues were left to the tax white paper.

Taxpayers Australia also disagreed with the inquiry’s concern over SMSF borrowing, saying that the organisation “would not go as far as saying the ban should be re-introduced” as it was “too early to say that allowing borrowings has introduced excessive risk into the system”. Taxpayers Australia did say they “would welcome greater regulation to ensure that any borrowing is safe and in the best interest of the fund members” and suggested this could come from requiring advice on borrowing in SMSFs being a financial product, or caps on the “maximum percentage of a fund’s assets” that SMSFs could use for borrowing.

John Brogden, CEO of the FSC agreed with the FSI view that constant change in the superannuation rules was detrimental to consumer confidence super, saying “consumers need certainty and stability in policy settings to have trust and confidence in the system”.

However the FSC rejected the criticisms of limited liquidity and choice in superannuation in the interim report, as this fails to “recognise the need to give fund members choice within a compulsory system”, with Mr Brogden saying “if you force people to save, you must give them the choice on how they save”.

Many organisations shared the concern of the FSI panel that the superannuation system is not ready for the increase in retired members – including SPAA, which said the “retirement phase of superannuation was underdeveloped and did not meet the risk management needs of many retirees”. However SPAA also warned that the inquiry panel should consider the “overall framework of our retirement system” instead of simply products.

Rice Warner agreed that “the next growth phase for superannuation funds lies firmly in resolving demand from older members to help solve a number of issues, including funding adequacy in retirement”. However the “considerable uncertainty faced by their members” will cause difficulties for super funds.

The FPA is also interested in the report’s initial responses to the issue of the underdevelopment of the retirement phase of superannuation and the fact that it does not meet the risk management needs of many retirees. Dante De Gori of the FPA said “we will continue to focus on proposed solutions on default options in drawing down retirement benefits and mandating the use of particular retirement income products. It is critical we address this area, given our ageing population”.

Industry Super Australia, however, took from the report that superannuation should be focused on providing a “strong source of capital formation that supports economic growth”. Industry Super Australia also showed concern over the selection process of default funds, saying “it is heartening also to see recognition that disclosure and financial literacy are not enough to protect consumers, especially in the appointment of default funds”.

ASFA agreed that constant change was damaging to superannuation, saying “changes to superannuation policy create uncertainty for individuals planning their retirement. Therefore, any adjustments made need to consider the impact this will have on consumer confidence in the superannuation system”.

Tom Garcia, CEO of the AIST, said that the FSI concern over lower fees in superannuation “should be considered in the context of Australia’s pension system being among the most highly regarded in the world”, saying that fees and costs were secondary to a “healthy superannuation balance at retirement”. “Whilst fees and costs are very important, at the end of the day, what matters most to members are net returns to ensure a healthy superannuation balance at retirement,” said Mr Garcia. However the FSI panel has also highlighted the focus of superannuation funds with a high retirement balance, instead of income in retirement.

Andrew Conway, IPA CEO said that “we agree with the FSI report that many retirees do not know how to manage investments, inflation and longevity risks involved with retirement” and suggested that the superannuation system would be improved by reducing incentives to take a lump sum and increasing incentives to take annuities. He went on to say that “people need to treat superannuation upon retirement as a long term financial stream, not a sudden windfall gain”.

The Actuaries Institute welcomed the panel’s views on “the need for policy changes to encourage a greater use of retirement income stream products to overcome longevity risk”, observing that demographics will make it difficult to “finance a desirable standard of living during retirement”.

The Financial System Inquiry is currently conducting a second round of consultation, including public forums in August and accepting further submissions.

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