Policy needed to fight short-termism in superannuation: FPA

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FPA - superannuation short-termism, Financial System InquiryThe FPA have recommended an independent institution be established to “assess whether the superannuation system is meeting its objectives.”

This recommendation is made in the FPA’s second submission to the Financial System Inquiry, and comes in response to concerns about the lack of direction in superannuation policy, including short-termism.

“The role of superannuation as a pillar in Australia’s retirement income strategy requires a regular, apolitical system of review in order to build public confidence in superannuation as an independent institution”

The FPA argues that much of this inability to form a retirement policy is a result of the competing demands on superannuation – to provide retirement income, but also to invest in the Australian economy.

Lack of consumer engagement with superannuation encourages short-termism, without adequate regard for risk and fees over the long term, according to the FPA.

The media is also partly responsible for short-termism when it comes to superannuation. A superannuation policy with a focus on retirement outcomes, which provides “simple metrics which reflect the long-term costs, risks, and returns”, could encourage the media to change how superannuation is reported.

To resolve this lack of policy the FPA have recommended that a board or institution be formed. “The functions of this board/institution could be to perform periodic reviews of the superannuation system’s performance and to recommend policy changes to government.”

SMSF borrowing

The FPA have also advised the Financial System Inquiry panel that before changes are made to the SMSF borrowing rules a review should be conducted. This review would “identify what, if any, vulnerabilities exist as a result of borrowing inside SMSFs,” the FPA said.

As noted in the submission this is consistent with the recommendation of the Cooper Review, which also said there should be a review of SMSF borrowing. However the current government has announced that such a review would not be proceeding.

The FPA points out that SMSF borrowing only accounts for $2.3 billion out of $4.9 trillion in residential property lending.

“A prospective ban on leverage within SMSFs may not be the best way forward, as the weaknesses of SMSFs are properly characterised as an issue in financial advice and consumer protection rather than a weakness in the SMSF model,” said the FPA.

Instead of focussing on SMSFs, borrowing measures should be taken to tackle the issue of “poor and conflicted property investment spruikers in connection with SMSFs.” This would include increased surveillance and enforcement for those breaking the rules.

The Financial System Inquiry is scheduled to submit its final report to the Treasurer in November.

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