Take a deep breath people. After what seems like years of argument, nit-picking and downright bloody-mindedness, Parliament has managed to pass not one, but two pieces of vital legislation for personal investors.
The increase in compulsory super contributions to 12 per cent was passed by the Senate, mere days before amended reforms on financial advice made it through the lower house. With the first tranche of its Stronger Super reforms also in the legislative process, July 1, 2013 is shaping up as a landmark date for investors with the bulk of reforms due for introduction.
Ideally, the end result of all this is that people will get more retirement savings, they'll be invested in products they can understand that won't cost an arm and a leg and, if they want financial advice, the adviser will act in their interest, not just flog them a product.
Really? Let's look at what investors are in for.
The simplest change to get your head around is the increase in compulsory super contributions from their current level of 9 per cent to 12 per cent by 2020. Yes, that is 2020. The increase will be phased in gradually to reduce the impact on employers, the budget and employee pay packets (as they will inevitably pay for their higher super through smaller future wage increases).
That means the increase will only have limited benefits for the huge wave of baby boomers currently hurtling towards retirement with only limited superannuation.
Forget the impression pages like these often give of a generation of fat cats concerned at being able to continue to make concessional super contributions of $50,000 a year. As the chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, pointed out at this week's Conference of Major Superannuation Funds, the average 65-year-old male still has a super balance of just $190,000 and the average female just $112,000 - and these averages are pushed up by a minority who have a lot of money in super.
She says most people have about $70,000 to $80,000.
This is also the generation that was hit hardest by the global financial crisis. Because they had more money in super than a 20- or 30-year-old, they took a bigger hit. And unlike those 20- or 30-year-olds, they don't have another 20 years or so before retirement to recover.
As the head of post-retirement solutions at Towers Watson Australia, Nick Callil, told the conference, about 60 per cent of all an individual's investment earnings are earnt in the 10 years on either side of retirement. So it will take more than a (slow) 12 per cent to get many boomers back to where they should have been and even more to top up their savings shortfall.
There is no easy fix, but an analysis of the government's Household, Income and Labour Dynamics in Australia Survey by the Australian Centre for Financial Studies found less than a quarter of Australians are making additional super contributions. That would be a logical place to start.
Which brings us nicely to the financial advice reforms. An oft-quoted figure is that less than one in five Australians seek financial advice - even though most of us arguably could use it. There are all sorts of reasons, but there's little doubt at least part of the explanation lies in the fact planners have long been perceived (some rightly, some not) as acting as a sales force for product providers rather than independent experts.
The financial advice reforms address these perceptions by requiring advisers to act in their clients' best interests and banning commissions and other forms of conflicted remuneration. However, many financial planners may be exempt from some parts of the new laws, such as the controversial "opt-in" requirement - where planners will be required to ask their clients every two years if they want to keep paying for the planners' service.
Under a last-minute amendment negotiated to get the legislation through parliament, planners will be able to get a class order exempting them from this requirement if they sign up to an approved code of practice.
The idea is that the code will need to obviate the need for opt-in and the Australian Securities and Investments Commission gets to decide which codes qualify. But just how it will work could turn out to be a nightmare. With commissions banned, the real danger is that some planners will simply replace the commission gravy train with annual asset-based fees charged as a percentage of the client's investments. Like commissions, asset-based fees tend to be deducted automatically rather than charged when a service is provided.
It is a fait accompli that many planners will want an exemption from asking clients to opt-in to such fee arrangements. But that would just be perpetuating the bad old ways in a different form.
The planners have also won concessions on fee disclosure that is yet to be clarified, but doesn't do much to boost confidence.
Also still unresolved is whether the best interest duty, as it is currently worded, will allow planners to offer "scaled" or limited advice for people who don't want a full financial plan. Industry groups had been concerned it would not be possible, but have been reassured it will be made possible through notation and regulatory guidance. It should also be mentioned that the majority of these reforms will apply only to new clients, so if you already have a financial planner it will be up to you to demand equal treatment.
On Stronger Super, the parliamentary joint committee this week released its report on the first tranche of legislation with only minor recommendations.
Stronger Super will be next off the legislative ranks and includes MySuper - a plan for a simpler, low-cost default fund for investors who don't want to actively choose where their super is invested.
But the industry has found plenty to argue about there, too. Stay tuned.
Frequently Asked Questions about this Article…
What change to compulsory superannuation contributions was passed and when will it take effect?
Parliament approved raising compulsory superannuation contributions from the current 9% to 12% by 2020. The increase will be phased in gradually so employers, the budget and pay packets are less affected.
Will the rise to 12% super save baby boomers who are close to retirement?
The phased increase is unlikely to fully close the shortfall for many baby boomers. The article notes boomers were hit hard by the global financial crisis, often have smaller balances with averages around $190,000 for 65‑year‑old men and $112,000 for women, and about 60% of investment earnings are generated in the 10 years on either side of retirement—so a slow lift to 12% won’t quickly undo those impacts.
What is MySuper and how does the Stronger Super package affect default funds?
MySuper is part of the Stronger Super reforms and is designed as a simpler, low‑cost default option for people who don’t actively choose where their super is invested. Stronger Super is the broader legislative package that includes MySuper and other changes to superannuation.
What do the new financial advice reforms mean for commissions and adviser obligations?
The reforms require advisers to act in their clients’ best interests and ban commissions and other forms of conflicted remuneration. They aim to reduce product‑driven advice and improve trust in financial planners.
What is the opt‑in rule and can planners avoid it?
Under the reforms advisers would normally need to ask clients every two years if they want to keep paying for ongoing services (an "opt‑in"). However, a last‑minute amendment allows planners to seek a class‑order exemption from the opt‑in if they sign up to an approved code of practice—ASIC will decide which codes qualify.
Is there a risk that banning commissions will just create new fees?
Yes. The article flags a real risk that some planners could replace commissions with annual asset‑based fees charged as a percentage of client investments. Like commissions, these fees are often deducted automatically rather than billed when a specific service is provided.
Will people still be able to get scaled or limited financial advice under the new rules?
Industry groups were worried the best‑interest duty might outlaw scaled or limited advice, but the article says this will be made possible through notation and regulatory guidance, so advisers should still be able to offer limited‑scope advice.
What practical steps can everyday investors take in light of these super and advice reforms?
The article suggests some simple actions: consider making additional super contributions (fewer than a quarter of Australians currently do), ask questions about fees and whether your planner will adopt new standards, and if you already have a planner, demand equal treatment under the new reforms. Choosing a low‑cost MySuper default is another option if you don’t want to actively manage your fund.
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