Planners Look To Their Own Financial Future After Treasurer's Super Move
The Age
Saturday May 13, 2006
WHILE the immediate response to Peter Costello's proposal to simplify superannuation has been to see it as an assault on financial planners and a nightmare for those caught within the transitional zone between the current system and the new, there has been little discussion of the possible institutional effects of the plan.
The key components of the proposal with institutional implications are that, after 60, superannuation benefits - even if taken as a lump sum - would be tax free, reasonable benefit limits would be removed, there would be no forced payments of super benefits and super fund members could continue to make deductible contributions under aged 75.If one steps back from that, it appears that superannuants would, after reaching 60, have the ability to withdraw all or some of their funds, in the form of a lump sum or pension, or continue to make contributions to their fund, within an environment where the withdrawals were untaxed.The great and obvious virtue of the proposal is that it simplifies the most complicated element of an overly complex superannuation system. Continuing grandfathered changes to the system over decades have produced an extraordinarily complicated treatment of end benefits that, combined with its interaction with the tax and social welfare systems when superannuants reach retirement age, makes it impossible to navigate retirement without costly specialist advice. Hence the immediate reaction that the proposal is bad news for financial planners and their focus on minimising tax and maximising social welfare benefits. In a simplified system, the planners would have to concentrate largely on providing investment advice.The less heralded aspect of the changes in prospect, however, is the flexibility they create and the fact that they would remove the forcible eviction of superannuants from the system on retirement. At its simplest, they would have the option of leaving their savings in their fund while still being able to access them at their discretion without incurring tax on any withdrawals.That could change the very nature of a super fund because, over time and as the baby boomers move progressively into retirement, a growing proportion of its members would have the ability to use the fund - if the fund were willing - like a souped-up bank account.That's another piece of bad news for the planners, given that their normal point of entry into managing the savings of retirees and collecting fees (and commissions from product manufacturers) is the fact that the retirees have to shift their savings from their fund.One suspects that many members of funds, given the option, would be more comfortable allowing the fund that has accepted the responsibility for making investment decisions on their behalf to continue doing so rather than shouldering the responsibility - and the increased cost of moving into a retail funds environment - themselves. The planners would say that a decision by retirees to keep their balance with a super fund isn't necessarily a sensible economic one given that while there might not be exit taxes in future the member would still face the 15 per cent tax on earnings within the fund.It is conceivable, however, that under the new regime the funds will attempt to capitalise on the new-found flexibility of their members by creating new products or adapting new ones. More funds may offer allocated (and tax-free) pensions. Others may set up regular deductions from the account or access not dissimilar to a cheque account, so that the withdrawals are used for expenses rather than savings that generate taxable income outside the super environment.The funds are being offered the ability to retain balances, accept contributions from members who would previously have been forced to exit their fund and create flexible access to those balances in an environment where the massive simplification will also lower their administration costs.The industry funds in particular can be expected to take advantage of the opportunities the proposed environment proffers.The industry funds have already been progressively, and aggressively, developing the ability to offer banking and other financial services, including financial planning, to their members. The super proposals may create the ability to integrate those services within the funds themselves for members aged 60-plus, logically the members with the biggest average balances.Over time, we may see the industry funds, and perhaps the big corporate or wholesale master trust platforms, evolve into something akin to the "Allfinanz" institutions that have been the Holy Grails of the banking sector.With the big industry funds increasingly public offer funds, open to members from outside their industry sector, and some of the big master trusts managing both corporate and retail money, that isn't a particularly pleasant prospect for the "for-profit" funds management sector, or at least that part of it devoted to attracting, rather than actually managing, funds.The banks, having already seen their deposits progressively whittled down by the diversion of savings into superannuation, may also be unsettled by the long-term implications of the bigger super funds developing transaction capabilities and blurring of the distinctions between super funds and other financial institutions.If superannuants can keep their balances in wholesale funds after they reach 60, and experience management expense ratios (MERs) of less than 100 basis points, why would they contemplate shifting their funds into a retail environment where the MERs are more than twice that level?The pressure on the retail funds management industry and retail super in particular to reduce costs and get rid of expensive commissions to financial planners can only intensify. The long-term implications of Costello's superannuation proposals won't be clear until the detail becomes available and has been digested. The broad sweep of the proposals does, however, suggest that their eventual implications could go beyond their impact on individual superannuants and could well affect, potentially quite dramatically, the structure and practices of the financial services sector.bartho@theage.com.au
© 2006 The Age
