(August-2003) Light at the end of the tunnel

29 September 2005

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Now that we are over one of the most difficult years yet experienced in the superannuation and funds industries, it is time to take stock of consumer sentiment. We need to offer consumers a new compact that will build confidence in what is a fundamentally sound long-term savings system.

Building consumer confidence must be a priority for fund managers and super trustees alike. We cannot expect the level of voluntary contributions to bounce back to ‘normal’ levels overnight. If the experience of the late 1980s property trust failures is a guide, it might take three to five years to boost voluntary savings patterns.

We must not assume that some ‘automatic savings stabiliser’ will push voluntary savings to their 1990s levels. Considerable effort will be needed from all segments of the superannuation industry to achieve a return to normalcy. To use the words of Justice Oliver W Holmes: “The way the inevitable comes to pass is through effort.”

What has been operating to sap consumer confidence?

Adverse returns immediately come to mind. The typical balanced fund has experienced negative returns for the best part of two years — stronger markets will, hopefully, overcome this particular problem. On the plus side, investors in property and more conservative asset classes such as fixed interest, both domestic and offshore, have fared quite favourably.

The debate on fees has raged throughout this period of adverse returns. At times this debate has lacked focus and objectivity with claim and counter claim being levelled at particular fund segments. Employer sponsored master trusts have been confused with master trusts/wraps, retail funds offering income streams have been compared to less complex employer sponsored plans. Advice offered within product structures has been, incorrectly, ascribed a zero value when in fact, if purchased separately, it comes at a substantial price.

Unfortunately, in this environment, a claim that fees in a certain segment of the industry are high or are poorly disclosed is taken by superannuation savers and other investors as being a statement on the industry as a whole. Consumers can have difficulty in discriminating between product structures and pricing — hence the need for media and political comment to be clearly articulated.

We have a good super system, the envy of many of our OECD counterparts. We should be building on its strengths as opposed to making blanket statements that can only serve to undermine its long term integrity.

If there is a perception that fees in the industry are problematic, we must address that perception. Perceptions aside, some of the issues raised by consumers must be confronted openly and honestly by industry. It is of primary importance that markets have complete symmetry of information between consumers, distributors and product providers.

Consumer access to simple, concise and effective data on fees in product disclosure statements and other regulated documents is a fundamental plank of the Financial Services Reform Act (FSRA) and, come March 11, 2004, we must be in a position to be able to fully comply.

Basically, fee data should be itemised and specified so as to enable consumers to make comparisons between products. This PDS disclosure should complement the disclosure about provider remuneration that must be made via FSGs and SoAs, especially the full and complete disclosure of commissions in the latter document.

ASIC has done some very commendable work in consulting relevant parties on how best to disclose fees in a simple and concise schedule. Hopefully, in coming weeks the final document will be produced and the various associations will be in a position to recommend the Schedule as industry best practice disclosure. IFSA looks forward to being in a position to make this recommendation.

Even more significant in impacting on consumer confidence has been the lack of progress on key superannuation tax reforms (surcharge reduction and co-contributions). These reforms were taken to the people as part of Election 2001. They were subsequently announced in Budget 2002, and in the final moments of the Winter 2003 sittings they finally received Parliamentary attention.

Just a handful of parliamentarians took the chair’s call and debated the surcharge reduction element of these reforms. In the Senate, there was an unsuccessful Labor amendment to scrap the surcharge reduction (and to replace it with an undisclosed cut in the contributions tax). The Government’s motion to cut the surcharge was defeated by 33 to 27 with the non-government parties in the nayes.

In a media release by Senator Coonan, and subsequent reportage, it came to light that the Democrats and Government may well be in a position to strike an accord on the two bills. This would entail the Government channelling additional funds into the co-contribution initiative taking the benefits into the $40,000 income range at the expense of surcharge reduction. Hopefully, when the Parliament resumes in August 2003, an outcome for super savings will be achieved.

With progress on all three fronts in process, consumers should be more inclined to make additional commitments to superannuation.

— Richard Gilbert is chief executive of the Investment & Financial Services Association