If the Labor Party forms government after the next federal election, it will kick off a flurry of consultation with the financial advice sector as it reviews the superannuation system to address perceptions of inequity and unfairness, and moves to establish a royal commission inquiry into the banking industry.
An election is probably still more than 12 months away. But with every passing day and week that the Coalition Government wages war internally and remains riven by factional divisions, the odds of a Labor Government shorten.
In an exclusive interview with Professional Planner, opposition leader Bill Shorten says he has not formally ruled anything in or out of an inquiry. But it’s clear that Labor’s
royal commission would include close examination of the conduct of banks in financial advice and superannuation.
And that’s what’s needed to address “a pathology in elements of the banking sector and the financial services industry of a lack of accountability”.
“We’ll look at case studies where there have been problems across financial services and banking”.
Shorten was the minister for financial services and superannuation in 2012, when the Future of Financial Advice (FoFA) reforms passed the Senate, and is well aware of the shortcomings of the advice industry, and the impact on consumers. While the FoFA reforms – along with proposed new professional, ethical and education standards – mean
the quality of advice is improving, Shorten says, reform should not have taken as long as it did, and for some people it has happened too late.
“I feel bad for the people who’ve been ripped off. Historically, in the meantime, and even now.”
Shorten says Labor is determined to launch a royal commission inquiry, which he says is necessary because “we’ve tried just about everything else, haven’t we?”
“A royal commission is the king of all inquiries,” he adds. “It has the power to look behind. There are basically no excuses you can give not to give evidence. It has very strong powers.
“Too many problems occur too often. And every time it does, we all get the mea culpas and they say it won’t happen again, until the next time.”
Shorten says Labor would “have a serious look” at setting up a compensation scheme for victims of bank malpractice. “That’s a serious question that needs to be answered,” he says.
Superannuation could prove to be fertile ground in an election battle. Roy Morgan Research released in May this year concluded that “not surprisingly, superannuation has now become a big election issue that could influence voters”. It stated that about two-thirds of individuals with more than $1 million in superannuation are Liberal and National Party voters, and almost half of individuals with $150,000 to $1 million in super are L-NP voters.
“The proposed changes to superannuation in the [2017-18] budget have the potential to negatively affect these two groups, which together comprise (37.2 per cent of) L-NP voters with superannuation,” the research firm states.
But it added that “with a long time to run before the election, both parties will need to come up with their final superannuation details in order for the voters
to decide”. This is the key task facing Shorten, shadow treasurer Chris Bowen and shadow minister for small business and financial services Senator
The Labor Party had been outspoken against the use of limited recourse borrowing arrangements (LRBAs) in self-managed super, and Shorten says it remains opposed to the “SMSFs borrowing against the fund to invest in housing”.
“Housing is where we’re seeing a bit of activity,” he says. “If the SMSF has enough to invest in housing, that’s fine. But the Murray Inquiry stated it was a risk
to financial stability. Where you’re getting over-leveraging, that’s an issue. We’ve said that, if we get elected, we’d clamp down on that.”
Shorten says “so far, he only turned my mind to the housing question”, but offers to take on notice the issue of SMSFs using borrowings to acquire other assets.
Defining and enshrining in law the purpose of the superannuation system remains an elusive goal, despite claims to the contrary from both sides of politics. However superannuation’s purpose may ultimately be defined, “it wasn’t created to make the banks rich”, Shorten says. He argues that the system doesn’t even serve well the people it was meant to serve in the first place, particularly low-income earners and women, and gives an assurance that these shortcomings will be addressed as Labor releases policies before the next election.
Addressing shortcomings for women is difficult, he says, “but we recognise it’s an issue”. And it’s a big one: the Association of Superannuation Funds of Australia (ASFA) states that in 2013-14 the average superannuation account balance for a man was about $98,500 and for a woman it was less than $55,000.
“Women lose their super when they go on parental leave,” Shorten says. “The pay gap is real. In the public service, it’s 8.6 per cent; across Australia it’s nearly 20 per cent. Women on average have much lower account balances. Paying women equally to men would be a good start, because then the 9.5 per cent would be the same for everybody. Get more women into positions of power. We’re working on our policies there, but we see it as a gap in the current system.”
Defining super, once and for all
Shorten says the opposition will continue to resist policies that confuse the purpose of superannuation with other objectives, such as the First Home Super Saver Scheme, which would allow first homebuyers to make special contributions to a super fund that they could later withdraw, along with earnings on those contributions, to fund a home purchase.
“The government needs to stop tampering with first homebuyers’ schemes, raiding superannuation. I don’t agree with that,” he says, adding that the scheme will not help those who are least able to afford a home.
“It’s going to benefit only people who have the capacity when they’re young to put money in at a tax-preferred rate – personal contributions,” he argues. “It’s not
necessarily those people who are locked out of the housing market. If there’s money sloshing around in the system it doesn’t deal with supply…it’s a price stimulus.”
He says a better approach would be to reform negative gearing and concessional capital gains tax rates. But, he notes for Professional Planner, “The point is, we’re now talking about housing affordability…and that’s not the purpose of superannuation.”
Shorten says super’s purpose is simple: to help reward people for saving for their retirement.
“It’s a legitimate aspiration for most Australians to retire with some degree of financial security,” he says. “Also, superannuation provides a deepening of the liquid capital of the nation. It’s good for individuals and it’s good for national financial stability and growth.”
A rise to prominence
Shorten has arrived at an understanding of the system and its purpose through different perspectives since 1994, when he joined the Australian Workers Union (AWU) as a trainee organiser.
By 2001, he had been elected national secretary of the union and he came to national prominence as a skilled negotiator and media performer during the Beaconsfield mine disaster in 2006. He parlayed the resultant profile into a political career that started in 2007, when he was elected to Federal Parliament. In 2010, he embarked on a nearly three-year stint as Minister for Financial Services and Superannuation. He was elected leader of the opposition in 2013.
By then, he’d come to understand what superannuation meant to working people. From 1998 to 2001, he was a director of the industry superannuation fund AustralianSuper and from 2005 to 2007, he sat on the board of the Victorian Funds Management Corporation, gaining a fund’s perspective on the system.
Shorten says that during his time with the AWU, he formulated what he calls the “43-year-old rule”: until people reach the age of about 43, they’re just
not engaged with superannuation.
“I don’t know, you start thinking about your next 20 years and what you’re going to have when you retire in your 60s,” he says. “There’s no science to it, except at literally hundreds of workplace meetings, the young people, they’re interested in getting their house. The older people, they’re interested in what they’re going to get when they retire.”
Industry vs retail
The political divide on superannuation is driven by fundamental differences of opinion and ideology, which Shorten says are embodied in the Coalition’s set against the industry fund sector of the superannuation industry.
“I can’t think of any other sector of the Australian economy that represents literally hundreds of billions of dollars where the government wages such an ideological war,” Shorten says. “But industry funds, I think, are good competition for banks in superannuation: low fees, good performance.”
Shorten argues that choice – of fund and investment options – is an important pillar of the superannuation system, but should not cost an arm and a leg and shouldn’t be hindered by peripheral issues.
“If something is not performing, you should be allowed to pull out,” he says. “But choice is getting undermined, quite often, by life insurance products now. People reach a certain age and all of a sudden they’re stuck in a bank fund because they can’t get a comparable life insurance policy in another fund, but they keep getting gouged on fees.”
In August, the Productivity Commission will deliver its final report into the allocation of individuals to default funds under the industrial award system, and alternative ways of doing it, potentially opening up greater competition between industry and retail funds. Shorten says competition for default funds is “not too bad”.
“The government is just hung up on unions and industry funds, that’s [the root of it],” he says. “It’s all politics. Competition for default funds is not a bad idea at all. But by the same token, people have choice [of fund] when they move around.”
Room for improvement
For all its perceived shortcomings, Shorten says, there is “a lot more to be positive about in superannuation than negative,” and he cites as major policy achievements of the last 25 years the increase in the compulsory rate of contributions – although he describes the freeze at 9.5 per cent, well short of the originally planned 12 per cent, as “just hopeless” – and the creation of “a $2 trillion pool of capital”.
“It’s created greater liquidity in our markets, and it’s meant that people have something to retire upon other than potentially just their house,” he says. “It’s diversified the asset base of Australians.”
Shorten says super funds generally deliver “pretty good returns”, and communication with members about features and choice is improving.
“I think that’s important,” he says. “The more control you give to individuals in their lives, the more granular quality you get in relationships.”
Even so, he says, there must be a continued and strong focus on minimising costs, and on ensuring fund members are getting value from service providers. He reserves particular scorn for a style of funds management that masquerades as active and charges a fee accordingly, but delivers quasi-index returns. He is equally scathing of funds that charge high fees for individuals with “modest accounts, in vanilla investment products”.
“If they’re giving you Commodore service, they shouldn’t charge you Rolls-Royce fees,” he says. “It’s a regulated, mandated flow of capital, and people are making a lot of money out of just indexing.”
His advice to funds is blunt: “Charge less for doing the vanilla products and always remember whose money it is.”
“It’s not the money of the trustees; it’s not the money of the people [working] in the funds. It’s the beneficiaries’. It’s the account holders’,” he says. “Costs are not the only factor, but if you don’t focus on costs, they’ll get away from you every time.”
Professional Planner’s publisher, Conexus Financial, sponsored the 2017 Federal Labor Business Forum Dinner.