By Blake Briggs, CEO of the FSC
Australians would collectively benefit from $16bn more in retirement savings and $22bn in additional retirement income by 2050 if the government removed barriers that prevent superannuation funds and fund managers from transferring consumers to innovative, new investment products.
Two decades of red tape and industry merger activity has left the super and funds management industry saddled with complex and burdensome layers of duplicate investment products, often built to align with the legislative requirements of the day, and then quickly superseded by the next round of regulatory change.
New research by EY for the Financial Services Council (FSC) demonstrates, however, that inefficient regulatory and tax settings have established barriers preventing the consolidation of investment products. The existing regime has resulted in up to 1.8 million consumers having $132bn invested in products that would benefit from a modernisation framework.
A product modernisation regime would allow super trustees and fund managers to efficiently move customers to modern equivalent investment options, when it is in members’ best interests, without triggering the early application of tax obligations.
Unfortunately, Australians’ savings remain trapped in outdated investment options, unable to transition to modern, often lower-cost contemporary products, without bringing forward tax consequences that would leave them worse off.
A successful precedent for product modernisation with corresponding tax relief already exists and has been the foundation of the rapid pace of mergers between APRA-regulated MySuper products, delivering efficiency, scale benefits and lower fees for consumers. The limited scope of this framework, however, means that it only applies at a whole-of-super-fund level.
A more even playing field with broader consumer benefits, advocated by the FSC, would allow modernisation within fund investment options and across managed investment schemes to occur. This is the logical next step to promote a more efficient and transparent financial services system.
A modernisation framework also delivers a dual benefit to the government’s medium-term fiscal position by reducing age pension outlays and increasing tax revenue from the super system.
The FSC’s modelling projects that, if the changes were introduced in the 2024 budget, the government’s budget position would be almost $1bn better off over the next decade, lifting tax receipts by $700m and reducing pension outlays by $240m in that time.
Over the next 30 years the government’s fiscal position would be improved by $21bn as retirees become increasingly self-funded in retirement, reducing their pension reliance and delivering Treasury’s holy grail of fiscal policy – a “structural save” without imposing a politically unpopular new tax increase on super savings.
Product modernisation is also the natural extension of the government’s Your Future, Your Super reforms. APRA’s annual performance tests of underperforming super investment options highlights that consumers are often stranded in historical products that are usually closed to new entrants.
Trustees often cannot transfer their members out of these out of these products and into contemporary products due to the tax and regulatory barriers imposed by the government as the individual tax consequences would not be in the best interest of the members.
If product modernisation was implemented regulators would also benefit from the reduced burden on monitoring a larger volume of products.
The prudential regulator APRA has repeatedly made it known that it thinks there is an unnecessary proliferation of products in the investment market, and by facilitating rationalisation the government would allow trustees to reduce the number of investment options available and lessen the burden of regulatory oversight, supporting an efficient, innovative and competitive industry.
The FSC is calling on the government to prioritise the interests of super consumers by acting to implement a product modernisation regime in time for the next APRA performance test in 2024.
The previous government, aware of the consumer benefit of acting, allocated $2.5m for a modernisation regime in its 2021 budget. However, the little observable progress to date demonstrates the risk is that the money has been siphoned off into other Treasury priorities.
The quicker the government acts, the greater the benefits to both consumers and the government’s fiscal position. Consider the case of a 40-year-old with an $80,000 balance today. If a modernisation framework were implemented next year, EY’s modelling demonstrates they would retire in 2050 with an additional $198,676. This is not only a significant boost in their retirement savings on paper, but also translates to an enhancement in retirees’ quality of life in retirement. Rarely does a policy proposal emerge that offers a genuine win-win for consumers, the government and industry. However, when they come along they should be embraced by policymakers.
A product modernisation framework gives consumers access to superior products, often with lower costs and higher returns, the government enjoys increased tax receipts and reduced aged pension outlays, and the industry benefits from greater operational and administrative efficiency.
The financial services industry has experienced decades of increased regulation that ultimately increases costs for consumers. The FSC is calling on the government to help turn the tide on this trend and implement reforms to deliver a more efficient financial services sector.
Blake Briggs is the CEO of the Financial Services Council
- This oped was published in The Australian on 20 November 2023.