The Case for Better Financial Education in Australia - March 23, 2019
In the wake of the Hayne Royal commission, the Australian Financial Review has characterised individuals seeking financial advice as facing a tough choice; "pay a fortune for genuinely independent advice, accept your advice is conflicted or ditch humans altogether". The latter refers to the advent of what is called robo advice - advice delivered by a computer. Advice of this nature is in its early days, is currently largely restricted to investment advice driven by information provided in a questionnaire. It has significant potential, but it is not yet able to provide fully fledged, holistic financial planning advice.
The Hayne commission clearly exposed deficiencies in financial planning advice, ethical issues and conflicts within some of the major providers, including the banks. However, the push for better, more qualified advisors and ever higher compliance costs risks a situation where independent advice is indeed only available to those with a high individual net worth, and it is a truism that those in need advice are often those who can least afford it.
What this whole discussion misses is the woeful lack of financial education in Australia. Instead of pursuing an ever more expensive compliance regime which cannot eliminate all risks, some of that money would earn a better return applied to financial education for adults in Australia. We have an extraordinarily complicated superannuation and retirement system, and there is no expectation that individuals would never become expert or not need specialist advice, but it could be expected that improving levels of education would also improve the country's broad financial efficiency, reduce the scope of operations of unethical operators and improve the quality of advice generally.
Just remember, it is the consumer that pays for compliance costs and safety nets, either directly or indirectly.
Doctors and Managing Health Costs - "Open Referrals" to Medical Specialists - February 26, 2019
Many of you reading this website will be of an age where things go wrong medically on a much more regular basis than used to be the case when "we were young". That means a sometimes unavoidable interaction with the health system.
We preface his comments by saying that Australia undeniably enjoys a very good quality health system, and that to some degree our comments reflect "first world problems". However, it's also undeniable that one of the reasons why many people in retirement "save rather than spend", even if they only receive the age pension, is a concern about healthcare costs and particularly "gaps". Many have also seen the medical profession become distinctly more commercial with the passage of time.
These comments come largely as a consequence of one of us being referred to a medical specialist several weeks ago. On this occasions, contact with a specialist resulted in being told that the earliest available appointment was three months away and being pointedly told that a "gap" payment would need to be made for the initial consultation. This is not an emergency matter, and we are sure that processes exist to accelerate things if that were the case, but what is clear is that this particular GP only refers certain matters to certain specialists, and has done for 20 to 30 years.
That's not necessarily a bad thing if the client feedback from these specialists is good, but most would not consider a 3 to 4 month wait acceptable. As we mention elsewhere on the website, we think patients need to be more prepared to ask their GP about waiting times, and indeed costs. In the absence of clear information about both they should consider asking for an "Open Referral". This is a referral letter from a GP which is not addressed to a particular specialist, giving you a choice and effectively the ability to shop around in terms of both access and cost.
If you never heard of an Open Referral before, the Government provides that the, "referring practitioners don’t need to address a referral to a specific specialist or consultant physician."
A valid referral only needs to include the following:
- relevant clinical information about the patient’s condition for investigation, opinion, treatment and/or management;
- the date of the referral; and
- the signature of the referring practitioner.
Productivity Commission Report: Superannuation - January 15, 2019
Our favourite Government economic agency, the Productivity Commission, has just released a report on superannuation, and we would encourage everyone - regardless of age - to read the short synopsis available entitled, "Superannuation: Assessing Efficiency and Competitiveness". We would have liked the government to you have given the PC a much wider ambit to conduct a total review of the system, but the Government would have been concerned about "unintended consequences" - and it has no enthusiasm or ability to handle complex subject matter this close to an election.
In any event, just to pique your interest, we've extracted a number of interesting observations below both in terms of fund performance and expenses - the emphases are ours:
On Fund Performance
"Over the past 21 years (to 2017), many super funds regulated by the Australian Prudential Regulation Authority ( APRA ) have delivered solid returns to their members — averaging about 5.9 per cent a year in nominal terms, or about 3.5 percentage points above inflation (after fees and taxes)."
"Averages can conceal a lot of variation, especially across individual funds and products. After adjusting for differences in the asset allocation of each fund, we found a wide range of performance ..... It is nigh impossible to overstate the significant implications for members’ retirement incomes from this wide dispersion in fund performance over the long term. For example, a typical full - time worker experiencing the investment performance of a bottom - quartile fund over their lifetime would retire with a balance 54 per cent (or $660000) lower than if they experienced returns commensurate with the top quartile (based on the median fund’s return in each quartile)."
On the performance of SMSF's
"More than one million members have chosen to self - manage their super in a self - managed super fund (SMSF). Large SMSFs earn broadly similar net returns to APRA - regulated fund s, but smaller ones (with less than $500 000 in assets) perform significantly worse on average."
"As a percentage of balances, the reported fees members pay have fallen since the global financial crisis — from 1.3 per cent in 2008 to 1.1 per cent in 2017.... Nevertheless, a tail of high - fee products remains entrenched. Annual fees exceed 1.5 per cent of balances for an estimated 4 million member accounts (holding about $275 billion). Almost all of these accounts are in choice products offered by retail funds."
"Through the looking glass" - Comparing retirement income options - December 23, 2018
A recently released Federal Government Consultation Paper proposes to construct a simple fact sheet to allow prospective retirees to more easily compare retirement income products. The paper refelects the fact that we have an overly complicated retirement system weighed down by regulatory matters.
"In almost all cases, consumers are provided with lengthy Product Disclosure Statements which focus on discharging the product issuer’s legal responsibilities. Complex disclosure and a lack of simple, clear information can lead to people relying on behavioural biases to make decisions and choosing a default retirement product, which may not suit their circumstances."
The proposed approach is that, "expected retirement income should be presented numerically and with an income graph using average real annual income from a $100,000 investment, over the period from retirement (currently age 67) to age 97. Income presented should be net of fees and taxes."
Easier said than done, and it means that individuals are going to explicitly understand the trade-offs between risk and return, the interaction between superannuation and the social security sydtem and income returns, including or excluding capital. It is almost absurd to think that individuals will not need professional advice in many circumstances, prior to making very significant personal decisions, yet the rising cost of delivering financial planning advice means that it will remain unavailable to large proportions the Australian population. The only way to effectively bridge this very major gulf is to embark on a very significant public education campaign and at the same time work to simplify as many aspects of the decision process as possible.
We have real concerns for the ability to government to really simplify this area of policy - it is very complex and requires a "root and branch" review of superannuation income - we don't see any government in the current climate having an appetite to sort this area out, despite the clear need. So, likelihood is that we continue to bumble along, with the government trying to provide tools that try to help people to "peer through" a complex thicket of legislation, rules and regulations.
Grattan Institute Report - November 10, 2018
The Grattan Institute has released an interesting and optimistic perspective with respect to future retirement income, entitled, "Money in Retirement, More than Enough".
The report posits that, "The conventional wisdom is that Australians don’t save enough for retirement. But this belief, encouraged by the financial services industry fear factory, is mistaken. The vast majority of retirees today and in future are likely to be financially comfortable." Most of the publicity attracted by the Report has been around the suggestion that there is no need to increase the current 9.5% Superannuation Guarantee to 12% as currently planned, but it also includes a number of other recommendations, including:
- The Age Pension assets test taper rate should be reduced to $2.25 each fortnight for every $1,000 in assets
- Superannuation tax breaks should be reformed further - including further limitation on both concessional and non-concessional contributions, and a 15% tax on super earnings in retirement
- The value of the (family) home should be included in means tests for the Age Pension and Aged Care - above a suggested threshold of $500K - with the value of assets that do not reduce the Age Pension correspondingly raised to the same level as that applying to non-homeowners.
Our response is that these are interesting suggestions and may need to be examined closely if, for demographic reasons, the current system becomes simply unaffordable. We believe the exclusion of the family home has a distortionary affect across the whole economy and a "white elephant" that will need to be addressed, but it will require a courageous Government. Of more concern is the degree of equity in the system and whether "savers" in the system are being disproportionately disadvantaged both in terms of access to the pension and aged care and whether this represents a "moral hazard".
From a more practrical perspective we do have some concerns about some of the assumptions used in the analysis about the adequacy of future retirement income - consider the chart below:
The assumptions are important and they include, "A person born in 1965, who works uninterrupted until age 67" - we think that in practice the number of people who both work uninterrupted and to age 67, will in fact be very limited. The Report is welcome as it provides a different perspective of retirement income policy but the area need a very substantive review, by a body such as the Productivity Commission.
One last observation regarding the Report and a comment made:
"The retirement incomes system should also avoid boosting inheritances because inheritances tend to increase wealth inequality and to reduce incentives to work. This creates a quandary for retirement income policy. .... many retirees don’t spend down their capital. In part this appears to be driven by a psychology of extreme prudence."
Prudence may well be a factor in retiree behaviour but so is the spectre of significant Aged care accommodation payments (RADs). Retirement income and aged care funding should ideally be addressed in tandem.
How does the Australia Retirement and Pension System Compare Globally? - October 24, 2018
In the recently released Mercer Global Pension Index, Australia continues to rank highly when compared against retirement systems in other developed countries. However, whilst Denmark and The Netherlands moved to an "A" grading this year, Australia slipped from a B+ to a B in the rankings.
|A first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity|
|A system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system|
Australia's drop in the rankings largely seems to stem from relatively recent changes to the assets test and increasing levels of household debt. In terms of how Australian system could be improved, the Report continued to flag the following measures:
- introducing a requirement that part of the retirement benefit must be taken as an income
- increasing the labour force participation rate at older ages as life expectancies rise
- introducing a mechanism to increase the pension age as life expectancy continues to increase
We are generally in agreement with these suggestions, and particularly with respect to limiting the ability to draw lump sums from superannuation. A better approach in this regard may be to adopt similar measures to those introduced in the UK, which only allow a 25% lump sum withdrawal on a tax-free basis.
Seniors Mortgage Debt Growing Strongly - October 21, 2018
Ideally, individuals should aim to be debt free on retirement. However, a recent speech by an Assistant Governor of the RBA clearly shows that the number of individuals with mortgages Aged 55+ has more than doubled in the period from 2001 - see the graph below. To some extent this may reflect a longer work life, but otherwise it significantly increases the risk that households will be more susceptible to financial stress on retirement, when income generally decreases.
Aged Care Access and Funding - Let's Just Start Again! - October 19, 2018
There is an anecdote, often quoted by consultants, that says if you suddenly put a frog into boiling water, it will realise it is in danger and jump out. But if you put a frog into cool water and heat the water up gradually, the frog may stay in the water until it is boiled alive.
We quote it here because we believe that the residential aged care system has, for a variety of reason,s just become too complex and confusing to continue. However, most participants in the system seem unprepared or unwilling to recognise that radical change is desirable and needed. This complexity comes at a point in time, invariably towards the end of a person's life, where they often don't have the capacity to cope with the complexity and nor will their families have the requisite experience. It is also injecting an undue amount of stress into the senior population and leading to undesirable economic behaviour for the broader economy.
We need to start again with a clean sheet, from scratch, to develop a system that is as efficient, equitable and as transparent as possible - and that includes a review of how aged care accommodation is funded. We do not believe that the current system,with its focus on accommodation payments to fund the building of aged care accommodation is either optimal or equitable.
The area is complex and multi-faceted and there is a need to integrate with tax and social security policy, but our key views are as follows:
- Many seniors fear the need to enter residential aged care, principally because it brings with it the need to pay a refundable accommodation deposit (RAD), which now averages around $350,000 in the major capital cities. It is possible to pay for accommodation using the income stream equivalent, the daily accommodation payment (DAP), but it is the RAD figure that induces stress and worry. In turn, that induces many seniors to "over save" during their retirement years, even though the great majority will never enter residential aged care.
- Asset and income tests determine whether individuals require the payment of a RAD, and these mean that a significant, and perhaps inequitable, share of the burden for financing the residential aged care system falls on those who have saved and invested. Indeed, individual RADs quoted by aged care facilities, include an amount to cover costs attaching to housing residents who do not pay an accommodation charge. That is poor policy, and invariably individuals will alter the circumstances to reflect the system, leading to more and more administration in an effort to play catch up.
- The current approach, plus other inadequacies in the tax and pension system, lead many retirees to retain their main residence as a hedge against the need to pay a RAD at some point in time, rather than downsize or use funds otherwise.
- Funding for aged care facilities is a major issue, and likely to become significantly more so with a rapidly ageing population. Why aren't other ways of funding the capital required being considered, particularly given the existence of trillion dollar superannuation funds looking for long-term revenue streams. If in some way the cost of high-quality standard age care could be removed from individual residents, retaining strict gateway requirements in places currently, with individuals only paying the net added cost of higher quality accommodation or "optional extras", then this would materially reduce and fairly spread the "finance shock" currently attaching to residential aged care.
- Nothing is free, and we need to carefully consider all potential forms of funding, without exception, and indeed consider whether private operators should feature in this sector. It is completely foolish to have most or all of the aged population - except those who have no funds or income - "stressed" in case they need aged care. Figures show that currently only 7% of Australians aged over 65 will enter aged residential care and, if they do, it will be for a relatively short period. This is the sort of situation where "insurance" is usually the most effective product - and provided through the Government rather than a commercial provider. We would only generally comment at this stage that we believe funding should be biased towards the older, rather than younger, age groups.
Productivity Commission Draft Report on Superannuation - June 13, 2018
We are fans of the Productivity Commission; they normally produce well considered, practical reports mostly devoid of politics. And so it was with their latest draft report on Superannuation released in May 2018. Not all of the recommendations are relevant to retirees, but we mention some of the more interesting recommendations below in summary form;
- Individuals new to superannuation should be presented with a single shortlist of up to 10 superannuation, "best in show" products from which they can choose a product. Clear and comparable information on the key features of each shortlisted product would be provided. The 10 products would be chosen by an independent expert panel through a competitive process, with the process regularly repeated every four years. The effect would be to see a reduced role for employers, was they would no have a role in selecting "default" funds.
- Require that all superannuation funds publish a simple, single page product dashboard for all the superannuation products.
- Legislate to ensure that all exit and switching fees charged for superannuation funds represent only cost recovery
- Require that members are provided with insurance cover on only in "opt in" basis below age 25 and that trustees provide a simple calculator on their websites through which members can determine how insurance premiums will impact their balances that retirement. It was further suggested that the government should commission a formal independent review of insurance in superannuation.
- The report was sceptical about the need for a Comprehensive Income for Retirement (CIPR) product, arguing that no one product will suit all member requirements. Currently, as you mention elsewhere, we regard the (unfortunately named) CIPR more as a vague objective rather than as a product offering, believing that there is no "silver bullet" where retirement income is concerned - but we are worried that the critical missing ingredient is a lack of independent, qualified and cost-effective advice.
Superannuation and the "Moral hazard" - February 25, 2018
With effect from January 1, 2018 retirees lost $3 of age pension (per fortnight) for every $1000 of assets owned over a certain threshold, compared to $1.50 per $1,000 of assets previously.
The much discussed effect of this change, and we can only presume that it was unintentional on the part of the Government, was to introduce a situation where an individual or couple who owned their own home would be better off, in terms of total retirement income, with $400,000 in super funds funds rather than $800,000 in funds.
The effect was to effectively introduce a disincentive to save, and a ludicrous situation where some individuals chose to spend their superannuation funds on holidays or home improvements in order to access additional Age pension payments. These expenditures have been referred to by some commentators as having an "earnings rate" because they generate additional pension payments.
These changed introduce what we refer to as 'moral hazard' - a "situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.' The risky behaviour in this case is spending retirement funds in a questionable manner, and the "other party" protecting their behaviour is the Government, with taxpayers footing the bill.
The government is effectively sending a signal that it is only willing to support a certain (modest) level of retirement savings, reinforced by recent restrictions on both concessional and non-concessional contributions. That is a dangerous signal unless it is clear that the superannuation guarantee at current (and planned future levels) will do much of the heavy lifting in terms of future retirement incomes and supplant the Age pension.
We very much support the concept of the Age pension being a "safety net", not an entitlement, but you cannot have structures in place which effectively discriminate against savers in favour of those who benefit from the safety net; regardless of whether they did not have the opportunity to save or because they chose to spend and "enjoy the moment".
To provide an example, we cannot afford - either societally or economically - to support, formally or tacitly, the following sort of financial plan seen in a local newspaper and paraphrased below:
"My wife and I are both 60 years of age and own our house outright. We have $500,000 in super and intend to retire, spend it all by the time we reach 66 and then go on the Age Pension"
If a better balance isn't struck - and we don't necessarily see that grandfathering is the answer; it provides "protected pockets" and increases complexity - then we can see constraints being placed on super lump sums and I doubt that will be in many peoples best interest.