Andrea Slattery

The Government’s decision to again delay the introduction of the promised Superannuation Guarantee (SG) increases highlights the need for superannuation to be removed from the short-term political cycle, says SMSF Professionals’ Association of Australia (SPAA) CEO/Managing Director Andrea Slattery.

The decision, announced yesterday after the Government reached agreement with the Palmer United Party in the Senate, will put the current SG levy at 9.5% on hold until to 30 June 2021, when it will increase by 0.5 percentage points until it reaches 12% in 2025.

It reverses the Government’s announcement, made in the May Budget, to freeze the SG at 9.5% until 30 June 2018, and on 1 July 2018 to resume increasing it by 0.5% increments until reaching 12% in 2022-23.

Slattery says: “What this decision highlights is the urgent need to have an informed debate about measuring the long-term budget cost of superannuation and what is considered an adequate income for retirement, especially when it’s considered that people are now living, on average, into their mid-80s.

“In its submission to the Financial System Inquiry (FSI), SPAA recommended that major superannuation policy decisions be removed from the annual budget cycle and instead be subject to a five-year review as part of the intergenerational report. In light of this decision, the acceptance of that recommendation is more imperative than ever.”

She says the Government’s decision to make this short-term fiscal decision came at the expense of the long-term retirement goals of the Australian people.

“By linking the abolition of the mining tax with the decision to freeze the SG for seven years, the Government is again demonstrating that dipping into the superannuation ‘piggy bank’ is always an option when difficult fiscal decisions have to be made.

“SPAA was critical of the Budget announcement in May to delay the SG levy until 2018, and now Australians will suffer a further blow to their rightful ambitions to be self-sufficient in retirement.

“Moving the SG rate to 12% as quickly as possible was an important measure to ensure that Australians had adequate balances in their superannuation funds on reaching retirement.

“But this decision only works to undermine the public’s confidence in the superannuation system that’s the key plank to their long-term retirement planning,” she says.

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John Brogden

The Financial Services Council has called for new architecture for Australia’s financial advice industry.

John Brogden, CEO of the FSC said: “Significantly improved adviser education, increased ASIC powers and greater disclosure of experience and ownership are needed to increase public confidence in financial advice.”

The FSC’s submission to the Financial System Inquiry recommends a revised model for financial advice which includes an Advice Competency Standards Board to oversee the development of competency standards, adviser education and the register of advisers.

“Where appropriate ASIC should have new powers to prevent someone from managing a financial services business,”  Mr Brogden said.

“The FSC supports an enhanced public register of advisers which discloses the ultimate owner of the licensee.”

“Consumers  have the right to know the ownership and alignment of the adviser they are dealing with.  The register should disclose the education, experience and history of advisers.”

The FSC has also called for greater clarity on the definitions of financial advice.

“Better definitions and labelling of advice and sound architecture for building competencies are critical to gaining the trust and confidence of consumers,” Mr Brogden said.

“We have recommended the Murray Review considers a model which establishes clear segments of personal advice, general information, factual information and intrafund advice and for new adviser competencies to address these segments.”

“Our revised model for advice clearly distinguishes between personal advice and information and ensures consumers will receive appropriate advice from advisers with appropriate competency and skills,” he said.

The FSC’s submission highlighted four areas where more work needs to be done in the advice sector including:

• clarification of the different segments of financial advice
• adviser competence and professionalism
• governance and disclosure, and
• increased powers for ASIC.

Click here to read the FSC Financial System Inquiry submission.

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Andrew Bragg

The current structure of Australia’s insurance framework is inhibiting product innovation, creating underinsurance and unnecessary public sector cost, the Financial Services Council said yesterday.

In its phase two submission to the Financial System Inquiry, the FSC said: “Regulation must allow insurers to meet consumers’ needs.”

Andrew Bragg, Director of Policy for the FSC said: “Australia’s insurance framework is too fragmented. It requires separate licences for individual products.”

“This prevents insurers from offering multi-purpose products such as combined health and life insurance policies to meet the needs of Australian consumers.”

“We are recommending to the Murray Review that the prudential framework be streamlined so the industry can develop innovative products that better meet the needs of consumers,” Mr Bragg said.

The FSC also said private disability insurance could be leveraged to meet the ballooning costs of disability welfare in Australia and to reduce the increasing pressure on the Commonwealth Budget.

“Life insurance can be the private sector solution to the increasing budget costs of welfare, just as superannuation is to an aging population and private health insurance is to managing health care costs,” said Mr Bragg.

“Modelling by Deloitte Access Economics shows if the government treated private disability insurance in a similar way to private health insurance, $8.5 billion in net savings could be achieved.”

“The costs of the National Disability Insurance Scheme and Disability Support Pension must be sustainable and should not be monopolised by the government.”

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Matt Walsh

The Friendly Societies of Australia (FSA) yesterday said the Financial System Inquiry should promote measures in its final report that support sustainable pre-retirement life-event savings and investment products, recognising the positive role they play in helping Australians become more self-reliance and fostering greater competition in the delivery of financial services.

The FSA lodged its second submission to the Financial System Inquiry on behalf of Friendly Societies across Australia who help people plan for future life-events through savings, investment and insurance products.

FSA President Matt Walsh said while some matters had been referred to the Tax White Paper process, the FSI still has a major role to play in supporting a better savings culture.

“The FSA urges the Inquiry to recognise the benefits that an increase in medium to long-term life-event savings would deliver to our society. This includes a lift in national savings, better education outcomes and a reduction in the need for government welfare given people could better deal with financial challenges through saving via these vehicles.”

In its second submission to the FSI Panel, the FSA argues insurance bonds also increase the employment opportunities available to Australians by facilitating access to a higher standard of education and can increase government tax revenue by diverting some discretionary savings away from superannuation that is only taxed at 15%, or less.

The FSA is pleased that the FSI’s interim report has noted the competitive disadvantage of some savings vehicles compared to super because of the differentiated tax rates.

“We have consistently argued for a reduction in the tax rate on friendly society investments from 30% to 20%. We are pleased that the FSI Panel acknowledged that the tax system treats some savings vehicles more favourably than others and look forward to taking this issue up strongly again through the separate taxation review.”

The FSA says products of its members inject much needed competition into the financial system by assisting Australians to:

• fund future common and foreseeable life-events, such as home deposits and ownership, raising and educating children, sinking funds to pay debt, health and aged-care, funeral expenses, job loss provisions, formal child care funding, and support for aged parents or family members with disabilities;
• better prepare for difficult financial times that inevitably arise at some point in their lives; and
• improve and sustain financial and social standards via self-reliance and a savings culture that does not resort to social welfare dependency in the first instance.

The full submission is available here.

The FSA is the industry association that represents 10 of Australia’s 12 APRA-registered friendly societies.

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Andrea Slattery

The SMSF sector was a well-functioning, efficient and allowing many Australians to meet their retirement income goals, the SMSF Professionals’ Association of Australia (SPAA) said its final submission to the Financial System Inquiry (FSI).

SPAA CEO/Managing Director Andrea Slattery said the FSI’s draft report was “positive” about the SMSF sector, and where it did raise several queries SPAA was confident that its submission would allay any concerns.

“This was the final outcome with the Cooper Review in 2010 when it found the SMSF sector was a well-functioning part of the superannuation industry, and we believe the FSI will reach the same conclusion in its final report.

“SMSFs are essential to provide consumer choice and competition within superannuation and have been critical in increasing Australians’ engagement with their retirement savings.”

She said SPAA was hopeful the FSI’s final recommendations would give trustees, and the professionals who advise them, some fresh insights into how to achieve improved outcomes in the future.

She added that the fundamentals underpinning the SMSF sector were sound, and as such SPAA had strongly recommended to the FSI that there was no need for any restrictions on establishing an SMSF – either a minimum balance or trustee education requirements.

“SMSF establishment should be an informed and educated choice by an individual based on their personal circumstances and there should no barriers to them making this decision.  SPAA also recognises the need for appropriate and high quality financial advice to assist people make this important decision.”

Slattery says SPAA’s submission gave the FSI “hard evidence” that showed it did not need to be concerned about SMSF operating expenses.

“We showed that SMSF costs are generally low, driven by a range of SMSF administration service offerings that suit different trustee’s needs.

“The cost of operating an SMSF is only one factor in a person deciding to establish an SMSF with control, flexibility and planning for retirement other key motivators in establishing a fund,” she said.

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Jim Minto

Australia’s largest life insurer TAL recommends in a new submission to the Financial System Inquiry a range of measures to improve consumer outcomes for life insurance products and services.

TAL Group CEO Jim Minto said: “We are seeking changes to allow consumers to have greater flexibility and ease to both obtain and maintain financial protection, and to enhance their confidence by improving various standards.

“While the FSI Interim Report noted that the Inquiry would investigate further Australia’s life-underinsurance problem, what TAL is seeking are changes to help address underinsurance so that people can have the right amount of financial protection they need.”

Mr Minto said life insurance plays an important role in society by helping people financially when they are unable to work due to sickness and injury as well as the families and beneficiaries of those who die.

“Life insurance not only protects the lives people have already created but it protects the future they imagine. To do this we are seeking strong consumer protection and regulatory oversight, enhanced advice delivery and effectiveness, and to give consumers access to more innovative and contemporary products that better meet their needs via the technology they are using today and in the future.”

Key fact sheet

TAL is seeking a requirement for a “key fact sheet” (KFS) to be provided to each prospective customer of life insurance. The fact sheet would be a standard format to be used by all life insurers so all prospective customers would be provided with concise, relevant information about the type/s of life insurance they are seeking. A requirement to provide a KFS has already been introduced for home loans and credit cards as well as home and contents insurance policies.

A key fact sheet enables consumers to compare products simply and helps to make it easy to understand what can sometimes be complex products. For life insurance in particular, these fact sheets should compare stepped and level premiums so consumers better understand the costs involved over the longer term.

Enhance ASIC powers

TAL supports providing ASIC with additional product intervention powers to improve consumer confidence where necessary. An example is eliminating stepped premiums from funeral insurance products where the customer has income-tested government benefits or fixed incomes. The reason TAL is calling for this is because stepped premiums – which rise over time unlike level premiums – can eat into fixed income and over time become less affordable. This has been an ongoing issue for consumer action groups.

Higher advice standards

TAL believes strongly in the value and importance of advice for Australians. Life insurance is often provided via advisers who can ensure that Australians have appropriate levels of cover to meet their individual needs. TAL strongly supports measures to lift adviser standards, via mandatory certification, minimum university education qualifications, a national register and ongoing training. Until standards improve and financial planning becomes a profession, planners will continue to be viewed poorly by the public. TAL continues to promote increasing standards of the advice industry, and has actively promoted this view through its own advice group Affinia Financial Advisers.

Enhancing access to low-cost advice

TAL supports the use of scaled advice – or limited advice – as an appropriate middle-ground option to help consumers receive the level of advice they both want and need. To help consumers navigate through the different forms of advice that is available, advice labels should be renamed to provide greater clarity. Specifically, general advice should be renamed Product Information, scaled advice renamed Product Advice while Personal Advice (or full advice) should remain unchanged.

Allow life insurers to give consumers products and services they want

The regulation of all insurers should be aligned to the greatest extent possible and regulations should be changed to allow life insurers to provide ancillary benefits or ‘riders’ to consumers where only general or health insurers can currently provide those benefits. An example is life insurers currently cannot pay for the medical treatment of a customer. In short, life insurers are prohibited from offering benefits that resemble general insurance or private health insurance. TAL believes underinsurance can be improved if flexibility in the regulatory framework is improved to allow insurers to develop innovative products and offer a greater range of benefits to consumers.

Mr Minto said: “TAL would like to thank the FSI for the opportunity to contribute in helping to reshape the financial system so that it can be more sustainable and deliver better outcomes for consumers and our society. As Australia’s biggest provider of life insurance in all its forms, TAL is determined to focus on the needs of our customers and consumers because we are passionate about the role that life insurance plays in society.”

The TAL submission will be published on the TAL website.

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Jim Minto

The growing number of people who lodge ‘late notified’ claims against disability policies many years after their cover has ceased force upwards pressure on the price of premiums.

Australia’s largest life insurer TAL, through its initial the Financial System Inquiry submission, is calling for a time limit to be placed on when claims can be made for ‘living benefit’ policies.

TAL Group CEO Jim Minto said: “A big problem facing life insurers is that a claim can be made for a disability benefit many years after the customer has first stopped work and even ceased to have cover.

“This means life insurers are forced to assess ‘total and permanent’ disability (TPD) claims for when someone was once covered and may even currently be working at the time of the late claim.”

A big problem of the current open-ended disability claims arrangement is that the greater the distance between a claimable incident and the time a claim is made, the harder it becomes for both the insurer and the claimant to successfully process the claim.

This is partly because insurers often have to form a view using extremely patchy and inconclusive evidence to determine what a former or current customer’s condition was at a much earlier date.

Mr Minto said: “As well as being difficult to determine due to insufficient evidence, late notified claims could also have potentially harmful implications for life insurers costing models.

“That’s because these unaccounted for long dated claims make it harder for insurers to adequately calculate their ‘incurred but not received’ reserves and capital needs.”

Consumers end up paying higher premiums for disability cover because insurers are legally required to set aside money for the ‘incurred but not received’ costs expected for such claims and therefore need to recover those extra costs.

Section 54 of the Insurance Contracts Act – which encompasses life insurance as well as general insurance policies – currently prevents the denial of a claim merely because it is notified late.

Far better for both customer and insurer is for the claims to be made as close to the claimable event as possible, not up to over 10 years later.

To help minimise the impact of late notified claims, and maximise the chances of claims being successful, TAL urges customers planning to lodge a claim against their life insurance to get it into the system as early as possible.

Five tips to help consumers achieve a successful claim:

• Do get the claim in early because any delay in lodging the claim could delay the outcome.
• Do disclose previous conditions and correctly answer questions because incorrect responses may compromise future claims.
• Do claim directly or via your adviser if you have one. There is no need to use a lawyer to make claims; it does not change the result which in most cases is to accept and pay a claim.
• Do ensure you keep your life cover current. Letting your policy lapse leaves you unprotected. Protecting your ability to earn an income and your life is a necessity not a luxury.
• Do update the amount of your cover as your and your family’s needs change. Remember that for many people their income improves over time so income protection insurance coverage amounts should be updated.

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Jim Minto

In the wake of the interim Financial System Inquiry report, Australia’s largest life insurer TAL is calling for greater recognition of the “affordable” level premium pricing method.

TAL Group CEO Jim Minto said: “Consumers are continuing to voice concerns about rising costs and pressures of manage their home budget. We have found that while most people choose stepped premiums for their life insurance which rise with age, they are overlooking level premiums which stay the same.

“Although level premiums initially start higher than stepped premiums, they can provide households price certainty for the future because families don’t have to find extra funds each year.”

Mr Minto said the reason most people opt for stepped premiums over level is because they are initially much cheaper.

“But one of the problems with stepped premiums is that people can discontinue their valuable cover as the price increases more in later life, and they may even stop paying for their cover at a stage in life when they actually most need it.”

“Stepped premiums are in many cases suitable, particularly where the need is shorter term, but level premiums provide pricing certainty and predictability over the long term.”

Mr Minto said level premiums are comparable to fixing mortgage rates, which allow for better household budgeting and planning.

“Australians are familiar with fixing their mortgage rates and locking in utility rates to manage costs, but are more reluctant to fix their life insurance premiums which, in the long run, usually end up cheaper overall.”

TAL has recommended in its initial submission (pages 13 and 14) to the Financial System Inquiry (FSI) some minor changes to the regulation of premiums to help life insurance companies make level premiums more attractive to consumers.

The submission also recommends that policies sold to people on benefits or fixed incomes such as a pension should preferably be level premiums only.

A recent example of a level premium innovation was with TAL’s new InsuranceLine funeral insurance product which now only offers level premiums.

“While over half of our funeral insurance customers were already on level premiums, we found that many on stepped premiums would give up their policies as they aged and their premiums went up, at the very time when they needed it most, so we decided to only offer level premiums to overcome affordability concerns,” Mr Minto said.

He said the life insurance industry needs to communicate better to consumers around the pricing models for each forms of life insurance: income protection, disability, life and critical illness.

Background on types of life insurance premiums can be found on TAL’s A Voice for Life consumer information portal, including an animated video to help explain, in simple terms, the difference between stepped and level premiums for consumers.

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Jordan George

 The Financial System Inquiry and Government Pension Review have the potential to open up the availability of “relevant and appropriate” retirement income products, Jordan George, Senior Manager, Technical & Policy, of the SMSF Professionals’ Association of Australia (SPAA), told the organisation’s Technical Conference in Sydney yesterday.

The FSI, in its interim report, said the retirement phase of superannuation was underdeveloped and did not meet the risk management needs of many retirees.

“This is an assessment of the current state of retirement income products that SPAA agrees with and we will be working with both inquiries to achieve a better policy outcome for retirees.

“It is important that the FSI’s first consideration is the overall framework of our retirement system rather than just a focus on products. In this respect SPAA contends the SMSF sector is demonstrating just how well the Australian retirement system is working and meeting Government objectives by successfully providing income streams to retirees and is leading the industry in doing so .

“When it’s considered that about 35% of SMSF trustees are in the pension phase, and 64% of retirement phase assets are held by SMSFs, then it is obvious why this is an issue of paramount importance to SPAA.”

Jordan said the FSI was examining the option of providing policy incentives to encourage retirees to buy retirement income products that help manage longevity and other risks.

“Other policies they have flagged include the Introduction of a default option for how individuals take their retirement benefits; mandate the use of particular retirement income products; the role of Government long-term and inflation-linked bonds; and removing legislative impediments to development of annuity products.

“What the FSI is saying is that an important consideration is to have a more flexible, principles-based approach to determining the eligibility of retirement income products for tax concessions and social security concessions, as well as examining the capacity of the private sector capacity to provide the right solutions.

“When coupled with the Government Review of Retirement Income Products, which will look at the regulatory barriers restricting the availability of relevant and appropriate retirement income stream products and the minimum payment requirement for account-based pensions, it is clearly an issue that the Government understands has to be addressed.

“SPAA will prepare detailed submissions for both inquiries. But the organisation’s starting point will be the principle that whatever policy decisions are reached they must be based on people on not being compelled to adopt a defined strategy,” he said.

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John Brogden

The Financial Services Council yesterday welcomed the interim report of the Financial System inquiry.

Superannuation

The FSC agrees with Murray’s commentary that policy settings in superannuation lack stability. John Brogden, CEO of the FSC said: “Consumers need certainty and stability in policy settings to have trust and confidence in the system”.

“The inquiry has appropriately recognised this as a critical element in superannuation policy.” “The MySuper system, although less than 12 months old, has already seen a reduction in superannuation fees. As the FSI report suggests, MySuper needs more time to demonstrate that it can deliver on its objectives,” Mr Brogden said.

“We believe that the Australian superannuation system has returns that are comparable and in most cases better, than equivalent economies.”

The inquiry’s criticisms of liquidity and choice in superannuation however, fail to recognise the need to give fund members choice within a compulsory system.

“If you force people to save, you must give them the choice on how they save.”

We also note that the report has called for a broad debate on retirement income policy.

Mr Brogden said the FSC has advocated for a debate on the policy settings surrounding the critical retirement phase and supports this recommendation. Insurance

The report appropriately acknowledges the important role insurance plays for individuals and the economy.

“The report acknowledges that underinsurance ultimately ends up as a cost to government. We look
forward to engaging in detail with Inquiry on policy settings to reduce underinsurance, said Mr
Brogden.

Advice

The FSC welcomes the Inquiry’s observation that financial advice is critical for Australians, particularly in an environment of compulsory savings.

We look forward to providing a detailed submission supporting the discussion on increased competency and educational standards for financial advisers, the introduction of a register and increased powers for ASIC.

Importantly, the Inquiry acknowledges that there is a significant demand for affordable, low cost scaled advice.

Mr Brogden said: “We support increased quality, accessibility and affordability of financial advice.

Millions more Australians need to take advice to grow their wealth and secure their retirement.”

Financial Services Trade

The interim report identifies the significant opportunity of Australia being in the right place at the
right time.

“The report recognises the importance of integrating Australia’s financial services system into the Asian region and the need for the government to take a lead in coordination.”

It highlights that Australia’s financial regulation is very different to Asian jurisdictions and the need for harmonisation.

Mr Brogden also said: “The inquiry can play a critical role in increasing financial services trade in Australia, particularly in areas such as the Asia Region Funds Passport.”

Consumer Outcomes

The report has made important observations with respect to disclosure and technology. “We commend the inquiry for its focus on how consumers can better access and interact with the financial system. Focusing on the increasing use of technology and more effective disclosure are critical areas for further discussion,” Mr Brogden said

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