Michael Nowak

Policy and advocacy will again be high on the Association of Financial Advisers (AFA)’s agenda in 2014, following a year in which the association made a total of 22 submissions on policy and regulatory change.

“It has been an exceedingly demanding year from a policy perspective,” AFA President, Michael Nowak said. “By maintaining an authentic voice in advocating for sensible regulatory outcomes, the AFA is in a strong position to influence future policy settings.”

The AFA made submissions on behalf of advisers on a wide range of issues in 2013, including the implementation of FoFA reforms, superannuation, TASA, corporate superannuation advice, education and training. “We made submissions to Government, Treasury, ASIC, the Tax Practitioners Board as well as other parties and we expect the coming year to be just as busy,” Mr Nowak said.

The AFA is passionate about serving the interests of AFA members and their clients and one of its core objectives is to help members deliver great advice to more Australians.  “This is why we held firmly to our beliefs, opposing elements of FoFA that are counter-productive to more people getting access to affordable, quality financial advice,” he said.

Mr Nowak also said the AFA welcomed the new Minister, Senator Arthur Sinodinos to his role following the 2013 Federal Election and is pleased with the consultative process the new Government has demonstrated since being elected into office in September. “We were exceptionally pleased that the Minister chose the AFA National Conference in October to deliver his first speech as Minister to the financial services industry; a speech in which he shared his views on the valuable work our members do with their clients,” he said.

The AFA supports the Government’s proposed changes to FoFA and is looking forward to the FoFA amendments announcement in the near future. “We have ensured that the Government understands the time critical issues affecting the advice market,” Mr Nowak said, “In particular, pressing concerns with issues such as grandfathering and how it is preventing advice practices from choosing a new licensee.”

AFA COO, Phil Anderson, said the Government has already flagged a Financial System Inquiry and has begun a consultation process on MySuper and default superannuation. “The Financial System Inquiry presents an opportunity for a number of important issues to be addressed, including the implications for consumers of MySuper, corporate super advice, superannuation governance and external dispute resolution schemes,” he said. “We are actively engaged with the Government and expect to provide significant input into the Financial System Inquiry and any other inquiries that may be subsequently launched.”

Mr Nowak said the advice market is entering an exciting phase. “The AFA has chosen the theme INNOVATE: Think. Create. Act. for 2014. We are again taking the initiative next year to help advisers and their practices find the opportunities that exist in our rapidly changing market. Consumers, legislation and business models – they are all changing and a time of change is synonymous with a time of opportunity. We don’t think there has ever been a better time to be able to experience the value of AFA Membership – the advocacy, inspiration, sense of community. It will be a great year.”

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“Reform of the system for disability care and support is essential from a social policy and long-term economic perspective, and it is important that the proposed National Disability Insurance Scheme is developed and implemented on a sustainable basis,” said Julie Evans, Convenor of the Disability Taskforce of the Institute of Actuaries of Australia. The taskforce will examine the Productivity Commission’s draft report.

“The Institute notes the draft report’s focus on the need to provide certainty for people with a significant disability and their carers. A sustainable scheme has features that recognise the financial risks involved where long-term commitments are made. Identification and effective management of these risks will provide certainty to those who will receive long-term care and support from the NDIS in the years to come,” Ms Evans said.

“Strong scheme governance and financial management, including comprehensive monitoring, are essential for sustainability. The draft report’s proposal to use a commercial insurance based approach provides a good platform for this,” she said.

Salient lessons can be learned from the experience of current state-based accident compensation schemes and other similar organisations operating internationally.

“Lessons from existing accident compensation schemes include the social value that can result from early intervention and participation in the workforce, and that an individual approach to case management is important to optimise long-term outcomes. The value of consistent and disciplined management has also been demonstrated,” Ms Evans said.

In its submission to the Productivity Commission’s enquiry, the Institute set out principles covering financial aspects which need to underpin provision of disability care and support services. These principles were developed based on the work of the many actuaries who provide advice on the financial sustainability of insurance schemes which provide support for those with disability through Workers Compensation, Motor Vehicle Accident Compensation, Medical Indemnity Insurance, Life Insurance or Superannuation.

“As part of the actuarial profession’s contribution to Australia’s public policy development, the Institute looks forward to providing further input to the Productivity Commission and public policymakers on the Productivity Commission’s draft report, as the Commission develops the formal recommendations for its final report,” Ms Evans said.

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Opening the annual ACSA conference in Sydney today, themed Investment Opportunities in a Rebalancing World, ACSA Chair Paul Cutts said Australian institutions while enjoying improved investment conditions continued to face a significant change agenda.

“Institutions and indeed economies around the world are rebalancing as markets seek new equilibrium. Regulatory change, especially in Australia’s superannuation and tax policies, is an additional source of challenge, as will be the likely entry this year of at least one new securities exchange to the local market. ACSA expects that the custody community will be working closely with institutional clients to reshape business models and increase efficiencies in response to these shifting priorities,” he said.

At the same time, institutions are facing other, sometimes competing factors, including growing attention to after tax returns, monitoring and management of risk and improved transparency.

“All these factors are testing the suitability of existing operating models and sometimes the boundaries between internally managed and outsourced services. While we expect to see improved efficiency through the industry’s ongoing commitment to standards and automation in key areas of investment infrastructure, at the same time the needs of our clients to differentiate and to adapt to external change imply demands for new and extended services,” said Mr Cutts.

“The constantly changing information requirements of clients are an area where custodians can add value. For instance, environmental and social governance information is becoming a more prevalent theme. Clients are constantly looking for more detailed, accurate and timely information to aid their decision making process,” he said.

ACSA also released today an update on key industry statistics. The past year witnessed further growth in the industry with total assets in custody now $1.85 trillion as at December 2010, up nearly 8.5 percent from the end of 2009.

In highlighting achievements of the Association in the last year, Mr Cutts referred to the proactive work undertaken by ACSA in 2010 to consult with the Board of Taxation on the implementation of a new tax system for managed investment trusts. He also mentioned the significant level of engagement expected within the custody industry arising from the entry of an additional securities exchange later this year.

In explaining ACSA’s approach as an industry body, Mr Cutts observed “ACSA will maintain a firm core philosophy of, on one hand, working enthusiastically with policy makers to share opinion, experience and ideas; and on the other, to pragmatically embrace change with a clear line of sight to the needs of end investors.”

“Although the Australian custody industry is highly competitive, it is a testament to the professionalism of ACSA members that we can work together as an Association on the raft of common issues that matter to members and benefit our clients,” Mr Cutts concluded.

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The Institute, whose member actuaries work for insurers rating risks and setting premiums, notes that the lack of adequate insurance coverage for floods and/or its prohibitive cost, are key issues which must be addressed in any national funding solution.

“One positive outcome of the Queensland events is that flood has finally become a serious subject of debate after many years of being ‘out of sight, out of mind’ or ‘too hard,” according to Peter McCarthy, chairman of the Institute’s General Insurance Practice Committee.

“While flooding and severe rain events have always been common in Australia, compared to say, cyclones or earthquakes, getting insurance can be very difficult or prohibitively expensive. Furthermore, a distinction is often drawn by insurers between flood types, such as riverine versus storm, which can elude consumers,” Mr McCarthy said.

“The issues with flood are that, unlike other disasters, the same properties flood again and again, many high risk areas are known by residents, business owners, governments and insurers, and the scale of damage is greater than for other disasters,” Mr McCarthy said. Flood premiums insurers must charge to provide full flood cover are also extremely expensive. As a simple illustration, a $500,000 property which floods every 30 years may require a premium for flood of up to tens of thousands of dollars.”

The Institute believes that any national solution for flood must begin with an agreed policy goal and an understanding that the issues are broader than insurance. “For example, is the objective to fully compensate everyone affected for their losses or to partially compensate a proportion of those affected?” Mr McCarthy said.

“There’s also a need to decide what property will be covered and to what limits. Will there be compulsory cover? Will private residence and commercial properties be covered? Will government infrastructure be covered?

Defining what ‘flood’ events are covered is also key, Mr McCarthy said.

“There are complexities regarding interaction of flood with other natural hazard covers. For example, flood damage which occurs when rain is still falling creates an overlap between ‘storm’ and ‘flood’ covers. Or, in the case of Cyclone Yasi, damage caused by wind is likely covered but damage from a river flooding caused by rain from a cyclone may not be covered and storm surge is normally not covered.”

A realistic assessment must also be made about whether it’s affordable to implement the solution long-term. The collection mechanism (tax, levy, or premium), level of compulsion to contribute and amount required to reinstate damaged assets, may also limit options.

“To manage affordability, options must address the level of cross-subsidies from owners of properties that are not in flood prone areas to owners of properties which are,” Mr McCarthy said.

And, to estimate costs and address issues associated with a funding solution, modelling of flood impacts is required, but the limitations of this must also be recognised, he said.

“Floods referred to as a ‘1-in-100 year’ or similar event may be more like 1-in-25 levels.  And, changes in land use (eg increased urbanisation leading to concrete covering land that was formerly grassland or forest) changes future flood impacts.”

It’s also important that a solution does not discourage research into flood prevention and mitigation, Mr McCarthy said. Changes may reduce the likelihood of flood damage, through changes to building codes or zoning, or reduce incidence or severity of damage through levees, dams or other structures.

Governance and oversight is also important and includes relevant legislation, public reporting and dispute resolution. This includes whose responsibility it will be to ensure property at risk is covered – whether this is individuals, government or both. Any funding solution should also address what relief should be provided to those with no insurance or those who are underinsured,” Mr McCarthy said.

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Though lost super accounts are not a major issue for clients who have a financial planner, there are of course many Australian’s who have and this legislation will go a long way in helping to reconnect them with their lost super accounts and also reduce the number of multiple accounts.

“The FPA called for the use of the TFN through a number of submissions and we are always supportive of measures that make it easier for the client and the financial planner to use the superannuation system. Making the ‘back-office’ of superannuation more efficient and less onerous will encourage more Australian’s to engage with their fund,” FPA CEO Mark Rantall said.

“We are therefore very pleased that the government has followed through with this policy.”

“We will now review the detail as outlined in the draft legislation and contribute to the consultation process that has been outlined. And of course we look forward to working with the government on the implementation of the remaining Stronger Super Reforms.”

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Global investment manager, ING Investment Management (ING IM), says global economic growth is forecast to be significantly lower in 2011 with a widening divergence in the performance of emerging versus developed economies, high volatility in markets and rising uncertainty over macroeconomic issues.

It warned that untested policy prescriptions from governments and central banks – which it has termed ‘test tube policies’ – could further contribute to significant market volatility. ING IM also said that much of the developed world has made only 30% – 40% of the adjustments needed to adapt to the new environment and challenges, and estimates there is a 60% chance that global economies and markets will muddle through 2011.

Eric Siegloff, Global Head of Strategy and Tactical Asset Allocation, said: “We are likely to face a tough and volatile economic and investment environment next year with the divergence between the emerging and developed economies widening further. Companies and investors will also need to brace themselves for unexpected consequences from the ‘test-tube’ macroeconomic strategies being employed by governments and central banks.”

ING IM expects real global GDP growth to be around 3.8% in 2011, compared with its forecast of 4.8% for 2010. GDP growth in the emerging economies is projected at 6.5% (2010: 8.1%) while forecast developed
world GDP is 1.6% (2010: 2.2%), widening the economic performance gap between the two further.

These forecasts could be further modified by the 25% possibility that the world could lurch into another serious downturn, compared with a 15% chance of a surprise on the upside with strong economic growth. Developed economies may continue to be dominated by deleveraging and output gaps that would lead to deflation and low nominal growth.

“Investors will need to take a much more dynamic approach to their investment strategies in the more turbulent and divergent financial market conditions we predict in 2011. This means a greater focus on growth, and in particular dividends, income and yield – or what we call ‘DIY’, added Mr Siegloff.

“With such a high degree of uncertainty, investors need better risk management and a total return approach instead of focusing on benchmarks. In the low return world we are predicting, beta alone will not deliver. You need to place a greater focus on asset managers who can consistently provide alpha,” he said.

Australian economy remains well positioned

The Australian economy is growing solidly with output and income growth strengthening and unemployment falling. While growth in the major advanced economies is expected to slow, the emerging economies of Asia are continuing to grow strongly.

As a result, Australia’s major trading partners are expected to grow at their fastest pace in over 20 years and this is boosting global demand for commodities and driving Australia’s terms of trade. According to INGIM, this surge is expected to provide substantial impetus to domestic growth, supporting rising incomes and activity, underpinned by strong growth in exports and business investment as we move froward into 2011.

James Wright, Chief Investment Officer and Head of Australian Equities said: “We expect the Australian economy to grow more strongly than the rest of the developed world in 2011. While inflation is expected to rise, the withdrawal of monetary and fiscal stimulus and the appreciation of the Australian dollar will help to contain demand and inflationary pressures.”

2011 equities outlook

Global equities

ING IM believes the key drivers for global equity markets in 2011 will be positive earnings growth, attractive valuations, abundant liquidity and strong corporate wealth. These will underpin three strong themes for next year – sustainable income and growth, increased corporate spending, and emerging markets.

Sustainable income and growth: Here, dividends will become an even more important income generator, while low payout ratios, strong balance sheets and high profitability will support further growth.

Corporate spending: Corporate confidence is rising, and strong cash flows and balance sheets will lead to increased activity in buybacks, dividends, M&A activity and capital expenditure.

Emerging markets: There are still many attractions here for investors, including low public and private debt levels and high economic growth. ING IM still believes that emerging market equity valuations are not in ‘bubble’ territory as some market commentators claim.

“The 2011 outlook for global equities is good and we expect returns to be in line with earnings growth. However, investors will need to focus on yield and also on growth markets,” said Mr Wright.

Australian equities

ING IM. believes solid population growth and the demand for raw materials, as well as robust employment will be positive for Australian equities

Just like the two-speed world expected in 2011, in Australia the two-speed economy is expected to continue, with the industrial sector more closely tied to developed market demand and the buoyant resources sector tied to emerging market demand.

“Strong business investment, rising commodity exports and robust income growth supporting household consumption will continue into 2011 which will support the local markets. However, we do expect continuing volatility which will create value-capture opportunities for active managers,” said Mr Wright.

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The Self Managed Superannuation Funds Professionals Association (SPAA) has today warmly welcomed the appointment of Mr Bill Shorten MP to the position of Assistant Treasurer and Minister for Superannuation and Financial Services.

“We congratulate Mr Bill Shorten MP on his appointment as Minister for Superannuation and we look forward to working with him to advance the interests of the hundreds of thousands of Australians who choose to manage their own superannuation,” said Andrea Slattery, CEO of SPAA.

“The $390 billion self managed superannuation sector is now the largest sector in the $1.2 trillion superannuation industry by assets and number of funds, and represents the most engaged segment.”

“We note and support Minister Shorten’s comments that improvements to superannuation represent an opportunity to increase the quality of life of all Australians and deliver us a sustainable future. We are confident Mr Shorten’s background as trustee of two superannuation funds will stand him in good stead in his new role developing policies to benefit the broader retirement savings sector.”

“SPAA is keen to progress policies that raise standards of professional advice and help all Australians saving for retirement. We look forward to progressing the Future of Financial Advice Reforms and the implementation of the SPAA/Australian Artists Association guideline on investing in art through self managed super funds.”

“SPAA would like to work with the new government to find a workable solution to the excess superannuation contributions issue, where Australians legitimately trying to save for retirement, often by making catchup contributions later in life, are penalised with tax of up to 93% for making inadvertent errors.”

“SPAA is also keen to consult with the new government on the possibility of restoring the original superannuation contribution caps in full. The caps were halved in the 2009 Federal Budget against the backdrop of the GFC and have only been partially restored. SPAA believes the current caps, at $25,000 for those under 50 and $50,000 for those over 50 (the latter cap applying to those with less than $500,000 in superannuation), prevent large numbers of Australians from being able to save adequately for retirement.”

“SPAA would like to take the opportunity to thank the former Minister for Superannuation Chris Bowen for his very good work and to congratulate him on his new appointment as Minister for Immigration. We also look forward to working with Senator Nick Sherry in his new portfolio of Small Business,” Ms Slattery said.

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The bulk of the savings would come from making electronic transactions mandatory and straight through processing.

The research, The $20 billion dollar prize, released at the Financial Services Council Annual Conference in Melbourne today, lays out a blueprint for implementing SuperStream and outlines the opportunities and challenges.

It found that implementation would require a $1 billion investment across the industry.

SuperStream is the package of back office reforms proposed by the Cooper review. The recommendations include removing paper and cheques from the system, creating standard contribution and rollover forms and extending the use of tax file numbers for consolidating accounts.

John Brogden, CEO of the Financial Services Council, called on the Government and the Opposition to guarantee SuperStream would be implemented by 2012.

“Pulling $20 billion of costs out of the superannuation system while at the same time significantly improving services will ultimately benefit consumers,” he said.

“The next government cannot delay the implementation of $20 billion worth of savings in superannuation. Any delay is not in the long term interests of funds, members or employers.

“We currently have the ludicrous situation where many small and medium businesses pay salaries electronically but pay super by cheque. Superannuation contributions need to be fully integrated with Australia’s payment infrastructure. We must have a system where employers can log on to pay salaries and super at the same time.”

The research also found that implementation of the measures could see fees rise across some sectors of the industry as funds with antiquated systems are forced to make big investments to upgrade their technology and as members consolidate their accounts.

“There are three superannuation accounts on average for every Australian. Many people have forgotten they have small amounts of money in super accounts from jobs they had 15 or 18 years ago,” Mr Brogden said.

Some funds expect account consolidation will reduce the number of accounts they have by up to 40 per cent without significantly reducing their cost base. For members with multiple accounts, consolidating those into one account will reduce their fees.

Graeme McKenzie, Ernst & Young’s Oceania Leader for Asset Management, said implementing the industry-wide superannuation reforms would require strong governance provisions.

“Industry has told us that they strongly support the SuperStream initiatives but these changes cannot be achieved in isolation. They want a governance body established with strong powers to ensure that
implementation is coordinated and successful,” Mr McKenzie said.

“Effective governance and legislative direction is crucial to the success of SuperStream as the efficiency of the superannuation industry is impacted by the behaviours of members, employers and the diverse nature of super funds. The success of the proposals will only be as strong as the weakest link in the chain.

“However, the winners of this process will be those who embrace the changing landscape of superannuation with an ability to manage the complexity of that change and maintaining focus on improvements and benefits for employers and members.”

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John Brogden, CEO of the Financial Services Council, said these were critical public policy issues the financial services industry must take a more active role in addressing.

“As the largest sector in the Australian economy, responsible for managing the savings of all working Australians and facilitating investment in all industries, the financial services industry has an obligation to lead broader economic policy discussion and development,” he said.

National savings

The Financial Services Council/PricewaterhouseCoopers CEO Survey 2010 found that less than half (44 per cent) of CEOs have confidence with Australia’s approach to addressing the needs of tomorrow’s ageing population.

Andrew Wilson, Wealth Management Leader, PricewaterhouseCoopers said: “By 2050, one in five Australians will be over 65 and begin drawing down on their retirement savings. This may have far-reaching implications on the economy as the amount of money flowing out of super funds begins to exceed the amount of money flowing into them.

“This ‘de-accumulation’ may significantly impact equity markets and economic growth as investors move from higher risk, longer-term investments to more conservative ones.

“It is acknowledged that Australia’s savings pool, particularly investments in equity markets, helped support companies seeking to recapitalise during the global financial crisis. Such support may not be readily available once we move into this ‘de-accumulation’ phase.”

Mr Brogden said: “Australia is facing not only an ageing population but also a critical shortfall in retirement savings to the tune of $695 billion. The financial services industry is ideally placed to help Australia respond to this challenge.”

CEOs acknowledged the industry’s responsibility in helping Australians secure a comfortable lifestyle in retirement.

They identified improving consumer engagement with superannuation, expanding service and product offerings to cater for an ageing population and broadening the availability and breadth of advice as the chief strategies towards achieving this.

Infrastructure standoff

Nearly all (95 per cent) the CEOs surveyed were not confident that Australia’s approach to infrastructure would meet the nation’s future needs.

“It is clear that if Australia continues with its current approach to funding we will fall well short of meeting our infrastructure needs both now and into the future. There is a significant opportunity for the financial services industry to work with government in this area for the benefit of all Australians,” Mr Brogden said.

CEOs identified daily unit pricing requirements; the scale and complexity of transactions; and a lack of confidence as key barriers to greater investment in infrastructure projects.

“Securing channels of funding from super funds is about providing the industry with confidence that infrastructure will deliver a reasonable return commensurate with an acceptable level of risk,” Mr Wilson said.

“Instruments such as municipal bonds have been used in the United States and in parts of Asia. A similar mechanism could be set-up in Australia to provide government with access to new funding.

“Furthermore, the government could also build confidence by providing funding during a project’s ‘start-up’ phase before selling assets onto investment-funds.”

Australia’s role in Asia

Most CEOs considered Australia should be positioned as a regional financial services hub, exporting financial services and skills throughout the Asia Pacific region. However there were differing views on how best to achieve this.

“There is no doubt that Australia is very well placed to capitalise on the strong economic growth in the region. At the same time, if we are to maximise this opportunity it is clear that further tax and regulatory reform is required, as outlined in the Johnson report,” Mr Brogden said.

According to the survey, the provision of asset management services is where Australian investment managers could realise immediate growth opportunities in Asia. Other sectors such as custodial services, platforms and insurance offerings often require a well-established, local physical presence and distribution capabilities, which can take many years to establish.

Survey respondents highlighted that Australia’s wealth management footprint in Asia was relatively immature compared with other nations.

“We are 10 years behind more established entrants from Europe. There are already more than 5,000 European-domiciled Undertakings for Collective Investments in Transferrable Securities (UCITS) offered throughout Asia,” Mr Wilson said.

“There has been much discussion for Australia to develop an Asia Region Funds Passport. However, we should not limit ourselves to Asia. UCITS are a global passport for the European industry and we should be just as ambitious. Australia has an opportunity to export its financial expertise on a much greater scale.”

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The SG increase to 12% will also boost the average annual net retirement income for Australian workers by $1,795, taking the average annual net retirement income to $45,710.

AMP Financial Services Managing Director Craig Meller said the Federal Government’s decision to lift the SG to 12% will have a positive impact on the retirement savings for all Australians.

“Every Australian worker deserves a comfortable retirement and recent changes made by the Federal Government demonstrate its commitment to a robust and sustainable superannuation system for generations to come,” Mr Meller said.

However it’s the children of today’s workers, those yet to enter the workforce, who will reap the greatest benefits with their retirement adequacy expected to be around 75% of their income – 10% more than the current 65% benchmark.

Factoring in an increase to the SG to 12% the Index reveals 20 to 24 year olds will benefit the most and are projected to have an extra $107,535 in assets in today’s dollars when they retire, while a 30 to 34 year old will have on average $59,737 extra.

Other key findings from the AMP Retirement Adequacy Index for the six months to 31 December 2009 are:

• Strong market gains have seen average super balances increase 5.8% or $2,192 over the six months.
• A fall in voluntary contribution levels outweighed this gain with average contribution rates declining marginally to 12.4% of individual’s salaries.
• The fall in contributions among high income earners from 28.6% to 25.1% can be attributed to the reduction in concessional contribution caps to $25,000 per annum in the Federal Budget 2009.
• The fall in contributions among low income earners may be partly due to the suspension of the co-contribution program, coupled with broader economic uncertainty.

The AMP Retirement Adequacy Index used data for the six months to 31 December 2009 from 328,000 AMP corporate superannuation clients to predict retirement adequacy based on 65% of an individual’s pre-retirement income.

Economic forecaster, Access Economics, used this data to measure the implications of the current super data for future retirement incomes.

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