Submission for consideration into the:
Review into the governance, efficiency, structure and operation of
Australia’s Superannuation System
Under the Superannuation Guarantee Administration Act 1992, an employer must, in
the current financial year make Superannuation contribututions of 9% on behalf of all
their employees earning from a minimum $450 per month up to a maximum limit of
$40,170 per quarter. This equates to a compulsory employer super contributions
ranging from about $486 to a maximum of $14,461 per employee member depending
on their wages which is then subject to a reduction of the 15% Superannuation
There are about 9 million employee members, but also, there are a further third of
individuals for whom Superannuation is not compulsory, namely:
i. Unincorporated, self employed individuals operating as sole traders or in
ii. Individuals under age 65 who are not an employee, nor self employed and
These other individuals need to be SOLD the concept that Superannuation is
important in securing their financial well being in retirement. Superannuation is also
available to them and they need to be educated as to the the various type of
contributions that are allowed, the annual fiscal limits etc,.
When this comprehensive sweeping review was first raised the main objectives were:
1. To reduce the overall fees and charges made to a member’s balance on
compulsory superannuation (including superannuation - financial product
advice) to about 1% p.a. for the life of the membership.
2. To instill trust and safeguard each Superannuation member’s financial
3. To investigate whether Trustees should be directed and/or be required to
invest in the national interest investments - such as infrastructure.
As I will be proceeding on annual vacations shortly, I will not be in a position to
comment on Phase two, I am therefore making this submission to cover all of the
three main objectives stated above which could apply to all three phases.
This submission is based on over 33 years personal experience in the direct personal
interaction, by way of providing specific Superannuation product based financial
advice solutions to Superannuation members both in the accumulation stage as well
as the drawdown retirement income stage.
There are a number of Commonwealth Acts under which the whole scenario
a. Superannuation Guarantee Administration Act 1992
b. Superannuation Industry Supervision Act 1993
c. Income Tax Assessment Act 1997
d. Corporations Act 2001
e. Financial Services Reform Act 2001
f. Trade Practices Act 1974
g. Anti Money Laundering & Counter Terrorism Financing Act 2006
The legislation and the regulations thereof interact and have a very definite bearing
on the overall outcome and are overseen by various federal government regulatory
bodies such as the ATO, ASIC, APRA and ACCC etc.
ASIC realised that the current prescribed disclosure regime (of embedded holistic
financial planning advice aspect) incorporated in Section 945A of the Corporations
Act has led to lengthy, holistic documented. If done, with the utmost diligence, it
could take about 15 hours to analyse, prepare and present the documented solution
based on the detailed factual personal information collected from the individual
ASIC acknowledges that about 46% of the adult population can not read well enough
to able to understand these detailed disclosure documents that are required to be
produced to fully comply with the requirements of Section 945A.
This lack of literacy gives rise to a further problem as to how information provided on
the internet can be relied on by this 46% of the adult population, if they are unable to
read, comprehend, and fully understand the implications of the written word.
Accordingly, in April 2009 ASIC made a Class Order [CO 09/210] under Section
951B(1)(a) of the Corporations Act 2001 exempting Superannuation Fund Trustees
and the Trustees – authorised representatives from Section 945A to provide personal
intra fund advice including risk management insurance to their existing super fund
Authorised Representatives of Australian Financial Services Licencees are the
entities that generally provide the necessary Superannuation - financial product
advice and maintain the link between the Super fund member and the relevant
Super Fund not the Trustees of the Superannuation Funds who do not know the
personal financial situation of the member or their intended objectives.
Accordingly, I agree with Federal Treasury (August 2009) submission made to the
Ripoll, joint parliamentary committee that the current Section 945A provisions be
repealed (specially, in the compulsory Superannuation area) and that it would
need to be replaced with a short prescriptive documentation process.
The other major disadvantage and danger to the overall financial well being of the
member is that, if the Superannuation Fund - Product Provider shifts the financial
services product integrity on to the “Financial Planner/Product Adviser” in the
“Advice Fee – for Service” regime the likelihood of getting any financial reparation
would be rather remote. The Financial Planner/Product Adviser could get fined,
banned from practicing or even jailed. The only entity that has the financial resources
to make any sort of financial reparation is the Fund provider.
Now let us address each of the three main objectives:
A. How do we equitably distribute the about 1% p.a. - Fees and Charges?
I suggest using the trillion dollar superannuation environment to create a level
playing field and drive down the annual - fees and charges to the objective level
of about 1% p.a. which must include the provision of superannuation financial
product advice to each and every superannuation fund member.
Therefore, all members of Superannuation Funds must be provided
Superannuation - financial product advice at the cost to the
Trustee/Superannuation fund provider and there should be no additional cost to
the Superannuation fund member, other than, for voluntary, additional contributions
and/or increased risk management protection insurance premiums over and above
that specified in the Super choice legislation.
Financial Product Advisers & “Independent” Holistic Financial Planners:
Under the current environment I believe that the intermediary (financial product
adviser) that actually interfaces with the member be broken in to two very distinct
1. Financial – (Superannuation) Product Advisers – paid by the
Trustee/Superannuation provider who provides the incidental and retention,
continuing ongoing, very specific, limited Superannuation financial product
The Trustee/Superannuation product provider being responsible for the
overall integrity of the product offered. These (Superannuation) Financial
Product Advisers work to a “restricted – approved product list” approved
by the AFS Licensee. The Trustee being the responsible entity.
2. Financial Planners -Truly, independent, holistic, comprehensive, unbiased
“Advice only - Fee for Service” paid for and initiated by the member. The
member knowing that they will need to pay for the service without any
recourse to their Superannuation account balance.
There is “no” financial remuneration payment nor any support what-so-ever
from the Superannuation - financial product providers so that there can be no
percieved financial conflict of interest can exist in their advice.
These Financial Planners are not restricted by any “approved product
list” but cover the whole range of financial services products available and
so, could be considered as giving the best advice to the member.
However, for this concept to work effectively, it would be necessary to create a very
level playing field and regulate, cap the various fees and charges made in the
compulsory Superannuation financial product supply environment so that if a
member is not satisfied then the member could change providers with ease, minimal
cost with little or no financial disadvantage.
The “only” real area of concern to a member considering making such a change in
provider may be the need to probably having to requalify for insurance - risk
management cover in their new superannuation fund.
It is vitally important to identify and recognise the entity who derives the most
financial benefit from the Superannuation fees and charges that currently prevail in
the current Superannuation environment:
The entity that benefits most (in order of financial benefit):
1. The ATO from the tax on concessional contribution, superannuation fund
income earned and realised capital gains and from the payments received by
the five entities mentioned below.
2. The Superannuation Fund Trustee/Administration – their shareholder,
executive incentive bonus payments etc.
3. The wholesale, Investment Asset managers – their shareholder, executive
incentive bonus etc.
4. The Insurance providers – shareholders, executive bonus etc.
5. The AFS Licensee - Distributor (shareholder, executive incentive bonus
etc.) – who after deducting and retaining their annual licensee fee, which
can amount from a minimum $15,000 p.a. or up to 23% p.a. of the financial
product adviser annual remuneration up to a maximum deduction of
The balance of the distribution fee paid to the Licensee is then paid to the
Financial Product Adviser who actually provides the incidental advice
documents, implementation, AML & CTF Act ID verification, any member
clarifications and retention review/continual ongoing Superannuation financial
product advice to maintain the overall financial security and well being of the
Currently the retail Superannuation fee and charge structure amounts to about
0.75% to 2.8% p.a.
Although there are written disclaimers and disclosures it is a nightmare maze.
Current fee and charge disclosures are spread over a multitude of documents and
from the member point of view, it is not working because of the obvious lack of
transparency, specially, the layered volume based kick backs.
If we are to aim for an overall about 1% p.a. fee structure then the Trustee would
need to split/share this overall - about 1% p.a. fee and charge across all the
relevant participants so that it is fair and equitable.
Remermber, that the entity that spends the most time dealing with the individual
member is the Superannuation - financial product adviser. The entity that maintains
and retains the link between the member and the fund.
I suggest the break up of the objective 1% p.a. target fee - as outlined below:
0.5% p.a. Administration/Accounting/Compliance/Research.
0.0 % p.a. For wholesale bank - cash and short term deposit investment options
as the rate is pre-determined by the bank.
0.1% to 0.3% p.a. For other wholesale investment options - Management
(0.15% p.a. for balanced – diversified investment option).
0.25% p.a. as a Distribution fee on Cash and Term deposit investment options.
0.4% p.a. as a Distribution fee for all other available investment options.
The above mentioned Distribution fee includes the provision of the incidental
financial product advice, implementation and retention through continual,
ongoing review, personal - superannuation “only” financial product advice.
Where the Trustee sub contracts out the administration, compliance, research,
investment management, distribution and retention, all of the above mentioned
suggested fees are a legitimate income tax deduction to the Trustee of the
Superannuation Fund which means that the effective fee applied is further reduced
by 15% in the super accumulation stage.
The effective total - overall annual fee and charge applied in the super
accumulation stage as outlined above:
At the low end of 0.75% p.a. for cash and term deposit options reduces to
0.6375% p.a. and
At the upper end of 1.2% p.a. for all other investment options reduces to
This suggested fee structure is now in the desired ball park of 1% p.a.
Other Fees, charges and Costs
Government levies, taxes on Contributions, Earnings and tax on Realised
Entry/Contribution fees on compulsory mandated contributions – Nil – banned.
Exit fees – Nil - banned.
Investment management - out performance fee – Nil – banned.
If this fee suggested structure is implemented then, Industry Superannuation
Funds who advertise that they pay no fees for distribution, retention, financial
product advice, have no shareholders nor the need to pay executive bonuses,
the Industry Superannuation fund overall fees and charges should work out at
about 0.4% p.a.
As approved superannuation based retirement income stream funds pay no tax,
there is no tax offset available and the fees pass through at the rate mentioned.
Further, to defray the administration cost on member low account balance
between $1,000 and $10,000 an annual fee applied at the rate of $5 per month be
c.p.i. adjusted but “only” in $1 per month (annual c.p.i. increments).
Insurance – Risk Management Costs
Member – voluntary personal risk management - insurance premium
(over and above the insurance cover specified in the Super Choice legislation)
which would include the necessary incidental and ongoing review, product
advice, distribution/retention fee of 10% p.a. of the annual risk premium.
Please note that in this fee charging structure there is an automatic inbuilt cross
subsidisation of the actual cost between low and higher member account balances
compared to the overall financial service provided.
At the lowest end for a full financial year – employer compulsory 9%
superannuation contributions on $450 per month wages, after deducting the 15%
contribution tax, the amout invested in the fund for the benefit of the member is “only”
The overall fee and charge structure suggested would not even pay for the time
involved in making just one phone call.
Hence, the fees and charges must be made over the full life of the membership of the
Superannuation fund. It might take a member over 15 years from initially joining a
Superannuation fund to see any real financial benefit.
However, in due course, as Superannuation is a life time investment vehicle, from
first starting work, through retirement till death, the individual Superannuation
member account balance, should in the accumulation stage, be expected to increase
and be available to provide financial security and peace of mind in the drawdown
phase, in retirement.
Cross subsidisation of fees and charges in this suggested structure is no different to
our current progressive medicare levy, medicare levy surcharge and/or personal
income tax rate scales. Hence, this suggested fee and charge structure can not be
turned off by the member. The “only” way for a member to turn it off would be to
change Superannuation fund providers.
If we adopt this recommendation the “perceived” financial conflict of intertest in
commission payments that plagues ASIC and which is a cause of so many
problems in relation to the provision of superannuation - financial product advice
would be eliminated.
If a member was unhappy for any reason what-so-ever, this suggested fee structure
would not detract from easily changing Superannuation fund providerswith one
important proviso - checking that any risk management measures implemented
would continue in the new fund and were not jeopardised as a result of the move.
It should be remembered that Federal Treasury submission to the Ripoll, joint
parliamentary committee in August 2009 also stated that the price of banning
(distribution sales including specified financial product advice) commissions
would be high.
I fully concur and do agree with the comments of Federal Teasury specially if the
objective is to keep the fee and chatge structure to about 1% p.a.
However, for other member voluntary contributions, including salary sacrifice
employer concessional contribution made for and on behalf of a member,
[but excluding, for low income earners, voluntary contributions made to access
the Government Co-contribution and/or Spouse Contribution – income tax rebate
of up to $540]
which are made by a member as a consequence of being provided specific,
personal – Superannuation - financial product advice, a contribution/entry fee of
say 1.5% be applied to all such voluntary contributions, to cover the incidental and
ongoing retention, continuing advice to keep the member’s program on track.
Distribution Fee (annual and any on-going payments) need to be banned where
there is no incidental, and ongoing Superannuation financial product advice,
provided to the member to remove the “no-advice” providing AFSL from gaining
any financial reward for just offering the service - to rebate “only” part of the
annual on-going distribution/retention/advice fee payments to the individual
The othe big advantage in creating a level playing field should be the flow on effect
resulting in the reduction in fees and charges made by other retail - managed
investment - financial service products for the other non Superannuation – retail
managed funds, with similar investment asset option choice.
I think that the current practice of having the personal advice fee agreed to
between a Superannuation member and a financial services industry intermediary
and the mutually agreed fee being deducted from the account of a member’s
superannuation account could be construed as an illegal transaction under the
Income Tax Act.
Most Superannuation members, in the accumulation stage, are subject to
preservation rules and thus, are unable to access their superannuation account
They can not legally instruct the Trustee to divert funds from their superannuation
account balance to pay for any personal Superannuation - financial product advice.
Further, as any financial product advice provided to a Superannuation member does
not produce any assessible income for the member this Superannuation -
financial product - advice fee is not tax deductible under Sec 51 of the IT Act.
Lastly, this personal – financial product advice fee is also subject to GST.
This means that the member must pay from their other savings or other after tax
I repeat, where the Trustee sub contracts out the administration, compliance
research, investment management, distribution and retention, including the
provision of Superannuation financial product advice, all of the fees and charges are
a legitimate - income tax deduction for the Trustee of the Superannuation Fund.
This means that the effective fee applied, in the Superannuation accumulation stage
is reduced by 15%.
This is the way of making Superannuation – financial product advice available to
all members with minimal cost to them by firstly repealing the reqirements of Sec
945A of the Corporations Act and replacing it with a short prescriptive documentation
process in the employer – compulsory superannuation contribution area and
implementing the suggested fee and charge structure.
However, to make it truly worthwhile, all existing Account – Asset Based
Superannuation including Retirement Income Stream products must be moved to this
suggested basis using a Part 9 type of process to merge financial service products
when providers merge or get bought out and there is only one fee and charge
structure system in the Superannuation area. Some of the products that come to
Deferred Annuities – moved back to equivalent Superannuation accumulation.
Annuities – moved to Account Based Retirement Income Stream Pensions.
Retirement Savings Accounts – moved back to Cash based Superannuation –
B. How do we safeguard the interest of a Super fund member?
Since the introduction of compulsory Superannuation for employees the
Superannuation industry has grown rapidly and now amounts to about a trillion
dollars in assets.
This amount will continue to grow even more rapidly due to the compounding effect
of the preserved accumulation.
The current Risk Profiling and Asset Allocation process taught by the financial
services edicators and implemented for members develops an asset allocation
strategy suited to generating returns over decades of time and specially in the
retirement income stream field fails to give certainty in meeting annual expenditure
needs over the immediate next five years.
It is in this area, that Superannuation – financial product advice plays the most
important role specially in designing a dynamic moving asset alloaction investment
strategy over the lifetime of the Superannuation member and beyond, after death to
their financially dependent beneficiaries.
Trustee of the Superannuation Fund, fail in their fiduciary responsibility to
individual superannuation fund members by not providing the necessary
superannuation - financial product advice to the individual member so that the
member can exercise informed choice.
Further, many Superannuation members wrongly misconstrue that the default
Balanced – Diversified Investment option is a recommendation by the
Superannuation Trustee/Fund provider.
In some cases is no transparency as to the liquidity, valuation process, the
inherent investment risk, nor a disclosure of the type of investment assets that do
back the value of the “balanced – diversified” default investment options of the
I have attached examples of the other “mandatory - type of information” that I
believe all superannuation members should be provided with before they enter into
any investment asset option choice – within superannuation.
I, suggest, that Superannuation Funds be required to "mark to market" daily
valuations of each member account balance.
This member balance must include and allow for all fund taxation (including future
taxation liability on unrealised capital gains) inherent in the asset value backing
the Super fund.
All Superannuation Trustees/Fund providers must, as a mandatory - minimum,
provide investment choice of at least, the following basic – liquid, investment
options including those making award winning direct, no product advice, on-line
Cash (Default – option) when a member does not exercise informed investment
option choice, so that the member can never suffer a notional financial loss.
Short Term - Deposits
Australian - Fixed Interest
International - Fixed Interest
Diversified – Balanced
Listed - Australian Property
Superannuation Funds that do invest in illiquid assets should not be permitted to
bundle and include any illiquid assets in their diversified – investment options.
Illiquid investment asset options are fine if you are investing in perpetuity,
otherwise they can be extremely dangerous investments.
Therefore, where illiquid assets are offered they can be offered as an individual
“optional” investment choice, with full and clear disclosure of the inherent risks
involved, such as, counter party risk, the possible restriction and/or delayed
access at the time of benefit payment or investment option switch request.
The valuation process employed for these illiquid assets would need to be fully
disclosed by the Trustees/Superannuation Fund so that the member can make an
The ATO should be required to audit the integrity of the Super fund valuation
process by checking the valuation formula used to determine each member balance
in their chosen investment option after fully allowing for all of the taxation liability,
including that on unrealised capital gains.
The ATO, currently has a fairly comprehensive finacial data minining facility that it
uses to check the amount of taxable income that is earned by individuals who own
listed shares and unitised managed investments plus the interest earned on their
personal bank accounts. This data mining process could quite easily be extended to
cover assets owned by all Superannuation Funds.
All members, other than those in a defined benefit Superannuation Fund, should
have the right to choose their Superannuation Fund and direct their employer
Superannuation contributions to the fund of their choice.
The choice of Superannuation Fund should always be left to the member, other than
defined benefit Superannuation funds.
Accordingly, the practice where union work place – industrial awards that direct
an employer to pay contributions to a specific - Superannuation fund - be banned
with immediate effect. This would create a level playing field between the various
Superannuation fund providers.
Superannuation projection - calculators
The Global Financial Crisis has shown that the projection calculators - can not be
relied on, specially, if you are about to/or are already in retirement, because, in
every decade, that I have been a permanent resident in Australia, since 1970 to now,
we, in Australia, have experienced some sort of extreme volatility in the actual
I feel that, given the government specified minimum draw down rate in the retirement
income streams, we estimate the Superannuation fund balance amount that would
be required to provide the member’s desired income till say age 100, because with
the continuing advance in surgical and medical science and technology, we are living
much longer than the previous generation and this longevity trend will continue and
there is a growing fear of running out of financial resources in retirement.
Then increase this Superannuation fund balance amount by applying suitable
volatility uplift factors for each of the decades that the retirement income needs to be
paid. This is where Superannuation - financial product advice once again becomes
C. Should Trustees/Superannuation Funds be directed and/or be required to
invest in the national interest investments - such as infrastructure?
After witnessing the dramatic infrastructure collapses such as the Sydney - Airport
Rail Link, Sydney Cross City Tunnel, Lane Cove Tunnel, the Bris Connections project
etc,. the answer is a definite – No,
I suggestion that the Federal/State Government issue guaranteed indexed -
Infrastructure Bonds – Term to maturity of 30 years - Face Value $500,000 per bond
to attract funds from Superannuation Funds the government taking the investment
risk of the success of the infrastructure project.
The suggested Infrastructure Bonds could also be the basis for the re-introduction of
Guaranteed - Indexed - Lifetime - Reversionary – Annuities to combat the longevity
Also, the use of finacially engineered and structured investments fall over quite
dramatically in the event of counter party risk as evidenced in the most recent Global
Financial Crisis which commenced in 2007.