There are many reasons to applaud the discussion paper issued by Treasury on better governance and transparency in superannuation, but its ownership by someone without an in-depth knowledge of retirement planning is worrying.
That Arthur Sinodinos, the minister for financial services and assistant treasurer, also has a background in banking and thus a clear bias for retail funds, is also troubling.
But first let us consider the paper. The equal representation model on boards was important to protect agreement between employers and unions in 1993, but not so now. Many boards are voluntarily reforming themselves, seeking the extra help of talented independents as the size and complexity of their funds has grown, but others are immobile, intransigent and open to widespread accusations of being self-serving or ineffective. These boards could do with the reform suggested in Sinodinos’ paper.
Meanwhile, the rethink of product dashboards and portfolio disclosure will allay widespread anxiety that these might do more harm than good in their current format.
In a sensitive way, the paper also deals with the issue of what default funds an employer has access to, by accepting that industry funds have outperformed retail funds. Any change here, it says, should recognise this. Indeed, many of the large high-governance industry funds have a “bring it on” attitude to such competition.
But concern arises from remarks made by Sinodinos at a breakfast presentation to announce the discussion paper, hosted by the Financial Services Council.
At the presentation in Sydney, he said the foundation of the Coalition’s beliefs was choice. He admitted that while his party had initially fought against compulsion, they had come round, but that their main “beef” now is the lack of choice in the system.
He partly qualified this later in the Q&A session with Jennifer Hewett of the Australian Financial Review, with the following remark: “I often hear that some people say that they are happy to be in a certain sort of fund because it is for a non-engaged investor or passive investors. I do not want passive investors. I want investors who actively take an interest in the financial outcomes.”
This is a hopelessly naïve statement that betrays an ignorance of behavioural finance and of the vast experience of retirement funds worldwide in well-meaning, but ultimately unproductive efforts to engage members. Humans are hardwired to worry about the short-term. A minority of us, largely actuaries and accountants, have the capacity to do financial planning 30 years out, but most need benign, paternalistic superannuation funds, with smart chief investment officers to do the choosing. Any other models are fraught with poor decision attributable to limited investor attention, overconfidence, herding and what behavioural finance experts refer to as “noise trading“.
The basis for Sinodinos’s views comes from a sector he is probably very familiar with, namely self-managed super funds, which he admitted “philosophically we quite like”, describing holders of SMSFs favourably as “people taking responsibility for their own savings”. On this basis he promised to keep regulation around self-managed funds “light touch”, and said education was preferable to prescription.
“If you keep improving the financial literacy of Australians, they will take a more a balanced view of how they allocate their assets,” he said.
A future in which we all make smart decisions on our retirement planning is an attractive one, but it is wishful thinking and it is up to the industry to make this clear to Sinodinos.