Planning for the retirement tsunami

I recently read an editorial in The Australian by Peter van Onselen entitled ‘Mexican standoff over super serves no one.’

It identified some of the more controversial issues in super at the moment, including the increase in the super guarantee rate to 12% from 9%, the low concessional contribution cap and the heavy tax penalties for exceeding the contributions caps.

Of interest were the author’s comments about superannuation in Australia in the context of the fiscal pressures that will be caused by our ageing population. As Mr van Onselen notes, if the government doesn’t fix super, ‘it is the equivalent of warning about an approaching tsunami without planning for its arrival.’ How right he is.

I would add to this that in formulating a plan for superannuation, we are only hurting ourselves when we make frequent changes to the system. Taking the tsunami analogy further, if people become confused about the latest plan of action when the tsunami hits – or they lose confidence in the latest plan – they simply adopt a ‘let’s worry about it when it arrives’ response. Clearly, this can’t be the approach for superannuation if the objective is a comfortable retirement for all Australians.

For super, the plan for the arrival of the retirement tsunami needs to be right – and the time to get it right is now. Superannuation has been subject to more than its fair share of tinkering by various governments over the years and this has eroded the confidence of Australians saving for their retirement through superannuation. More changes in recent years have resulted in many people being slugged with severe excess contributions tax penalties when they were simply trying to save for their retirement following the ‘new rules.’ Who wouldn’t lose confidence in the system?

So, as the government finalises its response to the Cooper Review into Australia’s superannuation system (we’re expecting a response before Christmas), one would hope that both sides of politics use this last opportunity to get it right. The message is simple: fix super in the best interests of Australians, and then leave it alone.

We have an obligation to overlook political short-termism for the benefit of Australia’s retirement savings in the future. After all, tomorrow’s budget balancing act will be acutely felt when the largest cost to government comes from supporting retirees via the aged pension and the health system. Indeed, the Mexican standoff over super serves no one.

More than an exemption

The last couple of months have seen many Chartered Accountants become increasingly engaged with the Institute as word spreads about the removal of the accountants’ exemption. It is an issue that certainly has many members “hot under the collar”. However I was surprised by the number of Chartered Accountants who weren’t fully aware of exactly what the accountants’ exemption is and the limitations it has in its application. (Yes, it still “is” – the removal is not due to take effect until 1 July, 2012.)

The accountants’ exemption refers to the ability for recognised accountants to recommend the setup or closure of a Self-Managed Superannuation Fund (SMSF) without the need to operate under an Australian Financial Services License (AFSL).

Interestingly, the only reason we need the accountants’ exemption is because SMSFs are considered or viewed as a financial product, which would otherwise require an adviser to operate under an AFSL.

My view is if SMSFs were more appropriately classified as a structure, not a product, the accountants’ exemption wouldn’t be required at all – it is the underlying investments that are financial products, not the SMSF itself.

The other difficulty with the legislation is that it doesn’t talk about an accountant advising a client NOT to set up an SMSF; nor does it allow accountants to explore alternatives for superannuation savings. In terms of structural, tax and asset protection advice, accountants need to be able to talk about SMSF as a viable alternative to other structures, such as companies and trusts, to potentially hold and grow assets.

Clearly, accountants need to talk about SMSFs with their clients but they also need to talk about a whole lot more! Accountants, as trusted professionals, are well placed to provide simple, affordable, non-product financial advice and have a significant role in ensuring Australians are able to gain access to advice when they need it.

This issue has had quite a bit of attention in the public domain – you may have seen an article I wrote in the recently released Spring 2010 edition of SMSF Magazine, entitled ‘Exempt No More’.

What kind of advice do you think accountants should be allowed to provide their clients? I would love to find out more about what our members think about this issue – please feel free to share your thoughts.

Re-engaging youth: a ‘super’ problem

Throughout the Cooper review process, the issue of disengagement with superannuation was frequently raised and debated. It was widely acknowledged across the industry that younger Australians tend to be particularly disengaged. The reasons for this appear to be varied:

‘Super is too complex.’
’I’m not retiring for another 50 years.’
‘I’ve only just started my career, why would I think about retirement?’
‘I don’t earn enough to worry.’
‘I’ve got better things to spend my money on!’

Anyone involved in superannuation and the broader accounting and financial services industries understands the benefits of starting early to save for retirement. Older Australians often regret their late consideration of superannuation. The question is, how do we get the message of early saving in superannuation through to younger people? Just as importantly, how do we get them to care?

Education is a large part of the answer. Students should be taught about financial literacy in schools. This is important to ensure students understand basic financial concepts, including superannuation. Younger Australians need to be aware of the benefits of starting to save for their retirement from early in their working lives.

However, education can only go so far. Let’s face it - I can teach my kids about all the great benefits of broccoli; it doesn’t mean that they will eat it!

I’m curious to know what others have to say on this issue. In an age of instant gratification, does there need to be a more immediate and relevant incentive to start saving? (Tax incentives to a low income earner may not be very appealing.) With an ageing population, we cannot over-emphasise the importance of superannuation. Unfortunately, if Australians don’t start to engage with their super early in their working life, it may be to their detriment in retirement.

Superannuation: ‘leaking revenue’?

I recently read the “red book” - a document that Treasury provided for the returning Gillard government. The red book’s purpose is for Treasury to identify the economic pressure points for the new government. While many of their points were interesting, I found the comments by Treasury on superannuation frustrating. They stated that “the superannuation system is increasingly leaking revenue, with Self-Managed Super Funds now the tax minimisation vehicle of choice”.

With SMSFs finally being ratified as a “largely successful and well-functioning” sector of the superannuation industry by the Cooper Review, it concerns me that the comments from Treasury may have a negative impact on the sector. With many of the misconceptions about SMSFs finally being put to rest, it is perplexing that Treasury would imply that those with SMSFs somehow have access to special rules or are otherwise abusing the system.

Let’s be clear - there are no special tax laws available uniquely to SMSFs that currently enable some sort of “tax rort”. SMSFs access the same tax laws as all types of superannuation funds, albeit that they are generally able to manage and utilise them more effectively than their larger counterparts. Furthermore, to refer to the use of legitimate tax laws that are available to any taxpayer as “leaking revenue” is inflammatory and misleading.

Early in 2010, the Cooper review identified SMSFs as a strong and robust sector of the super industry. After many years of public scrutiny, this greatly improved the perception of SMSFs. Any implication that SMSFs are somehow cheating the government of revenue will only encourage old prejudices and bias to resurface.

Why audit SMSFs?

The National SMSF Conference 2010 is continuing today and I’ve been having a great time attending sessions and meeting members. Feedback has been really valuable – members really appreciate the opportunity to hear from experts and build up their skills in the SMSF sector.

Yesterday, I attended a panel session on auditor independence. Interestingly, during the Q&A session, panellists were asked why do we need to audit SMSFs at all? While the answer may seem obvious to members, it may not be for some of your clients.

The first and most apparent reason to audit SMSFs is that it is required by law. However, while not all laws appear to stem from sound policy principles, I believe this one does. There are some good reasons for auditing SMSFs, not least of which is that it is in the public interest.

As you know, an SMSF has access to significant tax concessions. It is therefore essential for the public (and the regulator) to be comfortable that each fund abides by the law to ensure paying tax remains a fair and equitable process for all. An independent audit is an important part of this process.

What many people don’t realise, however, is that many SMSF trustees find a lot of value in the audit function. An auditor can provide independent and beneficial advice for trustees, extending their service beyond the role of compliance to one which helps trustees keep their fund on track and address any areas of concern as they arise.

The SMSF sector continues to show strong growth. The audit function is central to ensuring SMSFs can be used (not abused) effectively to maximise retirement savings for many Australians.

What do you think? Do you find auditing SMSFs a positive process?

National SMSF Conference - opening thoughts

What a great start to the National SMSF Conference this morning! It’s taking place at the beautiful Hilton Hotel in Sydney and over 300 members are participating.

Neil Olesen from the Australian Tax Office kicked the morning off with an update on the regulation of SMSFs. He pointed out that in 1999, there were 190,000 SMSFs in Australia and today that number has increased to 430,000. This suggests that Chartered Accountants will continue to work with more and more SMSF trustees and the opportunities in this sector are growing at a considerable pace.

David Shirlow, the Executive Director of Macquarie Bank gave us all an update on superannuation policy developments. Happily, he doesn’t think a change in government minister (from Bowen to Shorten) will slow down the implementation of the Future of Financial Advice reforms and expects it to be effective from 1 July, 2012. David said the Cooper Review recommendations around SMSFs were generally positive.

I don’t entirely agree with David – I think some of the Cooper recommendations need a lot more scrutiny. Let’s not forget there are different ways of achieving the objectives Jeremy Cooper is trying to achieve in the SMSF space. More on that later.

There are more exciting sessions to come today and tomorrow. I am enjoying the opportunity to meet with members and to hear their thoughts and ideas on superannuation. Please feel free to share your views about the conference or SMSFs in general, either in person, via this blog or by email.

Stepping up for the National SMSF Conference

The Institute is hosting its first National SMSF Conference on 23-24 September in Sydney. It’s a timely event given the announcement of our new federal government. Presumably, the Cooper review now remains on the government’s agenda and with it, the recommendations that may impact on many SMSF service providers.

Change is not new to the superannuation industry and it’s fair to say there will be more. This event will help arm practitioners with the right information so they can prepare for any changes on the horizon.

If you remember, Jeremy Cooper reported that the accounting profession is best placed to deal with competencies in the SMSF accounting and administration space – this conference illustrates the Institute’s willingness to provide quality training events for its members and the broader SMSF community.

I’m particularly looking forward to the panel discussion at the end of Day One of the conference. The panel, made up of luminaries from the audit world, are holding a session titled, Auditor independence – where do you draw the line of independence? This is topical because of Cooper’s suggestion that “true independence” is required in the SMSF sector.

As I have said before, competencies and independence are important in any audit – not just in the SMSF sector. But while Cooper’s objective to achieve high levels of competencies and independence is to be supported, the question is, will his recommendations meet the desired objectives?

The panel discussion promises to shed some light on this. There will also be opportunities for delegates to ask questions, so I am interested to hear what others think!

Other highlights from the Conference include ATO presentations on issues of concern to the regulator as well as some insights into “auditing the auditor”. Updates on major areas of interest for SMSF service providers including borrowing, deeds, tax and practical uses for SMSFs will be invaluable. Importantly, everyone will have opportunities to network with others working in the SMSF world.

So come along, this is an opportunity not to be missed.