Editorial - Superannuation e-news April 2008

Our Editorial last month expressed disappointment that SMSFs were being excluded from playing any role in the new proposal for First Home Savers Accounts. We are yet to be convinced that there is merit in the government’s decision to discriminate against SMSFs. In fact it should be a matter of concern that SMSFs have been singled out in this way since the vast majority of them are eminently suited to the role of holding first home savings money particularly for the offspring of existing members.

Earlier this year the Federal Minister for Superannuation and Corporate Law, Nick Sherry set up a working group comprising senior bureaucrats from Treasury, the Australian Securities and Investments Commission and the Department of Finance and Deregulation to focus on streamlining financial product disclosure documents for superannuation and to improve cost effective access to financial advice. These were proposals that the Labor Party took to the last election and we strongly support that objective and the aims of the working group. It has been clear for anyone prepared to examine the compliance costs associated with Financial Service Reform of 2001 that they have resulted in a steep increase in costs for the industry as a whole. This has ultimately been borne by the many long suffering consumers and investors. In many cases it is also likely that people have chosen not to seek advice. So we look forward to the outcome of the review as all consumers of financial products should particularly if we begin to see lower costs of service together with short and meaningful product disclosure statements. Other simplifications from this working group that relate to investment prospectuses and product brochures are also most welcome.

Over the last few months the world equity markets have experienced significant falls and unprecedented volatility as the US sub-prime crisis plays out. Some of the factors leading to this include poor credit management practices by lenders, often made worse by un-creditworthy borrowers receiving low interest start up mortgages that quickly clicked into higher rates. The widespread use of limited recourse mortgages in the US has not helped either as this has paved the way for highly geared mortgagees in a declining housing market to simply “walk away” from their mortgage and hand the keys for their property back to thee lender! The US Federal Reserve believes it can staunch the hemorrhaging through with a number of official interest rate reductions and by other actions to increase liquidity and rebuild confidence in the US economy.

Unfortunately the Australian market has not been immune from the contagion resulting in a dramatic downward trajectory on the stock market together with substantial volatility. The higher cost of credit experienced by our banks and other lenders coupled with rising official interest rates by the Reserve Bank aimed at cooling our overheating economy has unfortunately also seen a significant rise in interest rates for home borrowers and businesses in Australia. And whilst it might be of little comfort to those who have seen their investments greatly reduced in value, it is none the less worth noting that the Reserve Bank believes that the Australian financial system has coped better than most of the counterparts in other countries during this period of stress. It also indicated that our banking system remains “well capitalised” with “minimal direct exposure to the sub-prime problems in the United States”.