Editorial - Superannuation e-news August 2010

As we despatched the July Super e-news, Cooper's final recommendations were made public and later our response was posted on the Taxpayer website. It included an overall appreciation of its recommendations together with a detailed view of the issues relating to SMSFs. Two key points for mainstream superannuation included firstly a proposal to define a default fund account called MySuper for -disengaged- superannuation members. Cooper saw the need for this product because the current market based competitive model relying on disclosure- had generally failed to deliver satisfactory outcomes for this cohort. We agree with Cooper and unfortunately the industry would also have to concede the point. Just last week the Prime Minister indicated that if re-elected her government would introduce MySuper commencing on 1 July 2011. If implemented in the form suggested by Cooper, we think many more will adopt it, not merely the disengaged, because it has the potential to be a high quality product. If and when it is introduced, will it be marketed as a low cost option, with all that that implies for a financial services solution? It has the potential to be downplayed where providers seek to encourage members to buy alternative, higher cost solutions.

The second mainstream proposal – SuperStream – is intended to use modern technology to replace the existing high cost, manual back-office arrangements. Cooper was clearly attracted by the cost savings and potential service improvements available through current technology; however some industry participants feel that he might have been a bit optimistic about the size of the net savings. Even if the size of the projected savings is not universally agreed, but that the use of technology brings about lower costs and service improvements then its introduction should be inevitable.

A major recommendation by Cooper for SMSFs was to ban trustees from investing in personal use or collectable assets on the one hand and in-house assets on the other. Existing assets would have to be divested by trustees over a transitional five year period. Alternatively personal use and collectables could be moved into more expensive small APRA funds.

The government recently rejected this recommendation for personal use and collectables as part of its re-election platform indicating that should it be returned, it would not accept the recommendation to ban these investments, with the proviso that strict adherence by trustees to strict guidelines relating to documentation, valuation and storage of the asset was met.

We strongly support this practical approach because it will assist a large number of trustees who are currently so invested, even though they might represent a very small proportion of the total SMSF population. We also believe that where trustees have intimate knowledge or are able to obtain appropriate advice for such investments, they have the potential to be profitable. In addition the short five year divestment period proposed by Cooper could potentially have resulted in markets becoming flooded with assets from trustees embarking on forced divestment strategies with a potential to wipe out significant retirement savings. Allowing trustees the freedom to invest in such assets is also compatible with a thread running through Cooper's philosophy of leaving investment decisions strictly in the hands of trustees. Given the stricter guidelines proposed in the areas of potential concern this is a sensible position.

While the government's platform includes a rejection of Cooper's proposal to ban investments in collectables and personal use items, it does not have a similar position on Cooper's proposal to eliminate the current 5% concessional limit on in house asset investments and to bring it down to 0%. The relatively small current limit on in house assets is about right. We understand that the government is currently considering its position on this issue and their deliberations are not yet complete. We'll keep a keen eye out for new developments.