Are double-digit returns sustainable?

Could 2006 be the year of superannuation? Last year was meant to be with the introduction of super choice, but so far that issue doesn’t seem to have gone a great distance.

The super choice issue of 2005 will be a slow-burning fuse and I am not expecting a great deal more to happen on that topic in the year ahead.

Of course, the big news of 2005, and unlikely to be carried on in 2006, is double-digit returns. It seems highly unlikely that funds can chalk-up four years in a row of bumper returns — but we have been saying that for the past two years at least.

It seems unlikely that it will happen again in 2006, but let’s not discount it. If the US economy gets going, China drives on, and a few other economic events occur around the world — why not another year of solid growth?

A slowdown in returns could be a two-edged sword for the industry. Those who have changed funds might find that the grass is not necessarily greener and start making a lot of noise, while others might decide that it now makes sense to change.

Watch this space on that one.

However, 2006 could be the year of superannuation for two other key reasons. The Australian Labor Party kicked one ball into play in January with suggestions of an overhaul of super taxes. The industry, through the Investment and Financial Services Association, the Association of Superannuation Funds of Australia, and others, have long been calling for the removal of some, or all, of the taxes imposed on superannuation savings that now exist.

It is taxed on the way in, taxed on its earnings, and then taxed on the way out. The end result is money in government coffers now, but reduced superannuation nest eggs later on. This tax structure works against getting people off the pension and creating more self-funded retirees.

If governments really wanted to encourage more people to save and become self-funded retirees, then simplifying the tax system would be a good place to start. Let’s hope the Federal Budget in May sets us off on a good path to that end. The budget surplus could be put to good use in this respect.

By May, we should also see more of the other big super issue this year — licensing of trustees. TOWER went at it early and, in January, was one of the first to be granted its Regulated Superannuation Entity (RSE) licence. Several other big funds have followed.

But getting an RSE is a big hurdle to jump in meeting the Australian Prudential Regulation Authority’s compliance standards, so it will be interesting to see which funds, come May, are opting out. By that time, those funds that have decided to not get licences will be seeking alternative trustee arrangements — that could be very interesting.

Returning to the issue of super choice for a moment, there is one ‘sleeper’ of an issue that may erupt this year, and it is one that needs to be watched closely by both investors and advisers.

Those who have opted to exercise choice, or been advised to exercise choice, should have paid close attention to their in-super life insurance. Those who haven’t followed up on this issue could find themselves considerably worse off as a result, while advisers who failed to properly deal with it are likely to strike trouble with the Australian Securities and Investments Commission.

How many people are cancelling life cover in one fund before being accepted by a new fund? These people could find themselves uninsurable and without any cover at all. Advisers will need to hang onto their professional indemnity hat if that happens.

The levels of in-super life coverage is also a big issue, and likely to be bigger this year as the nation continues to grapple with the problem of underinsurance. Super trustees of group schemes appear to have a duty to make sure their members are properly protected in all circumstances and the existing arrangements are clearly not adequate.

With the average mortgage now around $200,000, super life coverage at the traditional level leaves a big debt to be taken on by any family should the worst happen to the primary breadwinner.

And the other big issue for the year ahead is clearly going to be moves to make Financial Services Reform (FSR) even more consumer friendly.

We have now had FSR for two years and there have been changes. Changes to the terms of Statements of Advice (SOAs) and changes to when SOAs are required are all welcome. But some people are still missing out on advice because they can’t afford it or the adviser can’t afford the time and regulatory burden to deal with an often small amount.

This defeats the initial aim of FSR — to make financial services more accessible and accountable to the consumer. It is an unfortunate fact that the consumer is paying for FSR — the cost of compliance is either being directly put on the cost of service or indirectly by preventing open competition on fees and charges.

At the moment, the costs of FSR are probably slightly outweighing the benefits so hopefully, with some more changes in 2006, that balance will shift.

Grahame Evans is chief executive officer of TOWER Australia Investments