Australia’s superannuation industry could have either of two proverbs applied to it. The first is that if it ain’t broke don’t fix it. The other is that will be no good closing the stable door after the horse has bolted.
Yesterday the Minister for Financial Services and Regulation, Joe Hockey, published an issues paper on the industry calling for public comment on what, if anything, should be done about changing the regulatory regime that applies to it. By and large the industry has been running reasonably well. But it would be dangerous to be complacent for several reasons. There have been some failures in the industry, including ones of major trustees, which have resulted in significant losses to funds and members. There have been some spectacular crashes in related prudential industries, notably insurance, which indicate that all is not well with the regulatory environment. No regulatory regime can prevent all failures, crashes and losses, but they can help prevent some. Nor should a regulatory regime aim to prevent all market losses. However, the spectacular nature of the HIH case indicates that perhaps the move to deregulation, self-regulation and market forces has gone far enough.
The argument in favour of some greater regulation of the superannuation industry also arises out the nature of superannuation itself. It is quite different from usual commodity markets. Superannuation has a high social element; the law requires people to put money in a fund; there is little choice about the fund for many people; the fund is tied up for a long time; there are taxation concessions so the Government has a stake; many funds put invitations out to the public; and there is great disparity of knowledge between those doing the investing and those whose funds are invested.
These factors call for significant regulation. The issues paper makes it clear that superannuation trustees and funds are not as rigorously regulated as other financial dealers in banking and in life and general insurance.
There should be a general licensing regime for all superannuation trustees and funds, with an appropriate level of professional indemnity insurance. The Australian Prudential Regulatory Authority should set some entry and operating standards, including risk-management standards. In the past decade with the Superannuation Guarantee Levy and an ageing population, there has been a proliferation of funds. It has increased the chances of a failure, which ultimately will impose a burden on taxpayers if those affected are thrown on to the aged pension.
Incidentally, the name of the Superannuation Guarantee Levy – which goes up to 9 per cent next July — should be changed. The name indicates that the funds are guaranteed by the Government, which they are not. The word was introduced presumably as an indication that workers would be guaranteed that a certain percentage of their salary would be put aside for their old age.
It may well be that an increase in regulation and insurance would have to be funded through superannuation industry levies. That reduce slightly the returns of all, but it would substantially reduce the risk.
In many fields of human endeavour, market forces can by and large be left alone to provide an efficient result and the best overall result. People can look after their own best interests. However, it is not wise to be ideological about it. In some fields, some fairly strong regulation is warranted. Superannuation is one such field. Australians now have $500 billion in about 11,000 superannuation funds and an additional 200,000 self-managed small funds where all members must also be trustees. The industry is growing rapidly. It has to fulfill major social and economic objectives as the population ages.