4 July 2008

Interview with Kai Chow, Trading Day, Sky Business News

Note

SUBJECTS: Superannuation Fund Returns and Regulation of Margin Lending

COMPERE:

Superannuation Minister Nick Sherry says that people need to remember that super is a long term investment. He says that despite current market downturns, long term trends are still positive.

Business Channel reporter Kai Chow asked the minister about some of the changes coming in.

NICK SHERRY:

It's very important that when members get their funds statement, they look at the five-to-seven year rate of return. Superannuation's a long term investment. You don't access the money for 30, 35 years you're in the system. So there are times when there are negative rates of return.

Now there's no doubt that the financial crisis caused out of the United States with sub-prime loans, has hit our share market and that in turn, has resulted in generally negative rates of return in our superannuation system. It's a one in seven year occurrence on average. We're looking at the moment, I think, of negative rates of return, between at five and six per cent negative. There'll be some that obviously are better or worse than that, but generally five to six negative.

But in the last five years including this negative financial year we've seen, returns are still plus 10 to 11 per cent year on year. So it's a long term rate of return. That's the important thing in a long term savings vehicle such as superannuation.

REPORTER:

What do you think of the idea of league tables? In other words, tables that allow people to compare different super funds. Couldn't this encourage some knee jerk switching?

NICK SHERRY:

Well I think it's very important to have, to be able to compare fund results. But I think one of the dangers is that you need to make a fair comparison. I mean, you've got to have someone who's got significant amounts of their superannuation in the share market, in equities, which will give you, long term, a better rate of return than say, bonds or cash. And one of the dangers of course is, people will say oh well, I'll switch to bonds and cash, which in the long term, wouldn't be good for them, frankly.

It is important we do have transparency on fees, all fees and it's important we have transparency on long-term rates of return, so that those individuals who I hope would make an informed and considered decision can do so if they wish to.

REPORTER:

Given you think that it is a bit of a one off, this downturn in the share market, which has hurt super funds, do you think then it is a bit rash for people to be considering switching to industry funds or cash funds?

NICK SHERRY:

Well, there are a range of investment categories within a fund and I think it's important to look at that five to seven year rate of return within your own fund, and if you think about switching to another fund, look at the comparable results of other funds, but also look at the results after all fees and charges. And don't rush in. Don't rush into a decision. Make a considered, informed decision.

What we call knee jerk reaction, change, we call rear view mirror investment decisions. Hopping out of equities into bonds or cash long term can have serious consequences. Individuals need to think long and hard and make an informed decision, and obtain the necessary information before they make that decision.

REPORTER:

If we do look at five to seven year returns though, some of that data is going back a fair bit, might be a old. Surely, in the end past performance is still never a guarantee of future performance.

NICK SHERRY:

It's not, but it's the best indicator we've got. I mean, how do you determine the future? You need to look at the past to learn lessons, and we do know that looking at a year's rate of returns can be very dangerous. But looking back five to seven years at least, if you can look back beyond, can give you a good indication of the future. It's no guarantee of the future, but it's a good indicator.

REPORTER:

Self managed super funds, do they need tighter regulation?

NICK SHERRY:

Well, what we're having a look at, and I think it's important to do this at the current time, in part because of the negative rates of return, we need to look at the governance features of our system. How can we improve the system? And when I look across the system, there are some features of self managed superannuation funds. We know that there are a minority of trustees who are finding it difficult to make informed decisions in accordance with the current law. So we need to improve the governance in that sector.

But my examination of the system, the superannuation system, which is compulsory, that governance examination's not just confined to self managed super funds. We'll progressively go through each area of the system, whether it be retail or industry or corporate, and have a look at ways in which any weaknesses we find can be improved by an overhaul of governance. It's part of the Rudd Labor Government's determination to ensure we improve the overall strength and robustness of the system going forward.

REPORTER:

What other areas of superannuation is the Government focusing its attention on?

NICK SHERRY:

One obvious issue where we are going to act are lost superannuation accounts. We have $12 billion in lost accounts, over six million lost accounts.

So our intention is to introduce auto rolling together of these lost accounts, so that Australians can be reunited with their lost monies. It reduces multiple accounts, cuts down on fees and people actually have their money and they can collect it when they reach whatever age they retire at. The lost accounts issue is a good example of why you need default solutions when millions of Australians can't find their account. Well, then it's up to the Government to find a proactive solution to reunite them with their lost account.

REPORTER:

If the volatility on the share market is a one off, as you say, then surely we don't need any further regulation to say, the margin lending industry? Some people in that field have said that - have really warned against any tighter regulations in that area.

NICK SHERRY:

I think for individual retail investors who are engaged in margin lending, it's a legitimate financial activity. But the states and territories have some regulatory responsibilities, and we're going to move that to the Commonwealth, so we have single standard national regulation. The other aspect of margin lending, many of the disclosure documents, I mean frankly, they may as well be written in Latin, they're so lengthy; 50 to 100 pages. We're doing a big job of work on simplifying disclosure.

There are arguments about ownership of shares in some circumstances and courts are determining some issues there at the moment. So I think we need to make sure in margin lending - and for that matter, across the entire financial sector - that we have disclosure documentation that is readable and understandable for investors. And particularly in this area, where there's been a lot of dispute about some aspects of margin lending practice.