Self-managed super funds are accumulating too much property debt, which is a major risk to the financial system, warns Challenger’s Jeremy Cooper.
Mr Cooper said the interim report of the financial system inquiry led by David Murray was right to question whether borrowing by self-managed funds should be banned, and warned that housing debt was a risk to the stability of the financial system.
‘There’s enough leverage in society anyway,” said Mr Cooper, who is Challenger’s chairman of retirement income. “We leverage up our homes, the minute you buy a share you’re building leverage, there’s a lot of personal debt around and we’re seeing people going into retirement with more debt”
Mr Cooper, a former deputy chairman of the Australian Securities and Investments Commission, said he was against government policy allowing self-managed superannuation funds to highly gear into property investments, but it was hard to unwind.
“I don’t like it, but it’s tricky to allow something and then ban it,” he said. “It’s problematic because there’s a lot of illusions about geared property investment that people fall into. They forget the effect of inflation and fact that they have to pay stamp duty.”
Mr Cooper is also worried about the impact of a policy option released by Treasury that wealthy retirees may not have to withdraw as much money from their private pensions.
The Australian Financial Review on Tuesday reported widespread concerns that a reduction in the minimum drawdown from account-based pensions would be an easy way for the rich to preserve tax-free superannuation for their heirs. The Abbott government is looking at whether a reduction in the rate would give self-funded retirees confidence that their funds would not run out during economic downturns.
Mr Cooper said if the option was implemented, “like all policy changes it creates unintended consequences”.
He said there wasn’t clear evidence about whether people would spend the money or save it, but if retirees did bank up tax-free funds to later bequeath, it may then result in alternative policies such as a death tax.
“We need to be careful what we wish for,” Mr Cooper said. “They [the government] then may say, ‘well if you haven’t spent it by the end, we will hit you with a tax at the end [of your life]’, like they do in the UK.”
In Britain there is a 40 per cent “inheritance tax” on legacies valued above 325,000 ($583,000).
Mr Cooper said minimum withdrawals created a lot of heat during the financial crisis, but the bigger question was about risky investments.
During the financial crisis, the former Labor government temporarily reduced the minimum withdrawal amount. “These account-based pensions were so smashed up in the crisis that they needed the government to change the rate,” Mr Cooper said.
He said retirement products were “letting people down”. “It’s been widely said that the risk settings that people in retirement have are way too high and that’s why they blew up [during the crisis].
“If you have an account-based pension that has roughly 70 per cent of growth assets sitting in it and you have a major downturn, maybe that’s the problem.”
Mr Cooper called on the Abbott government to better sell its policy to increase the retirement age to 70. He said the average age of death was now 87, and one in 10 women currently aged 65 would live past 100.
He called for a campaign to educate people about this reality and the impact it would have on federal revenue.
“Without a campaign… the government’s idea of pushing the pension age out to 70 is operating in a vacuum.”
Mr Cooper also slammed the way Treasury estimated the cost of superannuation tax concessions to the federal budget Treasury predicts superannuation tax breaks will cost $36.25 billion in 2014-15. It said the super concessions would cost $171 billion over three years.
Mr Cooper said this figure was inaccurate and Australia needed to come up with a better way to measure the revenue impact. The debate could then move on to how the super system could meet the needs of an ageing population.
“We need to come up with the proper model for what the super system is costing us,” he said. “The sooner we move on from all this bickering about $30 billion, which is not real, [the better].”