Normal people naturally expect that governments are there to aid them in their everyday lives, to help get ahead and achieve the best possible outcome. I have already highlighted how compulsory super rules complicate people’s struggle to achieve home ownership and even pay their rents without any consideration of its costs and benefits.
Unfortunately, this callous attitude towards the best interests of individuals has been a feature of Australian policy formulation for years. Whilst a public servant, Cabinet twice forced a Treasury Deputy Secretary and then as Secretary to formalize apologize for his behavior towards me. The first instance was for his behavior when Professor Swan and I helped Tax Commissioner Ted Cain convince the Gang of Three to free half a million low-income earners from personal income tax and introduce a long overdue sole parent tax rebate.
That could easily have been the heat of the moment incident. The second while in the Fraser government’s SWPS cannot. Minister Fred Chaney had convinced Cabinet to have a joint Social Policy Committee chaired by Treasury consider my SWPS proposal to encourage the rational use of savings by selling access to the age pension and its health benefits to retirees at its assessed actuarial full cost.
Looking at it rationally, that proposal had advantages. It provided an easy and certain way for retirees with assets to achieve a certain comfortable retirement income without the hassle of managing portfolios with the associated risks and costs. It was also a way to discourage quick disposal of assets to gain the age pension and the attached benefits.
Indeed, before the enforced introduction of a strict assets test, some retirees were investing large amounts (the biggest amount revealed in a survey was close to $3 million in a non-interest paying cheque account) to receive the full age pension plus benefits under the income test. At the prevailing interest rates at the time, investing $3 million in safe term deposits would have generated an after-tax income five times that available from the pension.
Turning up to meeting to discuss the proposal, the Treasury Secretary banned my entry – the Cabinet decision did not personally specify me as an attendee. Reporting back, my Minister called the PM who arranged an informal Cabinet meeting on the phone. PM. I know Dr. Sax (my boss) well. Never heard of Dixon. He must be good if Stone will not let him into the meeting. Decision Treasury Secretary to apologize. Reconvene meeting next day with Dixon as attendee.
The outcome was a Treasury conclusion accepted by Cabinet that it would be unfair competition for the banks and financial institutions. This followed similar Treasury inspired action totally removing the earlier RBA funding preference prior to deregulation to owner-occupier borrowers and the scrapping of the easily obtainable high-interest rate paying Granny Bonds available to older taxpayers.
Today, with all interest income taxed at full marginal tax rates with no allowance for inflation, safely accumulating a first home deposit is a challenging task especially for those without parental banks to help. How with this obstacle can anyone conclude our government cares about aiding a growing percentage of the population facing housing problems.
The government is not even considering multiple ways to help first homebuyers or renters needing cash reserves at low cost to budgets especially compared with the long run and immediate costs of the pressures placed on their budgets by the compulsory super rules. Penalizing fixed interest investors has the added disadvantage of increasing the incentives to consider higher risk and less secure investments receiving more favourable tax treatment.
While these criticisms focus on opportunity costs, namely what we could do to improve things, let us now turn to a case where government decisions and inactions have cost investors and others doing the right thing lots of money. This was the huge advertising and promotional effort to encourage superannuation savings (and support the compulsory super initiative) that started not long after the major 1988 superannuation tax changes Including the 15% tax on fund earnings. (Detailed in a later Chapter).
For years thereafter, the government aggressively advertised the benefits of investing in super focusing on the significant tax deductions available for personal contributions up to $3,000 a year. In the same way that the earlier maximum $1,200 annual tax deduction for life insurance contributions (abolished in the 1975 budget) had provided easy pickings for the large life insurance companies and their sales force, the official superannuation advertising provided a new highly remunerative hunting field.
With the government’s attention focused on the 1992 introduction of the compulsory productivity benefit (instead of a wage increase), they ignored the critical issue of fees including the commissions paid to salespeople. Irritated by what was happening in the market and the bad experiences of clients, I quickly produced 68 Super Strategies – a simple readable guide on common sense things.
Is super suitable for you? Choosing a fund- make sure you know what you are getting, fees etc. investment options? Maximizing the tax benefits. And for those with existing policies, how to tell whether you had been robbed?
That Chapter was essential. The legislation did not require prospectuses to set out fees and charges clearly. The major companies were masters of disguising substantial percentage agent fees via “basic” or “foundation” units which in hiring an actuary to interpret the text only received their full value many years later maturity of the policy. The balance in” investment” units had to do all the hard lifting to generate returns.
They sold these complicated (to understand) policies aggressively to poorly advised clients because of the usually 67% commission payable on the first two years’ premiums with the added advantage of another 67% commission on increases in the annual contribution (for example to allow for inflation or a jump in income).
When questioned, the companies justified this (unjustifiable) structure arguing that they were for $10 or $20 a week contribution out of pay-packets. The fact that 134% of the first 2 years’ contributions ended up in agents’ pockets did not appear to concern either the government or the issuers.
It certainly upset me because there were also low or no contribution cost policies available to people trying to increase their superannuation. That is why my book included an appendix on How to Know When You Have Been Robbed. This was a letter to send to the company or agent asking for details (which they had to reply to) asking amongst other things What is the current withdrawal/transfer value of the Policy?
Because the basic units only had value years into the future, the huge selling costs were at once obvious.
As only expected, the information spread quickly and three newspapers sought an article on how to assess the value of your policy including a draft letter. These articles were a huge mistake causing untold grief for my staff especially because of the multiple threats on the phone, in writing and in several cases by agents themselves.
To give an idea about how widespread the rip-offs were, Ray Martin signed me up for a 7-minute section on his popular Midday program. Within a short term the studio audience were shouting (about examples of policies sold to families or friends) as if it was a football game, the switchboard jammed up (with me too calls) and after 20 minutes the support staff were waving madly at Ray to move on to the organized program.
How could this be happening? Only because so many people had been affected. After that program, one highly paid person approached me. X I think I have one of those policies, contributing the maximum $100,000 a year. Me. Correct unfortunately you have lost $134,000 in commission, there is no legal protection, but you may be in luck.
Through my share investments I have met many leading company executives. The Chairperson of the company knows who I am and is unlikely to appreciate publicity about this policy. My advice is to write a personal letter to him, he will know who you are, saying that I suggested you contact him personally because I am convinced there has been a big mistake. Could he please investigate it?
Very quickly, the only possible reply came. Yes. Give my regards to Daryl. The agent concerned no longer works for the company and we have switched you into the policy you should have sold with a 5% annual fee on contributions. It did not stop there because not long after 4 Corners approached me to aid in preparing a program. (Currently seeking a transcript. Text following updated if necessary or actual text included if no copyright restrictions).
A disgruntled salesperson provided unbelievable aid. His company had hired him because he was Parramatta Road’s best used car salesperson. His gripe: he had earned $5million in commission, company said it was too much, would only pay $3.5 million. (Remember this was over 30 years ago). The program on my prompting asked him about training. Booklet. At first concentrate on family and friends, they are likely to be sympathetic and sign up to get you started. In your case we hired you because you can sell. Get into it. Before interviewing me 4 Corners on ASIC advice asked me not to mention the name of the company. (It no longer exists).
At least the ending was a bit better. Not long after a Parliamentary staffer sought advice. Instead of joining the no fee excellent coverage CSS as his super fund, he had chosen to keep his current super policy going. Unfortunately, it was one of the bum ones and the huge increase in his employer contribution attracted the 67% fee. My advice – cut your losses and switch to CSS at once and if he would not mind go into the adjoining offices and inform Treasurer John Dawkins’ staff about the rip-off.
That prompted the Treasurer to introduce legislation requiring the correct detailed disclosure of fees and charges, in ways that could not be dressed up in actuarial gobbledygook. Unfortunately, the legislation only applied to new policies. There is still, hopefully a small number, of old policies caught out by the high fee provisions.
Fortunately, fees are not really the problem today as they were then. A more important bigger risk now is the suitability of many elevated risk and illiquid asset structures for ordinary people with small balances and limited understanding of the investment risks involved.
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