Government seeks public comment on review of Military Superannuation

The fortunes of war, I’ll tell you plain,
Are a wooden leg and a golden chain.

In a masterstroke of obfuscatory timing, the new Federal government has chosen Christmas Eve to seek public comment on its predecessor’s review of military superannuation.

The review makes no less than 11 recommendations in its plan for future superannuation for members of Australia’s military forces.

The main one is that Australia’s defence forces should continue to have their own mandated superannuation scheme, with benefits that reflect the unique nature of military service.

It also says the Defence Department should now close the existing Military Superannuation and Benefits
Scheme to new entrants.

The review recommends that all new military personnel should enter a fresh scheme, based on an accumulation plan for retirement and defined benefits. The new scheme should also include separate defined benefits in case of death or disability.

The review team also recommended that the accumulation plan for retirement should be fully funded and taxed.

It set out six “key elements,” to achieve this objective.

These included:-

-employer contribution rates of 16 per cent of superannuation salary for the first six years of completed service, 23 per cent for the next nine years and 28 per cent after that.

-flexibility for members to select their own contribution rate, with a default rate of 5 per cent of after tax salary.

-members to have a choice over the superannuation scheme to which their contributions will be accepted.

-an option, after 15 years’ service, to purchase an indexed pension.

-a range of options for accessing benefits, after preservation age and

-flexibility for spouses and children of members to contribute, either personally or through an external employer.

The Minister for Defence Science and Personnel, Warren Snowdon, said:”The Rudd government will provide an opportunity for public comment about the review’s findings and recommendations.”

Full details at:http://www.defence.gov.au/militarysuperreview/

There are opportunities for the young and the bold in the US sub-prime mortgage crisis.

The crisis, certainly, still has a long way to run, but the bargain hunters, who will eventually end it, are already emerging from the shadows.

Take the Millers, from Dublin, for example. They have just made a $US700,000 offer for a one bedroom apartment, in one of the less fashionable parts of New York.

Christine Haughney, writing in the New York Times, reports that the Millers are far from alone. She says the number of foreign buyers, picking up bargains in New York has doubled over the past two years.

Paying $US5 billion, for a 10 per cent stake in an investment bank which has just reported multi-billion dollar losses, might not seem like much of a bargain, to you or I. But it did to the China Investment Corporation.

The CIC’s investment, in Morgan Stanley, one of America’s biggest investment banks, gives the Chinese government a window into the heart of global investment finance. That could well have implications for BHP Billiton’s hopes of taking over Rio Tinto, a merger the Chinese strongly oppose.

The troubled US banker is putting the best face on it. Its chairman and chief executive, John Mack, said the Chinese move would:”help to further bolster (his) firm’s strong capital position and enhance growth opportunities globally.”

Morgan Stanley’s position, though, was not enhanced by $US9.4 billion worth of write downs, that it suffered, as a direct result of the sub-prime crisis.

What, though, are the possible implications for  Australian investors?

What might you tell a 30 something IT specialist, for example, assuming that he desperately wants to buy a home, for his young family, in Melbourne’s presently inflated property market?

Well, you might say:”Have a look at Cincinnati, son.

“You can get a nice, double story, house there for about $US150,000.

“That’s just a fraction of what you would expect to pay in Melbourne.

“And the US economy will, one day, be through its present troubles.

“America is still a land of opportunity, for the young and well qualified.”

Remember what Rhett Butler once said, in that 19th Century American classic, Gone with the Wind.
“There are fortunes to be made, as the world is crashing down around you, just as there are in the best of times.” Rhett’s advice, though, is definitely not for the faint hearted.

Inappropriate commissions can cut the value of a superannuation pay out by as much as $120,000 over a working life, according to new research.

The research, conducted by the independent organisation, Rainmaker, was released today by the Industry Super Network.

The ISN’s spokesman, David Whiteley, said sales commissions on compulsory Superannuation Guarantee would amount to $765 million this year.

“Commissions are levied for ongoing financial advice, but the value of such advice is unclear,” Mr Whiteley said.

“This is an area requiring further investigation.

“But it does appear that many employees are not even aware that they are paying commissions out of their compulsory contributions,” Mr Whiteley added.

He warned, in particular, that:-

-Many employees join an employer nominated default fund at their workplace which often pay commissions to financial advisers

and

-Where employees changed jobs tey are often automatically transferred into higher cost retail funds.

So what can you do to protect your nest egg?

Mr Whitely said people should check their superannuation statements carefully to identify any fees or commissions that have been extracted.

And where commissions to financial planners are identified, they should try to assess the value of the advice being provided.

Mr Whitely said it would also be a good idea for people to compare the performance of their present funds with that of other funds, including industry super funds.

He said industry super funds, mostly started by unions, do not pay commissions to financial planners.

They are widely recognised as being among the superannuation industry’s lowest cost operators.

Where will the Reserve bank chairman, Glenn Stevens, and his high powered board be over the next few weeks, as waves from the US sub-prime tsunami hit Australian markets?

Where do you think? Out on the beach, like other Australians. That’s right, this bold board, which could not possibly hold off a “necessary rate rise” during the recent election campaign – even though that was unprecedented – can certainly do so, if something really important is at stake.  Its own rec leave, for example.

The board, which traditionally meets on the first Tuesday of each month, will be skipping January – this time. It will not meet again till February.

Ordinarily, that would not matter. But the situation, right now, is so serious that the board almost ordered yet another rate rise, earlier this month.

The minutes, from its November 6 meeting, leave no room for doubt about that.

“Members remain concerned about the outlook for inflation,” those minutes, which were published yesterday, said.

“Inflation in CPI and underlying terms was expected to be above 3 per cent in the first half of 2008, before declining somewhat thereafter….” they declared.
“The information available on the domestic economy thus suggested higher interest rates were likely to be required,” they added.

Some months ago, Mr Stevens declared that the board would be prepared to act, to raise rates, during an election campaign, if necessary.  That was admirable.  But what if action should be urgently needed during January?

Does it matter?  On the Reserve Bank’s own published credo, on the issue of urgency, it could.  Besides, just consider a few words from the memoirs of another central bank chief, Alan Greenspan.

Mr Greenspan,  now in retirement, wrote in his book The Age of Turbulence”:I was aware that the loosening of mortgage credit terms for sub-prime borrowers increased financial risk.

“But I believed then, as now, that the benefits of broadened home ownership are worth the risk.”

That position is becoming increasingly difficult to defend.

A New York Times columnist, Edmund L. Andrews,who is no fan of Mr Greenspan, recalls in a scathing article that the Fed had been warned, many times, of the emerging sub-prime mortgage crisis in the US.

But it chose to do nothing.

That article is worth reading.  Its at www.nytimes.com

The US Federal Reserve has – finally – stepped in to put an end to the shonky lending practices that led to the US sub prime mortgage crisis.

It’s too late, of course.  Most of the operators, who caused the trouble,  either went out of business, or stopped making sub-prime loans, months ago.

As Private Briefing advised earlier today, the Fed. under its previous chief, Alan Greenspan, had been warned of the trouble that was brewing, years ago.  But Mr Greenspan decided to do nothing about it.

However today, Australian time, the Fed issued proposes changes to Regulation Z, to strengthen what it called “truth in  lending.”  It’s statement sought public comment on the proposals.

Critics who will certainly say this is too little, too late, have a very strong case.

However, the Fed’s idea is still positive.  In its own words, that is “to protect consumers from deceptive home mortgage lending and advertising practices.

Both have been rampant, in the United States, over recent years.  The shonky lenders have, particularly, targeted unsophisticated blacks and Latinos, with their deceptive campaigns.

They believed, of course, that even this kind of lending was essentially riskless, because rising property prices would always cover the debt, even if the borrower defaulted.

Severe reverses, over large parts of the US property market, exposed the flaws in that argument.

Now the US Federal Reserve is struggling to keep the entire US economy out of recession.  It has been forced to cut key interest rates repeatedly and to pump billions of dollars into the system, to encourage lenders to lend again.

But markets remain shaky.

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Australia has “too many” investment funds, according to an industry leader, who wants the new Rudd Labor government to  make fund amalgamations easier.

Richard Gilbert, the chief executive officer of the Investment and Financial Services Association, made the appeal at an industry breakfast today

He also offered the Federal government a little assistance, that it might, one day, welcome.

“For a number of reasons, our industry has an excess of financial products,” Mr Gilbert said.

“For example, I am aware of one company that has 1,000 financial products.”

Mr Gilbert said these had  been accumulated not only through mergers and acquisitions, but as a result of changing legislation, as well.

“They say they could work well with, perhaps, just 15 products,” Mr Gilbert added.

He said IFSA is working hard, trying to persuade the government to make legislative changes, that would make product rationalisation easier.

However, he said that had to be done in ways that would not be to the detriment of the remaining investors in a legacy fund.

The present situation, though, is harming investors, already.

Mr Gilbert told of a member company that has a single investor, in a fund it cannot shut down.

“The (cost of the) management, administration and compliance to keep this fund running must be in the order of more than $130,000 a year,” Mr Gilbert said.

Guess who will, ultimately, pay those bills?  That’s right, the investors who play such a critical part in the operation of the Australian economy.

And the help?

Mr Gilbert was also kind enough to point the new Treasurer, Wayne Swan, towards what he called “a proven means” of returning “fiscal surpluses” to taxpayers, without igniting inflation.

“Superannuation incentives are a proven means of transferring public wealth into private hands, but with only minimal inflation and interests rates,” he said.

“The IFSA pre-budget submission will canvass this matter strongly,” Mr Gilbert added.

Your author, a veteran press gallery journalist, would advise Mr Gilbert to speak very slowly and clearly, when he explains this to Mr Swan.  Labor still has very painful memories of the fuss John Howard made, many years ago, when Paul Keating did something like that, with the second tranche of his famous L.A.W. law tax cuts.

The Deputy Governor of the Reserve Bank, Ric Battellino, says Australians should be prepared to pay for independent advice on investment.

Addressing a banking seminar in Sydney, Mr Battellino admitted that this has not always been the case in Australia.

“There appears to be a general reluctance on the part of retail investors to pay for financial advice on a fee for service basis,” he said.

That won’t surprise anyone in Australia’s investment advice industry.

“Instead, there has been a preference for commission based advice, despite the conflicts of interest that can arise in this situation.”

“This reluctance to pay for advice upfront appears to be a form of money illusion,” Mr Battellino said.

“…investors may feel that they are somehow paying less for financial advice if the cost is buried in reduced earnings for the future.”
Mr Battellino said relatively unsophisticated Australian retail investors have been taking big slices of quite sophisticated financial products, from the shelves of investment advisers, without properly assessing the risks involved.

Naturally, this is worrying the authorities. It should worry the investment advice industry, as well.

Mr Battellino noted that the Australian regulatory system relies heavily on financial literacy, rather than restrictive rules.

While this has advantages, it carries risks as well.

Mr Battellino said unsophisticated Australian investors were taking bigger shares of high return investments than people in other countries.
“One of the reasons for this higher participation by Australian retail investors in these markets is that the regulatory regime in Australia does not restrict access to any financial products as long as the provider meets certain disclosure requirements,” Mr Battellino said.

“This approach has been beneficial in terms of providing investors with a greater range of wealth creating opportunities, but it does raise some important challenges.”
Mr Battellino said some investors might not be financially literate, a comment which might well prove to be the understatement of the year.

The deputy governor said these investors might well have been tempted into apparently high return investments, without appropriately assessing the risks involved.

Recent experience with collateralised debt investments in the United States is salutory. CDOs with undisclosed, but high levels of shonky sub-prime mortgage assets, have already proved disastrous, on many fronts. And investors caught out this way, will be all too ready to blame anyone, but themselves.

A few cowboys, in the investment industry, who can’t see past their own commissions, when making recommendations, can do a great deal of damage, to others, as well as themselves.

Never assume that the illeterate are inarticulate. Mum and Dad investors, who believe they have been robbed of their hard earned savings, through reckless invesment advice, can always find a sympathetic reporter, somewhere in the media. Investment advisers, generally, are easily tarred, when that happens. Guilt or innocence doesn’t count. Solid reputations can be destroyed overnight.

for more see www.rba.gov.au

That new car in the garage isn’t the most expensive item in a typical Australian home. It might not be the home, itself, either, despite the soaring property market.

Quite likely, it’s the kids. A new study, conducted jointly by the National Centre for Social and Economic Modelling and the AMP, reveals that it now costs a total of more than half a million dollars to raise just two children to the age of 21.

NATSEM’s economists admit that raising a family is one of the most challenging and rewarding things people can do.

“It can bring a lot of joy,” they say in their report.

“But it does come at a high price,” they add.

The 18th AMP.NATSEM Income and Wealth Report draws from a broad range of statistical information to provide an insight into the cost of raising children from birth until leaving home.

It does so for three typical families in low, middle and high income brackets.

This report updates the 3rd AMP.NATSEM Income and Wealth Report released in 2002.

Their conclusion?

“A typical Australian family spends $537,000 on raising two children from birth to 21 years.”

A shock, certainly. However the economists add a word or two of comfort.

“On paper this is a big figure” they say.

“But any perception that it’s getting more expensive to raise children, is off the mark.

“According to this report, the typical family spends 23 per cent of its combined income on the cost of raising children.”

The economists say this is the same percentage as a broadly comparable family in 2002.

Sharp rises in housing costs have thrown 425,000 relatively poor Australian families into financial stress.

This is revealed in a new report, just released by the Australian Institute of Health and Welfare.

The Institute confirms that most Australian family budgets look bright, with their gross mid-level incomes rising by no less than 34 per cent, in real terms, over the 10 years to June 2006.

But it warns, too, that Australia is a very diverse country, with a very diverse community.

Its report notes, in particular, that sharp rises in rents house prices, over the past decade, have pushed thousands of families, with relatively low incomes, into severe financial stress.

It is widely accepted, that housing costs produce stress, when they exceed 30 per cent of a family’s disposable income.

John Howard made much of his “battlers.” That was one of his favourite descriptions of poorer Australian families.

The Institute looked at what had happened to them, on Mr Howard’s watch. Massaging figures produced by the Australian Bureau of Statistics, it came to the conclusion that some 425,000 Australian families, with incomes somewhere in the bottom 40 per cent, now spend more than 30 per cent of their income each week, on either rent or home loan repayments.

Default levels, on Australia’s home loans, are still low. That’s because Australia’s banks and other home lenders have been much more careful than their American counterparts, in choosing their customers.

But, if the Institute is right – and there is no reason to doubt that it is – thousands of Australian families are, already, finding it very hard, indeed, to keep a roof over their heads.

The Institute reports, for example, that almost half of all Australian families, in this income range, who rent privately, now pay more than 30 per cent of their gross income to their landlords each week.

That might well have had something to do with the outcome of the Federal election on November 24. The result, in fact, might well be seen as the battlers’ revenge.
The report, the latest in a series published every two years, is close to essential reading for financial advisers.

Its available at www.aihw.gov.au. The data on financial stress is in table 8.5.

Australians have more spending money than ever,with net disposable incomes rising by 5.1 per cent over the past year.

That seasonally adjusted figure, comes fromthe September quarter national accounts, which the Australian Bureau of Statistics released today.

It is just one of many in the national accounts which will worry the Reserve Bank, which only just held off raising rates, yet again, earlier in the day.

The bureau said real net disposable income rose by no less than 1 per cent in the September quarter alone.

But isn’t that a good thing? Well, yes, mostly.

However big surges in income can produce problems, particularly when there is little spare capacity in the economy, a situation the Reserve Bank, itself, says applies now.

The bureau also reported that the Australian economy grew by a quite substantial 1 per cent in the September quarter and by a truly impressive 4.3 per cent in the 12 months to the end of September.

Most economists are now worried that the prospect of the $31 billion in tax cuts, that Labor promised before the election, will encourage even more enthusiastic spending over the coming year.

And they too fear that this could overheat the Australian economy. They are urging the government to find spending cuts, in its own program, to offset that.

The new Finanance Minister, Lindsay Tanner, has promised to do that. His boss, Kevin Rudd, has already promised to take “a meat axe” to wasteful spending in the public sector.

The bureau’s figures also confirm that this is now close to an urgent necessity.

They show , for example, that final consumption spending rose by 1.2 per cent in the September quarter and 3.7 per cent over the year.

It is capital spending associated with the mining boom though, that is really driving the Australian economy. Although it eased by 0.3 per cent in the September quarter it rose by no less than 10.6 per cent over the year.

see www.abs.gov.au for more

Australia’s new leader, Kevin Rudd, is urging Australia’s banks to not to raise their home loan interest rates.

He was speaking on ABC radio this morning, just hours before he – and other new Labor ministers – drive to Yarralumla  to be sworn into their new posts.

The National Australia Bank, in particular, has warned that its home loan interest rates may have to be raised, to cover the higher costs of funds, incurred as a result of the sub-prime mortgage crisis in the United States.

Mr Rudd acknowledged that Australia’s banks do have a right to raise rates, for commercial reasons.

“That’s a decision for them,” he said.

However he also urged the banks to remember that Australian families are already “under pressure” financially.

“They should be very, very mindful of their customer base,” Mr Rudd said.

This process is known, in financial circles, as “jawboning.”

The main culprits are usually central bank chiefs.

Mr Rudd, though, has set something of a precedent by indulging in a little jawboning even before he officially takes up his new post, as Australia’s 26th Prime Minister.

He was speaking on the eve of the next board meeting, at which Australia’s central bank, the Reserve, will review the nation’s interest rates.

Although the bank’s Governor, Glenn Stevens, is making no secret of the fact that he is worried about Australia’s rising inflation, another rate rise this week is considered unlikely.  That is because the US sub-prime mortgage crisis is already slowing US economic growth.