Treasury’s retirement principles jumping the gun without DBFO: FAAA

It is no secret that the Financial Advice Association Australia (FAAA) wasn’t happy with tranche 1.5 of the Delivering Better Financial Outcomes (DBFO) reforms when they were released shortly before the federal election was called.

Chief executive Sarah Abood went as far as saying the FAAA “cannot support it without substantial change”.

Yet Treasury’s consultation on best practice principles for superannuation retirement income solutions treats the measures as though they are already in place, according to the association’s submission.

“We note the intended interaction between the principles and the draft framework, with the government’s proposal to permit trustees to provide simple retirement advice, that is also personal financial advice, under the Delivering Better Financial Outcomes reforms,” it said.

“However, we are concerned about the inclusion in best practice guidance for retirement income solutions, principles based on the government’s DBFO proposals, to expand trustee collective charging arrangements to retirement advice, and allow trustee ‘nudges’ and ‘prompts’ to members on retirement.

“To our knowledge, the legislation for these proposals under the DBFO reforms has not been finalised and has yet to be scrutinised by the parliamentary process.”

Much like its response to the DBFO draft legislation itself, the FAAA used its submission to the retirement principles consultation to oppose super fund trustees being able to collectively charge for comprehensive retirement advice.

“The cost of collectively charged retirement advice is likely to be significantly greater than the cost of collectively charged intra-fund advice in the accumulation phase,” the association said.

“This means members of these funds will be paying much higher amounts for advice they are not actually receiving – including members who have sought, and paid for, their own personal financial advice with their chosen adviser, but must still pay for the collectively charged advice provided to other members of the fund on top of that.

“Retirement advice is both complex and high stakes for the consumers involved – because if poor advice is given in this life stage, it can be extremely difficult for a consumer to recover their financial position when no longer earning income from personal exertion.”

In the FAAA’s view, licensed professional financial advisers who have the “education, experience and ethical obligations” should be the only people able to offer comprehensive retirement advice.

Accordingly, the submission called for an acknowledgement of the “role and limitations” of the superannuation system and superannuation funds to be included in the principles.

“Most critically that a ‘member’s interest in the fund’ (i.e. the member’s account with that fund) provides little insight into the other assets or personal financial circumstances (beyond potential information about age and income) of the member,” it said.

“Government policies that oblige funds to ‘nudge’ members toward particular retirement income solutions, draw down rates, and other critical decisions, may put members in a worse position in the broader context of their circumstances outside the fund.”

In line with this, the association argued there should be an obligation for funds to provide warnings that members need to consider “all their financial and personal circumstances, both inside and outside the fund”, before making any retirement income decisions.

“All members should be encouraged to seek professional financial advice to assist them to make an informed decision based on their own personal circumstances,” the FAAA said.

The submission also raised concerns over the impact that including “advised members” in the principles could have, including controls that can ensure these members are not “unnecessarily alarmed, or encouraged to act counter to their financial plan, by any engagement from the trustee about the fund’s offerings”.

“This should include engagement material from the fund that must: be clearly framed as information and education, not recommendations; specifically acknowledge that the fund is aware that the member has previously received personal financial advice and that they should see their chosen financial adviser to discuss the information; and not promote or offer intra-fund advice to an advised member who has an ongoing relationship with a financial adviser.”