In the December 2013 edition of Superfunds magazine, the CEO of ASFA, in her regular column, discusses the three major groupings of stakeholders in the superannuation system in Australia. In order, they were listed as 1) policy makers, 2) the general community and 3) individual fund members. When listing the fund members as the third group, the author said that individual fund members are “arguably for many, the most important”.

If I were writing that column, I would have reversed the order and dropped the “arguably” clause. Fund members are the most important stakeholders. The rest simply do not matter.

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Why do regulators of financial institutions issue regulations?  

During my career, the volume and complexity of regulation of financial institutions has increased significantly. Executives and staff of banks, superannuation funds, insurers, credit societies and so on have laboured under an increasingly suffocating mass of obsfucatory laws, regulations, practice standards, guidelines to interpret practice standards, class orders, announcements and frequently asked questions. Why is it so? What problems have been fixed by any of these new regulations? Why should a regulator decide how insurers must determine a capital adequacy reserve? Why should a regulator determine what is an appropriate solvency margin for a superannuation fund? 

Most, if not all, executives and staff of prudential regulators are well-intentioned. In my experience, they believe that regulation is necessary to guard against certain types of unsociable, unethical or simple incompetent behaviour by market participants to guard against losses adversely affecting the financial assets of consumers. The regulators believe that they can, to large extent, regulate away problems.

In the real world, problems cannot be regulated away. Laws against insider trading do not stop insider trades. Laws mandating certain solvency margins do not stop all insolvencies. Laws specifying in gory detail what numbers must appear on a periodic statement to a depositor do not make depositors any better informed.

Regulation is judgement. Why does a Government bureaucracy think it has better judgement about running an insurance company than the insurance company’s board of directors? When Governments regulate, they replace private commercial judgement with bureaucratic judgement. I have never met a regulator who knows the operations of a financial institution better than the executives of that institution. The fatal conceit of the regulator is to believe that they know best and that regulation is the key to financial stability and prudence.

Regulation promotes complexity and expense. Consumers pay for this.

The best form of regulation is that applied by institutions themselves, provided that there is no explicit or implicit publicly funded bail out mechanism should that institution get into trouble. Bail-outs change institutional behaviour. 

It is a requirement of Australian law that all employers that employ more than 100 employees must report to a Government department the breakdown of the employees by various characteristics such as gender, race, age and so on. ‘What for?’, I hear you ask. And that is a good question, one with no good answer that I can find.

I do not expect that anyone would seriously argue against diversity and inclusion in the workplace. The opposite would be homogeneity and exclusion and no business leader would nominate that as a way to improve the share price.

Diversity of people, ideas, motivations and personalities is good for group effectiveness. Inclusion of all people, rather than exclusion, means getting the best out of them. It is a no-brainer. So I do not think we have a problem. Continue reading →

There is an interesting application currently in front of the Australian Human Rights Commission. In essence, the applicant is requesting an exemption from the Sex Discrimination Act 1984 to be permitted to pay its female employees a higher rate of defined contribution into superannuation than it pays for its male employees. The applicant argues that paying the same rate of contribution (as a percentage of earnings) is discriminatory because females as a group live longer than males and therefore need more superannuation savings. The exemption request is to guard against disgruntled male employees claiming they have been discriminated against.

This application is interesting for several reasons. Continue reading →

If not, it is not up to scratch.

Most people accruing occupational pensions these days are accruing benefits under a defined contribution (DC) arrangement. The benefit value is the accumulated value of the contributions over time, with investment returns less fees and taxes.

If you are in such a DC scheme, you should ask yourself if the scheme is a DB scheme. It may sound as if I have been imbibing a little too freely at the drinks cabinet to make such a statement. DB schemes are most assuredly not DC schemes, so what is this nonsense about a DC scheme being DB?

The issue is fundamental to investment and saving. Continue reading →

The OECD has recently published a roadmap for the design of DC retirement savings pension plans. In doing so, the OECD has stated that its aim is to help countries strengthen their retirement income adequacy. Essentially the roadmap boils down to 10 recommendations. The recommendations all make good sense, yet it is instructive to review the Australian experience of the last two decades to see how sensible recommendations are not necessarily easy to implement.

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