AFC3440 Pension and

Financial Planning

Topic One: Introduction
AFF3440 Pension and Financial Planning 2013
Introduction
Unit Leader: Tony Cusack
Room: Intercampus Office
Telephone: TBA
Email: tony.cusack@monash.edu.au
Consultation Times: Friday 10 11 am
This weeks lectures
1. Administrative matters
2. RG146 compliance details
3. Introduction to Pension Schemes
4. Nature of financial planning
5. Issues and Problems in the Financial Planning
industry in Australia
6. Pension plans in other countries (separate
reading)
Administrative Matters
Course Outline: Obtain from Moodle
Course Objectives
Textbook and references
Lectures and tutorials
Assessment:

ASSESSMENT TASK DUE DATE VALUE
Mid-semester test Week 6 5%
Preparation of a financial plan 5:00pm Friday, 27 September (Week 9) 25%
Final Examination (3 hours) Official Examination Period 70%*
TOTAL 100%
* note: 50% hurdle requirement
Subject Objectives
describe financial planning activities, and legal compliance
requirements for financial planners
demonstrate specialist skills required for interaction with financial
planning clients
demonstrate generic knowledge of the Australian and global
investment environments, together with specialist knowledge in the
areas of superannuation, financial planning, securities and
managed investments
prepare financial plans for clients with different financial objectives
apply critical thinking, problem solving and presentation skills to
individual and/or group activities dealing with pension and financial
planning and demonstrate in an individual summative assessment
task the acquisition of a comprehensive understanding of the
topics covered by AFC3440.
Your Personal Objectives
You will be contributing to super all your working life,
then using your accumulated lump sum to provide for
your retirement
It behoves you to know as much as you can about it
from the outset.
AFC3440 provides an unparalleled opportunity to learn
about Pension funding and its place in your life.
Your savings under your countrys national pension
scheme are likely to be your largest financial asset,
certainly your most liquid.
What is RG146?
the RG stands for Regulatory Guide. It is a
Regulatory Guide issued by ASIC, the Australian
Securities and Investments Commission.
ASIC is Australias corporate, markets and
financial services regulator. As such, ASIC is the
body that is responsible for the administration of
corporate laws in Australia.
to assist in administering these laws, ASIC issues
a number of regulatory documents including
reports, consultation papers, information sheets
and regulatory guides.

ASIC Regulatory Guides
ASIC states that Regulatory Guides give guidance
to regulated entities by:
explaining when and how ASIC will exercise specific
powers under legislation (primarily the Corporations Act)
explaining how ASIC interprets the law
describing the principles underlying ASICs approach,
and/or
giving practical guidance (for example, describing the
steps of a process such as applying for a licence, or
giving practical examples of how regulated entities may
decide to meet their obligations).
RG146
RG146 was issued in July 2012 and is titled
Licensing: Training of financial product
advisers (a copy is included on Moodle)
it was issued in conjunction with the Corporate
Law and Economic Reform Program (CLERP),
and sets out detailed and rigorous criteria that
must be met by any entity wishing to practice in
the financial advisory industry
ASIC has identified 12 knowledge requirements
that practitioners must satisfy
RG146 compliance accreditation
In order to work in the finance industry in Australia, under CLERP
(Corporate Law Economic Reform Program), participants and
intending participants must be able to point to ASIC-approved
finance courses which they have successfully completed, to
demonstrate competence in various generalist and specialist skills.
The required skills and the nature of training which will suitably
prepare persons for a career in finance in those skills, are outlined
in ASIC Regulatory Guide 146.
A person who is able to demonstrate adequate training in a
particular financial competency is described as being RG146
compliant in that area.
Course providers (such as Monash) can apply to have their courses
listed on the ASIC training register.
Introduction to Pension Schemes
In general, a pension is an arrangement to
provide people with an income when they are
no longer earning a regular income from
employment.
A major part of this course is about pension
provision in retirement. We are interested in
both phases:
(i) the accumulation phase; and
(ii) the retirement phase.
Introduction to Pension Schemes
The accumulation phase focuses on a persons
working life over which assets are accrued to
provide for retirement.
Retirement involves use of personal assets
together possibly with Social Security support
to provide a pension for residual life.
How do governments figure in the scheme of
things? A brief outline of the problem in an
international setting is provided (see reading).
The Pension Problem
Governments are faced with the problem of
caring for their retirees (as are potential retirees
themselves including me and you!)
There are traditionally four pillars of retiree
pension provision:
(i) Social Security
(ii) State sponsored complementary private schemes
(iii) Individual savings
(iv) Continued earnings in retirement
The Pension Problem
In Western countries, these pillars above are recognized
as an attempt to avoid a fifth pillar family support,
where children take care of their elderly parents
Why did Australia introduce a state sponsored
complementary private pension scheme (in 1992, The
Superannuation Guarantee Scheme)?
In past decades in OECD countries, the proportion of
persons in working age (say 18 to 65) and persons over
working age (i.e. over 65) was relatively stationary.
This meant that governments had the option of levying
tax at a relatively constant rate to provide a pension on
which retirees could live.
The Demographic Imperative
Figure 1. In the diagram, the proportion of retirees/workers remains
at about 10% as the population increases
The Demographic Imperative
Figure 2. The proportion of retirees/workers is increasing over
time as the population increases
The Demographic Imperative
However, in most countries today, the proportion of
persons over working age is increasing.
So governments no longer have that option. It would
lead to inter-generational inequity workers in
successive generations having to pay more and more
tax to support the increasing proportion of retirees.
The solution most countries have adopted or are in
the process of adopting is to require its working
population to pay for its own retirement by
contributing to government regulated funds.
In most countries these are called pension funds. In
Australia, they are superannuation funds.

Two-tiered Pension Systems
In many countries, there are two tiers of pension
scheme (provided or coordinated by government):
Tier 1: Social security - Age Pension
A basic pension for which all may apply (but which may
be means-tested). This is so for Australia, Canada,
Ireland, UK, US, etc.
Tier 2: A complementary nationally coordinated or
state-sponsored private pension scheme
Each nations workers contribute to their own private
pension schemes over their working lives. This scheme
is used to top up (or replace) Age Pension entitlements.


Two types of retirement benefit
Indexed life pension defined benefit (DB) plans
amount of pension depends on how long you have
been in the scheme and the proportion of salary you
contributed. Pension is usually designated as some
multiple of your Final Average Salary.
Retirement lump sum accumulation schemes or
defined contribution (DC) plans at the end of
your working life you are in possession of a lump
sum. You must use this to provide yourself with a
RIS (retirement income stream) for the rest of your
life (Australia, most countries).

Schemes work in tandem
Since state-sponsored complementary private schemes
have not been in place long, Social Security and the
private pension scheme must work in tandem. In fact this
will continue to be the case indefinitely in most countries.
For instance in Australia, our nationally coordinated
system Superannuation Guarantee Scheme (SGS)
which has only been in place since 1992, initiated by the
Keating labour government. It is an accumulation scheme.
While it has only been in operation for just over 20 years,
it preceded the introduction of accumulation schemes in
most other countries.
SGS
Currently under SGS, Australian workers contribute 9%
p.a. to a Complying Superannuation Fund (complying
with prudential regulations of the Superannuation
Industry Supervisory Act (SISA 1993) so that the fund
qualifies for reduced taxation on investment earnings).
From 2012 to 2020 the proportion contributed will be
gradually increased to 12% of gross income.
Workers have some say in how their money is invested;
they have investment choice. This however is fairly
limited.
Employers have to provide a minimum number of
investment options.
Types of Super Funds
There are 3 broad categories of Funds:
1. Industry funds
e.g. UniSuper, HESTA, CBUS
2. Products from fund managers: retail
funds
3. Self Managed Super Funds (SMSF)
set up by individuals
Super benefit accumulation
the total amount of capital (super) benefit that
accumulates in employees fund accounts will
depend on a number of factors including:
asset allocation and long-term yields
income level
contribution level (contributions in addition to the
obligatory 9% can be salary sacrificed at
concessional tax rates to boost the final lump sum)
taxation of contributions and fund earnings
time in the SGS scheme
Super benefit accumulation
an indicative figure for your final accumulation
might be about $0.6m in todays dollars
this is roughly what you can expect if:
you contribute only the mandatory 9% of gross
salary;
your income increases in line with AWOTE;
the fund averages about 9% p.a. growth over
about 40 years; and
inflation is controlled at about 3% p.a. (the
RBAs inflation target).

The Age Pension in Australia
SGS has been in operation for about 20 years.
And note that the employee contribution did not
start at 9% p.a. it started at 3% p.a. and built
up to 9% by 2000.
Current Australian retirees have not had much
time to benefit from the scheme.
So, for two thirds of retirees over age 65, the
Age Pension is the principal source of income.
The current (since March 2013) Age Pension
maximum levels are included in the reading.
The Age Pension in Australia
The single maximum Age Pension is about 28%
of average weekly earnings.
life is therefore quite difficult for two thirds of
Australias retirees
The Age Pension is means tested: there is both
an assets test and an income test
Briefly, if you have too much in the way of assets,
your age pension will be reduced.
If you have too much other income your age
pension will be reduced.

Economic impact of SGS in Australia
As at March 2013, there was about
$1,500,000,000,000 (1.5 trillion, fifteen hundred
billion) dollars in superannuation funds in
Australia.
This is comparable to Australias GDP.
SGS has significantly raised National Savings,
which until the inception of the scheme were
insufficient to fund desired investment.