Wednesday, October 29, 2008

Retired Australians Deserve A Guarantee

More than two weeks after the Prime Minister announced that all bank deposits would be guaranteed by the Government without limit, there is still no real solution to the unintended fallout of frozen investment funds. With no limit to the guarantee, it should have been obvious that money tied up in non-guaranteed investment funds would be pulled out en masse and shifted into bank deposits. This exodus has prompted the freezing of the investments of about 250 000 Australians who can no longer access their own money. Most of them are not in urgent need, but nevertheless feel frustrated and worried about the security of their funds. Some of course may actually have urgent need of the money.

The first response by the Government was to introduce a $1 million threshold on the bank deposit guarantee, above which a fee would be charged. Unfortunately this has proved to be too little too late, as cunning operators are splitting up their money into smaller parcels of less than $1 million in different banks. Even so, it hasn’t done anything to unlock the frozen funds.

Fund managers have been calling for the deposit guarantee to be extended to cover their truest funds as well as bank deposits, but the Government maintains that it is not appropriate to expose taxpayer’s money to market based investment vehicles. And quite right too. So, the Government has come up with another solution… the Mortgage Funds should become banks, and that way they would of course be covered by the guarantee.

It seems so astoundingly simple, it’s amazing nobody thought of it before now. In reality, it’s not simple at all. This proposal is a political solution, not a practical one. Mortgage Trusts and Cash Management Trusts are not the same as banks, and for them to qualify would require capital reserves that they do not have, compliance with regulations which do not currently apply to them, and a significant amount of time to make the necessary changes. Hypothetically it could be done, but it’s just not a practical solution to the immediate problem of retired Australians being unable to access their own money right now.

Realistically, the life savings of older Australians have been placed in these investments as a direct result of almost two decades of Government Policy dictating how superannuation works, and how the proceeds of superannuation should be managed. Retired Australians have diligently played the game according to the rules laid down by the Government. Now, they are being penalized through no fault of their own, and they deserve a better response from the Government.

It is impossible for the Government to guarantee everything, and impractical to guarantee market linked investments, but perhaps a case can be made for devising a special category of guarantee for cash based investments held by individuals up to a practical cap of around $250 000. That’s about the size of the average superannuation payout, and is also the level at which the bank deposit guarantee should have been capped.

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