Whether the address by Senator Jane Hume to the Financial Services Council (FSC) Summit in late August this year will serve as a wake-up call that the government means business for superannuation remains to be seen. Any positive change will only reveal itself when the industry starts to act and implement the recommendations of the reviews and reports currently in the pipeline.
Previously, we have seen the industry simply ignore recommendations, water them down or make them suddenly disappear in the past so the history of reform is not good.
Out of the 76 recommendations from the Hayne Royal Commission we saw 10 of these directed to industry. The minister saw that if these recommendations were acted on, consumer protection would improve, there would be stronger and more effective regulators, executive accountability would increase and remediation of consumers and small business would occur at appropriate levels.
The minister pointed out that reform in super was plagued with long-term problems which should have been fixed by the industry and not the result of funds being ‘dragged kicking and screaming by Government towards a solution’. Unfortunately, this type of reaction is the easy way out and based on premise that, if fund members don’t complain, then its OK for the status quo to remain. Automatic insurance in super is one example, where the question of whether it was actually required by the member became irrelevant as the one size fits all scenario prevailed.
It’s recognised that structural problems in superannuation have eroded trust in the system and at the same time impacted members’ balances. But super is unlike no other investment as nearly one-tenth of every workers’ pay is compulsorily ‘saved’ in a system where the savings are put at risk for up to 40 years or more. This places strict obligations on the custodians of super money at the top end, such as fund trustees, investment houses and regulators who are bound to act in the best interests of the fund members.
The review of the Australian Prudential Regulation Authority (APRA) is a case in point which emphasises the obligations of regulators and Graeme Samuel as chair of the review telling them that super is for members.
Chapter five of the report is headed up – Regulating the Superannuation System for members – which provides comments on the regulation of superannuation in Australia as well as an assessment of APRA’s regulation of superannuation.
Just like many reviews before, we again see superannuation recognised as different from other regulation such as banking and insurance which is no surprise. The difference is because of compulsory contributions and the substantial tax assistance that super gets. However, the regulatory approach has been neutral and aligns with the way APRA supervises its other responsibilities.
The APRA review identifies the failings of the regulator and what’s required to ensure its role is ‘more than prudential regulation’. This is more than the current focus on the financial stability of funds and identifying associated systemic risks. To some extent the Hayne Royal Commission points out clearly that the regulatory focus is to be extended to providing outcomes for members just like the Samuel review.
In contrast to Hayne, the Samuel report points out the conflicts that exist within the regulator, imbalance of resource allocation and the need to concentrate on member outcomes – something you would have thought was mandatory. Maybe in future APRA and the funds it regulates will be able to show more clearly how super is protected and the way it is managed improves our level of confidence in the system. I dare use the words ‘how about greater transparency’ as the disclosure by some overseas funds makes Australia’s super system look like a closed shop.
The announcement of another review of the super system as recommended by the Productivity Commission in its report, ‘Superannuation: Assessing Efficiency and Competitiveness’ is interesting. The review which was recently announced is to look at a retirement income system which centres around the three pillars. These were put forward by the World Bank in the 1990s as a way of classifying retirement systems. While this may still be valid, maybe the world has changed, and the classification of the pillars may need to be revisited to redefine what a retirement income system looks like in the 21st century.
While parts of the Productivity Commission report have been sensationalised, there are some recommendations that certainly need further consideration. Whether these will be covered in the Retirement Income Review is yet to be seen but the release of the consultation paper which will happen in November will give us some idea. Three issues that have come out of the Commission’s report are the default fund issue, ‘best in show’ fund and curbing unnecessary insurance in super.
The default fund issue is to provide the individual with choice as to which superannuation fund will hold that employee’s superannuation contributions. This contrasts with the current arrangements where the default choice is with each employer. The current rules contemplate an individual having a number of funds as they move from employer to employer bringing with it the additional costs of multiple funds.
The introduction of a member-selected default fund where all employer contributions will be made to the fund is really a de facto exercise of choice by the member as allowed by the current system. In addition, other changes such as greater efficiency in rolling over amounts between APRA funds and the use of MyGov accounts has helped consolidate member’s super accounts. The problem may now be additional effort to consolidate lost member accounts for a member. However, consolidation may be impossible for some lost accounts which have an assumed name like that of a cartoon character.
The ‘best in show’ ranking of funds may have some use but in view of the many different situations for individuals, merely looking at a fund’s returns may have issues. Will this lead to an emphasis on short-term performance and members who adopt a flight to fancy only to miss out on longer term gains if they had stayed where they were. Will it result in a ratings agency type approach where the more bells and whistles the higher the rating? This has a long way to go and getting an agreed approach with a useful and valid measure may never be found. One thing that seems to come out of the ‘best in show’ ranking is that financial planners may end up with a greater role to work out which of the ranked funds is suited to the individual client.
INSURANCE IN SUPER
The curbing of unnecessary insurance in super should have been in place many years ago. There are many stories of, usually younger, members who had a number of jobs and their superannuation disappeared in the payment of premiums. The minister’s comments in the FSC speech about having to drag the industry kicking and screaming are well justified. Most of our children who took up jobs during the holidays were impacted. Any analysis of their situations would have shown that the type of insurance being offered was unsuitable as many had no debts, no dependants and leaving the amounts accumulate in the fund was probably the right decision. Maybe disability insurance could have been considered which may have required developing a new type of insurance for super members.
I do recall one member who wished to exercise member investment choice into the ‘balanced’ option for the fund. Insurance was not required as it was inappropriate, and the level of cover was very low in any case. As the balanced option turned out to be the default option, the member was required to take out insurance as part of the balanced investment option at the time.
Let’s have a look at some of the history of superannuation changes, many of which seem to be continually peppered with a long line of resistance. Take for example, the introduction of the preservation rules, rolling over amounts between funds within three days and even compulsory superannuation which ended up as compulsory superannuation guarantee. Even approval of allocated pensions, which received bureaucratic approval in the 1980s, didn’t make it into the law for many years due to industry resistance, and are now the mainstay of the income stream system.
But my favourite example of resistance must be the contributions surcharge which was put in place to plug a revenue black hole. By any means, it was a hated tax as it met many of the model rules of a creditable tax system as it was simple, relatively easy to understand and wasn’t easy to drive a truck through. At the time it was also revolutionary as it required reporting of many transactions electronically to the regulator. While this doesn’t sound extraordinary these days, it came at a time when a sizable proportion of funds still kept manual records. The renaissance from manual to computer systems was met with cries of protest because of the cost of the legislation but in the background it led to more modernised systems from an industry that was dragged kicking and screaming into the new world.
Where to from here, another very rough road to see change implemented. As fund members we really need to challenge the industry, regulators and government to make some decisions and put them in place efficiently and effectively. The history on this is not good as for some of the issues under consideration we have travelled a very short distance.
If the super funds really want us to have greater faith in their operation I want to feel the love and not be frozen out as I’m sure we all have felt from time to time.
Graeme Colley is executive manager, SMSF technical and private wealth, at SuperConcepts.