Industry Super Australia (ISA) has challenged the Productivity Commission (PC) arguing that its key draft report on superannuation contains a “disconnect” between its key findings and policy recommendations, particularly around the under-performance of retail funds and self-managed superannuation funds (SMSFs).
As well, the ISA has argued that financial advisers should be held liable for the quality of the advice they provide around the establishment of SMSFs.
In a confronting submission responding to the PC draft report on Assessing Efficiency and Competitiveness in the superannuation industry, ISA said that while the PC had found that the main sources of underperformance lay in the retail, choice and SMSF segments, it had nonetheless insisted that insisted that “it is the industrial default segment (where most funds are operated on a not-for-profit basis) that requires radical change”.
It claimed that despite the strong performance of the industrial default safety net and the not-for-profit segment, rather than consider how to make what works perform even better, the draft report “recommends tearing-up present default arrangements and replacing them with an untested and high-risk alternative named ‘Assisted Employee Choice’ (AEC)”.
The ISA then claimed that, if implemented, the AEC would “substantially increase the risk that millions of employees will find themselves marketed, advised and sold into the very segments that the Draft Report has identified as poor performing: retail, choice and SMSFs”.
“The Draft Report’s apparent willingness to tolerate underperformance in the retail, choice and SMSF sectors indicates that the Inquiry does not understand what the superannuation system is for,” the ISA said. “Contributions were mandated in 1992 for social policy purposes: to increase future retirement incomes for all, and to allow future governments to allocate more resources to other social needs. In this context, the performance of all parts of the superannuation system should be a public policy priority.”
The ISA submission went on to argue that the Choice and SMSF sector required substantial reform if they were to be maintained in a credible system.
“To protect members from being sold out of the industrial safety net, products that wish to solicit default members must meet a member best interest threshold. This would be a ‘better-off test’ in which the trustee of the incoming assets must make a reasonable determination that the member would better-off financially if they joined the non-FWC reviewed product(s) being offered,” it said.
“Separately, non-FWC approved funds could be subject to an ‘earned-profits’ requirement in which it (or the average fund member) must attain above-median net returns for a specified period before it was allowed to pay profits to shareholders while soliciting default members.”
“SMSF formation should be subject to much stronger regulation: (1) Formation should be pursuant to the recommendation of an independent, licensed financial advisor; (2) The advisor’s recommendation should be subject to liability for the quality of the advice, accuracy of the representations therein, and for the sufficiency of the process by which the advice was prepared (however, satisfactory process would not excuse poor quality advice or misleading statements or omissions), and (3) SMSFs could only be formed with a sufficient starting minimum balance amount, that would be indexed.”