Superannuation following Stronger Super

Freya Purnell takes a closer look at what life after Stronger Super might bring to the superannuation sector.

For the past few years, the Super System Review (known as the Cooper Review) seemed to consume all the oxygen in the room around superannuation.

But just as the Government released its response and began to move into implementation mode, many other issues began to rear their ugly heads – concessional taxation, a dearth of post-retirement options, prudential standards, default funds under modern awards and more.

So what might life after Stronger Super hold for the Australian superannuation system?

Stronger Super

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In September, the Federal Government released its response to the Cooper Review as the Stronger Super reform packaging, supporting 139 of Cooper’s 179 recommendations.

In framing its response, the Government said it was particularly mindful of three issues identified in the review – that fees in superannuation are too high; that choice of fund failed to deliver a competitive market and reduced costs for members; and that there is too much tinkering in superannuation.

The key planks of the Stronger Super reform package were:

• The creation of MySuper as a default superannuation product with a single diversified investment strategy and single set of fees, to be available from 1 July 2013;
• Providing the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission and the Australian Taxation Office (ATO) with the tools they need to improve their oversight of superannuation; and
• Improving the administration and management of accounts through the SuperStream reforms, to make processing transactions easier, cheaper, and faster for members and employers.

Other measures included the consolidation of multiple member accounts on an opt-out basis, as well as additional requirements for employers to provide better contribution information to employees. Taken together, the Government estimated the reforms would reduce the fees paid by members by up to 40 per cent.

MySuper

Though created as a ‘simple’ option, MySuper has drawn a chorus of misgivings which have dominated the Stronger Super reform discussions.

Jeremy Cooper – chair of retirement income at Challenger and chair of the Super System Review – believes that the implementation of MySuper is one of the challenges now facing the sector.

“The MySuper product is conceptual, and as much a philosophy as anything – it is not so tangible or practical as SuperStream,” Cooper said.

“If it is merely a matter of complying with a checklist of items, and you don’t really get on board with the principles of it, then it may not be as successful; the challenge is that it doesn’t get bogged down in the prescriptive elements with the substance of it being lost.”

Given the timeline, the clock is now ticking for funds to develop and offer this ‘no frills’ option. Despite the ‘one size fits all’ intention of MySuper, the addition of some flexibility has been seen as critical by some industry bodies for it to be successful.

The Financial Services Council (FSC), for example, welcomed the addition of variable pricing and tailored investment strategies for large employers (those with 500 employees and over).

“This is a great outcome for the 2.2 million Australians in corporate superannuation plans as it means their super strategy will continue to be tailored to their specific needs,” FSC chief executive John Brogden said.

However, concerns remain about the impact of a single fee structure for funds using a lifecycle investment strategy, with Aon Hewitt calling the plan “inequitable”.

“Lifecycle strategies that shift a higher weight to fixed income as a member nears retirement would result in lower costs associated with these members,” says Janice Sengupta, chief investment officer of Aon Hewitt.

“If the fund has to charge all members the same investment management fee, then older members would be subsidising younger members in the more growth oriented strategies.”

In addition, there remains considerable uncertainty around the provision of advice attached to MySuper products, which is being dealt with as part of the Future of Financial Advice (FOFA) reform process.

SuperStream

By contrast, the SuperStream initiative to increase back office efficiency has been uncontroversial and, in fact, welcomed with open arms.

“SuperStream is a group of really practical measures that are going to save funds a lot of time and money. It’s just been great to see how the industry has embraced it – the paperwork and clunkiness that the system has now will be gone,” Cooper says.

SuperStream specifically included proposals to improve the quality of data in the system, allow the use of tax file numbers as the primary account identifier, encourage the use of technology to improve processing efficiency and improve the way fund-to-fund rollovers are processed and the way contributions are made.

Again, 1 July 2013 marks the first deadline for implementation, with data and e-commerce standards mandated for superannuation funds from this date, and the Government’s clear direction has given impetus to industry-led moves on electronic transacting.

The Affiliation of Superannuation Practitioners (ASP) – a consortium of funds and administrators including AAS, AMP, BT Financial Group, Colonial First State, MLC, Pillar and Superpartners – last year piloted a program allowing ASP members to transact superannuation rollover data and payments electronically.

The pilot was very successful, according to ASP spokesperson Nigel McCammon, with 12,000 rollovers with a collective value of $120 million completed, and a reduction in the average time member funds were out of the market from more than five days to less than 48 hours.

However, the technology underlying the system meant it faced issues of scale.

In February, the group agreed to take the project to the next level as a web-based system – a move which “supports fully the Government’s intention and direction in regards to services and data standards”.

However, looking more broadly, the SuperStream initiatives are going to be less achievable for some players than others.

“There is a lot of diversity in the industry around operating environments. There are some challenges for those that have not invested in technology, and they now face a greater leap than others,” McCammon says.

In seeking to make improvements across the industry, McCammon also believes it is important that “we don’t derail efficiencies already in play”.

Is the industry ready for Stronger Super?

Despite these initial moves, new research by the Association of Superannuation Funds of Australia (ASFA) in collaboration with Ernst & Young indicates that industry executives are quite unprepared for the new environment.

The report, ‘Stronger Super Preparedness: Preliminary findings of study II’, builds on an earlier survey, and shows that industry preparedness has increased in eight of 12 business dimensions over the past six months, including fund governance, business strategy, and technology and data.

However, in areas such as members and employers, governance and leadership, and processes and procedures, little headway has been made.

ASFA attributes this to the dependency of Stronger Super to other reforms, including Future of Financial Advice and the introduction of prudential standards by APRA, as well as ongoing debate about the finer details.

“Until the missing regulatory detail is provided, the industry will struggle with this element of preparation,” the report says.

However, ASFA warns that without a sense of urgency to assess and act on the new requirements, industry players could miss an opportunity to renew themselves.

“Those players employing a wait and see approach may be making a terminal mistake.

"Without a robust understanding of key implications now, industry stakeholders will not have sufficient time to prepare,” the report says.

The research also indicated a shift in the assessment of the costs involved in implementing the reforms.

While in the first survey, SuperStream accounted for most of the anticipated costs, the second survey saw it level with MySuper, with each attracting 37 per cent of respondents’ estimated costs.

“This is a fundamental shift in thinking from earlier this year, when the industry saw MySuper as ‘just another product’,” the report said.

So while MySuper is pitched at reducing costs to members, initially at least, there will still be a considerable cost for its implementation.

More superannuation reform

Despite the wideranging nature of the Stronger Super reforms and other measures such as increasing the superannuation guarantee (SG) contribution to 12 per cent, introducing the low-income superannuation contribution and abolishing the SG age limit of 70, it seems there are still many other issues around super yet to be resolved.

Treasurer Wayne Swan and Minister for Superannuation and Financial Services Bill Shorten announced a superannuation roundtable to work throughout 2012 and specifically address how to better target and deliver current tax concessions and give retirees more product options in the post-retirement phase.

Tax concessions within super have long been debated in the industry, and while the remit of the roundtable is broad, Cooper says there is a clear message that any “tinkering” will have to be balanced from the superannuation system.

“It won’t fly if people change concessions, and that is going to have fiscal consequences,” Cooper says.

Also on the table this year is the introduction of prudential standards for superannuation by APRA, and a Productivity Commission inquiry into the selection and ongoing assessment of default superannuation funds in modern awards.

Expected to last around eight months, the inquiry will seek to develop transparent and objective criteria for choosing a default fund – a step applauded by the FSC, who called the current process “anti-competitive” and “riddled with conflicts of interest”, due to the involvement of employer groups and unions in the decision-making processes.

“Opening the default market to competition and creating a level playing field between all MySuper funds is crucial to ensuring fees continue to be driven down,” Brogden says.

“The industry fund monopoly must be broken so that competition can flourish in the superannuation system.”

Obviously, the endgame with this extensive reform process is to have a better, more secure, more efficient, and ultimately, more effective superannuation system.

But do investors and financial advisers see it that way, or are they just losing patience with the endless change?

SMSF Professionals Association of Australia (SPAA) chief executive officer Andrea Slattery, for one, believes confidence in the market is a critical issue at present.

“Both sides of government had promised over the last four or five years that they would not make any further changes to super once the reforms were finished.

"Now here, we have already got people talking about tinkering with tax concessions post-reform, and there are a lot of issues coming out of the implementation which will really affect people’s confidence in super as a system,” Slattery said.

Disappointing performance

The current poor performance of many superannuation funds isn’t helping matters.

APRA figures show that returns in the September 2011 quarter took a dramatic turn for the worse, with the overall rate of return -4.9 per cent.

Public sector funds generated a return of -4.2 per cent, industry funds generated a return of -4.6 per cent, corporate funds -5.1 per cent, and retail funds -5.4 per cent.

While the blame for this performance can be easily driven home to lacklustre investment markets, members may start to question the overall approach, given the volatility of recent years.

“The philosophy on asset allocation that we have enjoyed for some time – being equities focused – is starting to test the patience of a lot of members. Particularly as it affects retirees and those approaching retirement – I think there is a lot of work to do in that area,” Cooper says.

Research by ASFA bears this out – its research report, ‘Consumer attitudes to superannuation and super policy issues’, released in November 2011, shows that only 27 per cent of respondents were satisfied with the superannuation industry as a whole – down from 34 per cent in 2010.

Levels of satisfaction with the main superannuation fund of respondents are also now at their lowest level in eight years – a period which includes the bloodbath of 2008 – which ASFA director of research Ross Clare attributes to continued volatility and negative investment returns in many asset classes.

Countplus MBT principal Roy Massey agrees that amongst clients, superannuation performance is a big issue, but they are also becoming increasingly fee sensitive, and looking for an expanded range of options from their wrap account.

“A new development over the last few years has been the use of term deposits within super accounts. Clients are now inclined to hold a substantial amount of cash in their portfolio.

"One thing we have been asked for quite a bit recently is wrap accounts that use a range of providers for term deposits,” he says.

Performance issues have also impacted the levels of funds under management in the personal superannuation sector, according to Mark Kachor, managing director, DEXX&R.

Full year figures to the end of September 2011 show that total funds under management/advice in the personal superannuation market fell by 2.83 per cent, or $4.6 billion to $158 billion.

The employer superannuation market, by contrast, grew by 4.63 per cent to $88.5 billion – though this represented a 1.79 per cent drop on the June 2011 quarter.

He believes this shift is reflective of the fact that fund flow for employer superannuation is largely dominated by mandatory SG contributions, while personal super tends to draw discretionary contributions – which investors are less likely to make when balances are falling due to poor investment market performance.

“What you notice particularly in the personal superannuation market is that it tracks with about a nine-month lag on how the overall equities market is going,” Kachor says, adding that he believes this dynamic is more responsible for the decline of personal super than the rise of industry funds.

The retail vs industry fund war

With a ban on commissions and intra-fund advice imminent, the battleground between retail master trusts and industry superannuation funds seems set to continue – on features, returns, and of course, fees.

In this comparison of retail and industry superannuation funds (see Table 1 and Table 1b), there is significant variability in the features available for the funds, but there is a clear trend for lower fees among the industry funds, and generally higher returns (on a one-year basis).

No surprises there, perhaps – but what may surprise some is that the most recent Roy Morgan Research Superannuation and Wealth Management report found that in the 12 months to June 2011, 10 per cent of all superannuation products that switched to industry super funds came through a financial planner – representing an increase from 7 per cent in the year prior.

Massey believes much of this increase would come from planners employed by industry funds, but says he would recommend an industry fund in certain circumstances.

“Where the client does not require ongoing financial advice, they’re usually better off moving to an industry fund than staying in a retail product, where there is a fee being paid to an adviser and potentially a dealer group as well,” he says.

According to Industry Fund Financial Planning (IFFP) – which provides financial advice services to 16 superannuation funds, including Australian Super, HESTA, MTAA Super, Care Super, CBUS and Host Plus – demand for financial advice by industry fund members is on the increase.

The group is on a dramatic growth path, according to Frank Gayton, national practice manager for IFFP, with financial adviser numbers now up 15 per cent from the number at 1 July 2011, and negotiations are underway that could see adviser numbers up 50 per cent by the end of this financial year.

With a huge increase in the number of members seeking financial advice – which Gayton attributes to “fierce resistance” from consumers to commissions as well as the baby boomers taking an interest in their superannuation – there is currently a four to six week wait for an appointment with an IFFP planner.

On the issue of switching superannuation accounts into an industry fund, he says in many cases it is logical for their planners to advise such a step – especially for an investor with multiple accounts.

“It may be that someone has an account of $200,000 with AustralianSuper, for example, and a legacy account of $10,000 with Colonial First State.

"Logically, if someone is planning their retirement, you would consolidate them in one fund, and that would invariably be with the majority of the money,” Gayton says.

The post-retirement landscape

Perhaps more significant than any ongoing tussle between industry and retail funds is the impending demographic shift as baby boomers begin to move into retirement en masse.

With the first of the generation hitting age 65 last year, the move is already underway, but is the industry ready?

According to Cooper, baby boomers hold approximately $850 billion of the $1.4 trillion held in superannuation assets, and this is the group which will be transitioning from accumulation to drawdown over the next 20 years.

He predicts in future, many more will stay in the superannuation system after retirement.

“Today, 50 per cent of retirees just take the lump sum and then step out of the super system when they retire.

"That’s going to change very quickly, so within a relatively short number of years, 90 per cent will stay in the system in retirement, receiving some sort of income stream from their fund,” Cooper says.

This has implications for financial advisers, for whom retirees will form a larger part of their client base (with much larger superannuation balances than seen previously). And Cooper argues that the complexity of this phase is very different to the objectives of the accumulation phase.

“There is no silver bullet solution – it is all very specific to the individual retiree about what their needs and concerns are, their tolerance for risk, and what they are seeking to get out of retirement.

"Accumulation is a one-trick pony – you’re seeking to maximise your returns so you have the largest amount on which to retire,” Cooper says.

Crucially, to better meet retirees’ needs, the right products need to be available as well, according to Actuaries Institute chief executive Melinda Howes – and this is the task ahead for legislators, product manufacturers and superannuation funds.

Cooper says that while the Government agreed in principle with the Super System Review’s recommendation that post-retirement products should be designed around a strategy that would deal with inflation risk, longevity risk and market risk, it ended up in the “too-hard” basket because it is a very different approach to that taken currently.

He hopes that the superannuation roundtable will be able to provide a concrete plan on expanding the product options in the drawdown phase – including perhaps resolving the technical problems with deferred annuities, which help to address longevity risk for retirees.

Howes agrees that there is insufficient choice available to retirees to help them manage key risks, and also believes roadblocks to product development need to be removed.

“Over the last 20 years, people have been happy to be in account-based pensions in retirement because returns have been strong and consistent up until 2008. Back before that, interest rates were high, so people were happy to be in lifetime annuities and pensions.

“But now you have got a situation where people don’t want to be exposed to market risks, so they are looking to lock in some protection,” Howes says.