Issue 673, 30 May 2018
In this issue:
- Productivity Commission draft report
- Superannuation and victims of crime compensation: consultation
- Related party arrangements and conflicts of interest: APRA thematic review
- New body to boost financial capability
Productivity Commission draft report
Following a three-stage review of the superannuation system commencing in 2016, the Productivity Commission has released its draft report, Superannuation: assessing efficiency and competitiveness.
The draft report details the Commission’s view that Australia’s super system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees. In the Commission’s view, structural flaws—unintended multiple accounts and entrenched underperformers—currently harm a significant number of members. The Commission considers that fixing these issues could benefit members around $3.9 billion each year, with the balance for a new job entrant today lifted by $407,000 when they retire in 2064.
The Commission’s assessment of the superannuation system revealed mixed performance:
- while some funds consistently achieve high net returns, a significant number of products (including some defaults) underperform markedly
- fees remain a significant drain on net returns, even though reported fees have trended down on average
- one-third of accounts (about 10 million) are unintended multiple accounts, which erode members’ balances through unnecessary fees and insurance
- the system offers products and services that meet most members’ needs, but members lack access to quality, comparable information to help them find the best products
- not all members get value out of insurance in super – many see their retirement balances eroded by duplicate or unsuitable (even ‘zombie’) policies.
The Commission concluded that these outcomes have arisen due to inadequate competition, governance and regulation. In particular:
- rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment
- the default segment outperforms the system on average, but the way members are allocated to default products leaves some exposed to the costly risk of being defaulted into an underperforming fund, eroding their super balance by retirement
- regulations (and regulators) focus too much on funds rather than members, and subpar data and disclosure inhibit accountability to members and regulators
- while policy initiatives have chipped away at some of the problems, more changes are needed.
The Commission has recommended a new way of allocating default members to products:
- members should only ever be allocated to a default product once, upon entering the workforce. They should also be empowered to choose their own super product by being provided a ‘best in show’ shortlist of up to ten funds, set by a competitive and independent process
- an elevated threshold for MySuper authorisation should be introduced, including an enhanced outcomes test.
The Commission considers that this approach is superior to other default models, as it sidesteps employers and puts decision making back with members in a way that supports them with safer, simpler choice.
In the Commission’s view, these changes need to be implemented in parallel to other essential improvements:
- stronger governance rules are needed, especially for board appointments and mergers
- funds need to do more to provide insurance that is valuable to members – the industry’s code of practice is a small first step, but must be strengthened and made enforceable
- regulators need to become ‘member champions’, confidently and effectively policing trustee conduct, and collecting and using more comprehensive and member-relevant data.
ASFA will be making a submission in response to the draft report. As was the case for previous stages of the Commission’s review process, ASFA will be consulting its membership, including through the ASFA Policy Councils.
If you have any feedback that you would like ASFA to consider including in our response, please forward it to Andrew Craston by close of business Friday 22 June.
Superannuation and victims of crime compensation: consultation
The government has released for public consultation two draft proposals that would provide victims of crime with access to a perpetrator’s superannuation in certain circumstances. These involve:
- introducing a new claw-back mechanism for ‘out of character’ superannuation contributions made by criminals to shield their assets from use in compensating victims of their crimes
- allowing victims of serious, violent crimes to be able to access a perpetrator’s superannuation as compensation, where other assets have been exhausted, subject to appropriate limits and thresholds.
This follows an initial consultation into the early release of superannuation in December 2017 (see ASFA Action issue 656), which raised the question whether a perpetrator’s superannuation should be available to meet unpaid victims of crime compensation orders.
The government is particularly interested in views on the likely effectiveness of the draft proposals, including their interaction with existing state and territory criminal and civil procedures.
The consultation will close on 15 June. If you have any feedback you would like ASFA to consider in relation to the draft proposals please forward it to Fiona Galbraith by close of business Wednesday 6 June.
Related party arrangements and conflicts of interest: APRA thematic review
APRA has released the findings of its recent thematic review of related party arrangements for registrable superannuation entity (RSE) licensees, calling for greater focus by superannuation licensees on administering outsourcing arrangements with related parties to effectively manage conflicts of interest.
APRA’s review, conducted over 2016 and 2017, was prompted by concerns that some licensees’ management of commercial relationships with related parties could detract from the outcomes delivered to their members.
While RSE licensees had improved their handling of related party arrangements since APRA’s 2014 conflicts of interest thematic review, APRA found room for improvement, including:
- ensuring related party contracts are for a set period and contain clear termination provisions
- having contracts that contain clear and measurable performance indicators that the RSE licensee regularly monitors
- conducting rigorous market-based benchmarking when engaging or renewing contracts with related party providers to ensure terms and prices are commensurate with others available in the market
- proactively considering and documenting how decisions to use related party service providers are in the best interests of superannuation members.
APRA has written to all RSE licensees to outline its observations and recommendations from the thematic review, which it says are relevant for all RSE licensees to consider with a view to ensuring their related party arrangements are in the best interests of members and contributing to the delivery of sound member outcomes.
New body to boost financial capability
The government has announced it will establish a new body to boost the advancement of financial capability.
The new body, a not for profit public company independent of government, will administer grants and improve capabilities amongst Australians in relation to financial products and services. It is expected the body will seek deductible gift recipient status in order to enable it to receive tax-deductible donations from the public. It will also manage and distribute the $40 million in community benefit payments that form part of the settlement agreements between ASIC, ANZ and NAB, relating to the manipulation of the Bank Bill Swap Rate (and, potentially, future community benefit payments from enforceable undertakings that ASIC may agree to in future). The body will also manage the $10 million committed in the recent Federal Budget to developing women’s financial capability (see ASFA Action issue 669).
The new body will be overseen by a board chaired by Paul Clitheroe AM, one of Australia’s leading voices and advocates on financial literacy. He will be joined by Elaine Henry OAM and Air Commodore Robert Brown AM.
The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, said financial literacy and capability is “critical for economic empowerment, including for Australian women and young and older Australians”. The minister said the new body “will become Australia’s peak body in championing financial literacy and capability amongst Australians. It will use funds received as a result of corporate wrongdoing to educate and empower Australian consumers of financial products and advice”.
The minister said the establishment of the body will also support other Government initiatives, including the National Financial Literacy Strategy, the Government’s Strategy to Boost Women’s Workforce Participation and the More Choices for a Longer Life package (which includes the retirement income framework proposals from the recent Budget – see ASFA Action issue 669).
ASFA REGULATORY WATCHLIST
ASFA’s Regulatory Watchlist (ARW) tracks developments in Legislation, inquiries, consultations
and other regulatory announcements relevant to superannuation.