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Coalition Members and Senators Dissenting Report
Coalition Members and Senators
agree that the default superannuation industry needs reform to enhance
competition, transparency and comparability in the system.
We recognise that the regulatory
environment in the compulsory savings regime is critical in achieving the
policy goal, which is to maximise Australia’s retirement savings through
publicly mandated, privately managed superannuation.
The two MySuper Bills before this
Committee will change the way in which the private sector is allowed to operate
in this market.
In the Coalition’s view, these
Bills will not increase competition but they will contribute to better
transparency and comparability.
The genesis of these Bills was
the Super System (Cooper) Review of 2009-10.
Since endorsing the MySuper
recommendations in August 2010, the Government has approached delivery of the
reform in a very piecemeal manner.
There are two Bills before this
Committee now and there is another MySuper Bill (the third) which is yet to be
exposed for consultation.
In addition, competition matters
will be examined by the Productivity Commission, which is presently undertaking
a review into default superannuation under modern awards.
The final incarnation of MySuper
in these Bills is vastly different from where the government started.
The government's original
approach would have resulted in a highly rigid “one size fits all” default
superannuation market, which would have been unable to accommodate different
demographic profiles in Australian workplaces.
The Coalition welcomes the moves
away from a rigid “one size fits all” approach as it had the potential to
disadvantage many Australians.
Despite our in-principle support
for the policy, the Coalition has considerable reservations about the proposed
regulatory design features of both Bills.
We believe these reservations are
significant enough to oppose passage of the legislation. Principally these are
around the authorisation process, the licensing regime, a proposed “scale test”
and the lack of clarity surrounding the provision of intra fund advice.
Further, the Coalition does not
support the proposition that the Parliament should consider voting on these
Bills without the outcome of the Productivity Commission inquiry and any
legislative changes resulting from this inquiry.
Competition in the default superannuation market
The Coalition has long argued in
favour of genuine choice and competition in the default superannuation market.
Only with genuine competition in
an efficient and transparent default superannuation market will fund returns
and retirement savings for Australians in default super funds be maximised.
Current arrangements where
default funds under modern awards are selected by Fair Work Australia are not
transparent, not competitive and inappropriately favour union dominated
industry super funds.
The continuation of those current
closed shop anti-competitive arrangements for the selection of default
superannuation funds is a national disgrace.
In the lead-up to the last
election the government was shamed into promising a Productivity Commission
inquiry to address the anticompetitive aspects of its decision to hand to Fair
Work Australia the power to approve default funds. Having recognised the deep
flaws in the current process before the last election it was disappointing that
the government has been so slow to act on that commitment.
It took the government more than
eighteen months to commission this inquiry which we are now told will take the
best part of this year.
It is clear that the Minister for
Workplace Relations and Superannuation has been intent on protecting the best
interests of his friends in the union movement for as long as possible.
It is the view of Coalition
members of the Committee that this has been at the expense of working families
across Australia who have been missing out on the benefits of genuine choice
and competition for far too long
We have welcomed the fact that
the government has finally asked the Productivity Commission to recommend a
more open, transparent and competitive process for the selection of default
funds under modern awards.
However we consider that even
before the Productivity Commission has reported, the Parliament should amend
this legislation to force the government to ensure Australians in default
superannuation can benefit from enhanced competition in that market.
Specifically, we point to
recommendation 1.2 of the Cooper Review in relation to MySuper and modern
awards which said: “The SG Act should be amended so only a MySuper product
is eligible to be a ‘default’ fund nominated by an employer.”
In recommending, universal
eligibility of default funds for industrial purposes, recommendation 1.3
stated:” ...all MySuper products are able to be nominated, for ‘default
fund’ purposes in awards approved by Fair Work Australia.”
Coalition members of the
Committee are of the view that in creating this new default superannuation
product, all MySuper funds should be allowed to be an eligible default fund for
any workplace and be able to compete freely. To not allow MySuper funds to
compete on a level playing field fails to address the existing competition
issues in the default super industry and undermines the MySuper reforms.
Under the proposed reforms every
product must be assessed by APRA as meeting a minimum set of standards or
requirements before it is registered as a MySuper product. This process will
ensure that all MySuper products offer appropriate levels of consumer
protection and are therefore suitable to be utilised as default superannuation
funds.
Once compliance with this set of
criteria is established and a MySuper product is registered the Coalition
members of the Committee are of the strong view that there is no need for any
other process to further determine which eligible and suitable default funds
should be included into individual awards.
To embark on such a separate
process would create duplication and additional costs for no additional
consumer benefit or protection.
Once assessed as meeting the
relevant standards and being eligible to be used as a default superannuation
product, every MySuper fund should be able to freely compete in the marketplace
and to offer itself as a default fund with no further barrier or restriction.
Coalition members of the
Committee are concerned that instead of acting in the public interest, the
government’s continued delays in implementing reforms to ensure genuine
competition in the default superannuation market are driven by its desire to
protect the vested interests of union dominated industry super funds.
We consider it imperative that
action to address the current highly undesirable lack of competition in the
default super market should be taken now in conjunction with any other changes
to default super rather than be delayed further.
Recommendation 1:
That the legislation be amended
to allow any authorised MySuper product to become a default fund under any
industrial arrangement.
General concerns on Authorisation requirements
A number of submitters to the
Committee expressed concerns about the impact of APRA authorisation
requirements.
The Industry Super Network (ISN)
argued that given the time lag between an application by an RSE and a
determination by APRA:
...the sooner APRA provides pro-forma forms and guidance
regarding the application process as outlined in section 29S, the more orderly
the transition to MySuper will be. To avoid any confusion and uncertainty,
information on the MySuper transition process should be made available as soon
as is possible.[1]
The Australian Institute of
Superannuation Trustees' (AIST) noted:
...the key date where a fund makes a MySuper application for
a large employer MySuper prior to 1 July 2013 will be 27 December 2013. Within
this time frame, funds will be able to accept default contributions into their
existing default fund while their MySuper application is being decided. Effectively,
this means funds (other than in relation to large employer MySuper products)
will have to make an application for MySuper authorisation within the six month
window between January and June 2013.
Funds are likely to want to apply as early as possible in
this period and ideally prior to 1 April 2013, so that they can advise
employers of their MySuper status, and ensure that they will be MySuper
compliant if APRA require the full 180 days, as well as for other marketing
purposes.[2]
The AIST explained that:
...we think that there should be an absolute requirement on
APRA to process all applications within that time frame because the
consequences of not getting MySuper authorisation from a fund is dire. It is
not like not getting a public offer licence. You will not be able to accept
superannuation guarantee contributions after 1 October, which effectively means
for a live fund that you will not be able to operate in the marketplace.
...if employers are proceeding quite happily to make
contributions to a particular fund and then on 1 October they can no longer
make SG contributions to the fund how do they actually fulfil their obligations
under the SG requirements?[3]
The AIST told the committee:
we would strongly urge...the parliament to expedite the carriage
of all elements of the Stronger Super legislation through Parliament so that
there can be some greater clarity so that in the second half of this year,
funds are in the position that they can do everything that is needed to get
their application into APRA for their MySuper product.[4]
The AIST also recommended that where
APRA does not make a decision within the required period, it should be required
to give reasons.[5]
Mercer was unclear as to what APRA
will request from trustees as part of the authorization process:
At this stage it is unknown as to the level of detail that
will be sought by APRA as part of the application process. For example, it is
not known whether APRA will expect trustees to have developed appropriate
policies based on the proposed prudential standards before submitting an
application.[6]
APRA told the committee that it would
be seeking to make public its draft application authorisation forms and
standards in May–June 2012, with a view to finalising these before the end of
2012. It noted that it has already started 'dialogue with trustees about the
sorts of things we expect to see'.
APRA told the committee that:
The biggest danger is that there might be some trustees who
are laggards in the process and come in quite late in the piece...In terms of
the queuing process, we aren't going to date, stamp and number each form when
it comes in...But we have 260 frontline supervisors and probably 120 or 130
will have some involvement in this process.
If we got 100 different applications on one day, they are
likely to go to 50 different supervisors...The queuing issue might be less of a
problem than what people were suggesting...We're encouraging draft applications
in the second half of 2012 and that's again to facilitate the process.[7]
APRA explained to the committee that
this legislation gives APRA the job of approving specific products (as opposed
to product providers) for the first time in its history:
...this is the first time in any of our legislation that we
have a product authorisation role. Equally, this is the first time that our
legislation is actually a prescribed product, because we do not have prescribed
bank accounts or insurance policies and so on. So from that perspective it is
new. I do not think the process needs to be different; I think the level of
detail and the level of analysis that we undertake need to be different. That
is what we have been looking to try to do.
We will have challenges to get people out of the mindset of,
'I'm looking at everything this trustee does and how they operate,' to, 'I'm
looking at this product.' That is why we are talking about a MySuper
authorisation form and authorisation process as opposed to an RSE MySuper
offerer authorisation process. While it is different, I see that it is much
more of a check on the product's specific characteristics rather than on
trustee behaviour. Having said that, we have been public in some of our
seminars, which I referred to earlier, with comments that we will obviously be
looking more askance at the trustees who apply to offer MySuper products where
we have a long history of fringe behaviour, for want of better terminology.
There is an official word but I cannot remember what it is. We have said that,
but those numbers are not huge. It is not 50 per cent of the population but it
is probably somewhere around five per cent to 10 per cent. That does not mean
that it is trustees where we have a legitimate disagreement. We have had
legitimate disagreements with many people over time. But it is the ones where
it might just be taking an awfully long time to get rectification that we
thought was fundamental.
The Coalition members consider that
it is imperative given the complexity of the task ahead that APRA provide
appropriate guidance to the industry about the standards and forms required for
the authorisation process at least 12 months prior to the commencement of the
MySuper legislation.
Recommendation 2:
That APRA provides full details of
the standards and forms required for the authorisation process at least 12
months prior to the commencement of the MySuper legislation.
The process to obtain a tailored large employer MySuper plan
A provision in the Core Provisions
Bill requires prior authorisation of each tailored large MySuper employer plan
rather than simply providing a reporting mechanism.
Five organisations—BT, Mercer, the
Corporate Superannuation Specialist Alliance (CSSA), the Association of
Superannuation Funds of Australia (ASFA) and the Financial Services Council
(FSC)—all argued that the Bill's authorisation process for tailored MySuper
products for large employers is unnecessary.
BT Financial Group argued:
According to the legislation APRA may take up to 180 days to
approve a tailored MySuper offering. We believe the requirement for APRA
approval will result in:
Significant delays to how quickly members can benefit from
the new arrangement, by delaying how quickly the members can transition to the
new fund.
Uncertainty for employers who have commercially negotiated a
beneficial arrangement for their employees. Employers must wait for approval
from APRA and then take further action if not approved.
Reduced competition within the superannuation industry as
employers become less likely to negotiate a tailored arrangement or conduct a
competitive tender due to the considerable length of time it would take.
BTFG believes that the proposed level of APRA involvement in
commercial arrangements entered into by superannuation funds with employers is
unnecessary and inefficient. APRA’s role should be to monitor compliance with
MySuper legislation through annual reporting and ongoing supervisory
activities, as envisaged in the Stronger Super Information Pack.2
BT recommended that:
...the Bill be amended so that APRA is only required to
licence the ability of an RSE to offer MySuper products.
Superannuation funds that enter into a commercial
relationship with an employer and in doing so create a tailored MySuper
product, would then only have an annual reporting obligation to APRA. The
information collected could be used by APRA, along with its other prudential
activities, to monitor the tailoring of MySuper products and ensure that they
are consistent with legislation.
The CSSA told the committee:
Tailored MySuper funds should not require individual approval
from APRA, as a blanket approval could be provided RSE licenses. This would
reduce the time taken for approval and reduce administration, and therefore
costs.[8]
At the end of the day, the main difference between a tailored
MySuper and the standard MySuper, to use a better term, is that the investment
strategy can be chosen differently. There is no other difference between the
two of them. If, as FSC requested, you go for a MySuper approval and you get it
and do not have to come back with each tailored fund, it sort of takes away the
need to have any number or any restriction around it, in my opinion. Investment
strategy is the only difference, at the end of the day.[9]
The Association of Superannuation
Funds of Australia (ASFA) put a similar argument:
To compel the trustee to make a series of separate
applications to APRA would prove an extremely inefficient process, consuming
considerable resources and creating significant delays for little or no
benefit. As a prudential regulator APRA has the power to assess large employer
offerings as part of their regular reviews of funds.[10]
Mercer argued the case for not
requiring a tailored MySuper product authorisation process as follows:
The fund that Mercer runs is a good example. We mentioned
earlier the master trust with 260 corporate subplans. We have something like 50
employers, or more than that, that have more than 500 employees. They might
want to look at having a tailored MySuper vehicle. It seems very strange to us
that the trustee of the fund—there is one trustee running the whole fund for
all of the subplans—would potentially have to make 50 separate applications to
APRA. Most of the content of the applications would be identical. There will be
variations with fees and some minor variations with insurance and possibly
investments, but we are talking about the same trustees having met the trustee
obligations in similar ways. We think it would be better to have a single
application per trustee and some sort of provision for APRA to review and
disallowed—:
...in order to offer a tailored MySuper product, the trustee
must already have convinced APRA that it is competent to operate a MySuper
product. It therefore seems unnecessary that trustees have to obtain separate
approval to operate a tailored MySuper, particularly where the proposed
arrangement already has the requisite number of employee members to qualify.
The requirements will add to inefficiency, make transition to MySuper more
difficult and create further inefficiencies and time delays in relation to
future fund mergers.[11]
Mercer argued in its submission:
We do not consider that it should be necessary for separate
approval be sought from APRA in relation to Tailored MySupers. In order to
offer a Tailored MySuper, the trustee must already have convinced APRA that it
is competent to operate a MySuper product. It therefore seems unnecessary that
trustees have to obtain separate approval to operate a tailored MySuper, particularly
where the proposed arrangement already has the requisite number of employee
members to qualify. The requirements will add to inefficiency, make transition
to MySuper more difficult and create further inefficiencies and time delays in
relation to future fund mergers.
Recommendation :
The requirement for APRA approval of tailored MySupers should
be removed (at least for cases where the 500 employee limit has been exceeded).[12]
The Financial Services Council (FSC)
proposed an alternative authorisation process for tailored plans:
MySuper tailored plans must be reported to APRA on an annual
basis – APRA can disallow a tailored plan where the tailored plan is not
compliant with the licence conditions within 30 days. At which time, tailored
plan closure arrangements commence.[13]
The FSC proposal of a reporting
system for tailored large employer MySuper products was put to APRA for its
comment. It responded:
From our perspective, we are generally in favour of entry
control because it does give us the ability to evaluate the application that is
coming in and we can do a pretest of those issues. Having said that, all our
normal supervision work is like an exit control because once we have somebody
in we then continually supervise them and, over the years, we learn more about
what they are doing.[14]
From our perspective we see the introduction of MySuper as a
major change. There are different specific responsibilities for trustees,
different legislative obligations and we would have a definite preference for
an entry control. Having said that, when you tease it through the AIST
representatives, who have just finished, there is a lot of work involved in
that process, and we are conscious of that. We will work within the timeframe
to do as thorough job as we can on entry so that there will still be some
degree of post-entry review and potential exiting of trustees who we do not
believe are doing the right thing. We worked for a long time to get the trustee
licensing back in 2005-06 because we saw that as a significant means of
increasing the standard of the trustee directors and trustees within the
industry. We see this one the same way. [15]
Coalition members of the Committee
agree with those submitters who have stated that this process would be
cumbersome, time consuming, unnecessary and costly.
We endorse the FSC recommendation of
converting this cumbersome process with an annual reporting process that would
still allow APRA to disallow a non-complying fund. We believe that such a
process would address the public policy concern that the existence and number
of employer plans are unclear to APRA. It would require reporting without
undermining the efficiency, competitiveness and commerciality of tender
processes.
Further, the Coalition does not
believe this is the proper role for the prudential regulator, which should be
focused on risk and governance, not on commercial matters which affect neither
factor.
Recommendation 3:
That the requirement for MySuper
trustees to apply to APRA when issuing a tailored employer plan be replaced
with an annual reporting obligation.
The large employer threshold
There was significant concern
expressed to the Committee about the benchmark above which large employers can
tailor funds for their employees. The provisions of the Bill allow for such
tailoring where an employer contributes to a fund on behalf of 500 or more
members.
The Corporate Super Specialist
Alliance (CSSA) argued that tailoring of MySuper funds should be allowed for
all employers:
The proposed legislation allows for plans of large employers
and their associates to be tailored if they contribute on behalf of 500 or more
members. We believe this is inconsistent with the current superannuation
environment which allows tailoring of superannuation plans at any level that is
commercially viable, and we question why 500 members was chosen as a benchmark
for a large employer. A 50 member fund of executives could conceivably have
greater assets than a 500 member fund made up of blue collar workers, with a
lot less administration required, so why should members of that fund be
prohibited from negotiating a distinct product to suit the particular needs of
their workplace? Different workplaces will have very different requirements.[16]
The Association of Financial Advisers
also proposed a limit of 50 employees:
Further to our point above about prescriptive detail, the AFA
does not support the requirement that tailored plans can only be offered for
employers with 500 employees. This seriously limits the number of eligible
employers and would mean that many employees missed out on the potential
benefits of a tailored plan. If the government feels the need to be
prescriptive in this area, a number of 50 employees would be more appropriate.[17]
The Australian Institute of
Superannuation Trustees (AIST) argued for:
...an arbitrary requirement, such as 500 members for whom an
SG contribution has been received from the employer in the past 12 months, and
who have not terminated their employment with the employer.[18]
The Financial Services Council (FSC)
proposed amending subsection 29TB(2):
(2) An employer is a large employer in relation to a
regulated superannuation fund:
(a) where the employer is the only standard
employer-sponsor in relation to the class of beneficial interest referred to in
subsection (1), the employer has at least 500 employees at the time a
beneficial interest in that class is first issued and at the end of each annual
reporting period and where there is more than one standard employer in relation
to the class of beneficial interest referred to in subsection (1), the number
of employees of that employer and each other standard employer is 500 employees
or can reasonably be expected to grow to 500 employees during the reporting
period; or
(b) where there is more than one standard
employer-sponsor in relation to the class of beneficial interest referred to in
subsection (1), the number of employees of that employer and each other
standard employer sponsor totals at least 500 employees at the time a
beneficial interest in that class is first issued and at the end of each annual
reporting period and where there is more than one standard employer in relation
to the class of beneficial interest referred to in subsection (1), the number
of employees of that employer and each other standard employer is 500 employees
or can reasonably be expected to grow to 500 employees during the reporting
period;
(c) A person is not counted as an employee for the
purposes of subsection (2) if the person’s salary or wages are not to be taken
into account for the purpose of making a calculation under section 19 of the
Superannuation (Guarantee) Administration Act 1992.[19]
Mercer told the committee:
Our main concerns about that area are the complexity of the
test in the way it is written into the bill. We think it should be replaced
with a much simpler test. Various submissions have suggested it should be based
on the number of employees of the employer, or it should be based on the number
of members in the employer's fund if we are talking about a corporate master
trust, for example. We could live with either of those definitions as long as it
is something that is simple and easily measurable by the employer if it was
number of employees of the fund if it was number of fund members.[20]
Mercer recommended amending the 29TB
threshold so that it is based on either the number of employees of the large
employer and its associates or the number of members in the employer's plan.[21]
The Association of Superannuation
Funds of Australia (ASFA) argued in its submission that:
If a numerical measure of 500 is to be employed we suggest
that the measure be aligned with the prescribed class in regulation 3.01 of the
Superannuation Industry (Supervision) Regulations 1994 (“SIS regs”), which is
the class of members, other than standard employer members, which non public
offer funds are allowed to have without having to become public offer. This
includes former employees, or relatives and dependants (generally spouses) of
employees and former employees, of the employer - and its associates.
Further, with respect to the requirement that “any” employee
may become a member - there may be instances where, owing to the industrial
relations circumstances of the employer, it may not be possible for this to be
the case.
Finally, it is unclear whether the trustee must make a
separate application with respect to each large employer MySuper offering or
can simply make one application with respect to being able to offer one or more
large employer MySuper offerings. If it is the former then it is unclear as to
why this should be the case, given that the only additional criteria are relatively
narrow and capable of being determined “objectively” as a question of fact.[22]
In evidence to the committee, APRA
indicated that it did not understand the implications of the 500 fund member
threshold in proposed subsection 29TB:
What about the issue that there are some provisions here that
appear to give you very little discretion? I am thinking particularly of the
500 employee test or, as drafted presently, the 500 members of the fund test.
It is the case, isn't it, that if the number of members drops below that then
you essentially have to press the button to say that this fund has to cease
operating?
Mr Chapman: We will obviously treat that with some
discretion. If it is down to 499 today—
Mr FLETCHER: I just want to understand that because, unless
I am misreading the bill, I am not quite sure on what basis you would have that
discretion.
Mr Chapman: I have been corrected by my expert, Dr Ellis. I
have unfortunately said the wrong thing. One of the ways we want to address
that is that when we get the trustees applying for those sorts of funds—which
is in the draft application we are working on at the moment—we want to come up
with a contingency plan for if employee numbers drop. We have said publicly
that we do not think the trustees should be coming to us with a 29T(b) request
for 500 employees. We think it needs to be more than that. The trustee has to
be reasonably satisfied—and again we have those words 'reasonably
satisfied'—that the 500 are going to be there. There is a little bit of a scale
argument as well—
Mr FLETCHER: Can I just make sure I understand that? What
you are saying to me, in practical terms, if I am understanding correctly, is
that there is no discretion for you as drafted if it falls below 500 members
and therefore the only means to mitigate against the risk of a fund having to
come to a screaming halt with all the attendant inconvenience for members,
employers and so on is that the employer and the trustees must make sure that
there is in fact substantially more than 500 members? Is that a fair
assessment?
Mr Chapman: Yes.
Mr FLETCHER: That tends to make a bit of a nonsense of the
500 member test to start with, doesn't it?
Mr Chapman: I am not going to comment on your conclusion
there. Whenever you have any numerical test of any sort, there is always going
to be an issue about what happens when you fall below it.
Mr FLETCHER: Can I put the question to you another way.
Would it give APRA additional administrative flexibility if the provision were
amended so it did not refer to a hard test of 500 members?
Mr Chapman: Clearly the answer to that is yes. It would give
us an additional measure of flexibility. I know I have harped on this quite a
bit this afternoon, but the test we would have would still be the same. Whether
we are triggering that test at 550 or 450, it does not really matter. It still
comes down to the fact that the onus has to be put back on the trustee to
satisfy us that either they are going to stay above whatever the limit or they
have a plan to do something once they fall below the limit. So even if there
were flexibility in the legislation that said, 'If they fall below 500, APRA
has discretion on whether to close the fund or not,' we would be unlikely to
keep the fund open as it went from 500 to 400 to 300 to 200 to 100. We would
still be putting the onus back on the trustee to have a contingency plan in
place as they get down towards 500, which is what we propose at the moment. At
the moment we are proposing with the legislation as it is now that any trustee
who comes to us with a MySuper product between 500 and, say, 1,000 (a) has to
make an assessment that they believe they are going to be over that and (b) has
a plan which obviously would ramp up in terms of intensity and detail as you
get closer to the bottom about what they will do when those numbers drop. The
strict answer to your question is that clearly having that would give us more
administrative flexibility, but the process we would go through would still be
very similar. It is just that it would be returned from a hard number to some
'reasonable' number in APRA's view, which might be 450 or whatever.[23]
The Coalition members accept the strong
submissions made by so many participants in the superannuation industry that
the threshold in its current form is complex, unworkable and may have a number
of unintended consequences.
We therefore recommend a simple and
effective test that the threshold be amended to define a large employer as any
employer that has 500 or more employees at the relevant time.
Recommendation 4:
That the large employer threshold
be amended to define a large employer as any employer that has 500 or more
employees at the relevant time.
The ‘scale test’
The Committee also received evidence about
strong concerns relating to the proposed scale test contained in the
Superannuation Legislation Amendment (Trustee Obligations and Prudential
Standards) Bill 2012.
The Financial Services Council expressed its
concerns at the hearing as follows:
Mr Bragg: We are comfortable with the idea that the trustee
should consider scale. You recall that, during the review, the chairman of the
review was very keen to canvass the issue of the Canadian Pension Fund coming
to Australia and trying to buy Transurban and I think he mused at the time that
it would be good if Australian pension funds or super funds could do the same
thing. That is fair enough. Our view is that a scale test should not be in law.
Not only is it a barrier to entry but the test, as suggested in the current
drafting, is very subjective, very open. We are not sure how one would be
required to perform the scale test. I am not sure what sort of data you would
be asked to use. Presumably, it is a comparative test. So I am not sure how you
test scale. Another issue about scale is that the ACCC has made it very clear
that, in certain parts of the wealth industry, mergers are not permitted. So
even if you find you do not have enough scale, I am not sure whether you would
be able to get anymore scale.
Senator CORMANN: Obviously, the way the scale test has
currently been drafted into the legislation there is obviously the implication
in there that biggest is best. Is the evidence in the marketplace that biggest
is necessarily best when it comes to fees or performance?
Mr Bragg: It can be.
Senator CORMANN: Is it always the case?
Mr Bragg: No. There are some very well-performing smaller
industry and retail funds. There are some very inexpensive, from a fee
perspective, large corporate retail and industry super funds. I think it is a
mixed bag.
Senator CORMANN: Scale should be a consideration, but should
it be a test that drives decision making towards effectively aiming for bigger
scale, no matter what?
Mr Bragg: Not in isolation to member value.[24]
The Industry Super Network agreed that such a
test would be problematic in practice and accepted that there was no automatic
correlation between scale and fund returns to members:
Senator CORMANN: There are a lot of smaller funds that argue
they are cheaper and better performing than most of the other larger funds. The
data seems to support that proposition. Looking at the Superannuation
Legislation Amendment (Trustee Obligations and Prudential Standards) Bill, how
would trustees make judgments when they have to apply the scale test the way it
is currently proposed in the legislation? It is going to be rather subjective
isn't it? Who is going to ultimately make a judgment as to whether they have
properly discharged their duty to apply the scale test?
Mr Watts: We agree that is problematic. There is not an automatic
correlation to the scale with providing a financial interest to members. But
there is a sufficient link between scale and returns to members for that to be
appropriately considered. It is a proper duty that a fund consider whether it
has sufficient scale to operate in the financial interests of its members. How
it does that is going to be a problematic exercise because, no doubt, a smaller
fund may be of sufficient scale to perform well.
Senator CORMANN: How can a trustee satisfy themselves that
they have discharged a duty? How are regulators ultimately going to make a
judgment on whether or not they have?
Mr Watts: Ultimately I think it is going to be on the returns
they are providing to their beneficiaries.
Senator CORMANN: Does it create a significant level of
uncertainty though in making judgments? You are nodding.
Mr Watts: Absolutely, there will be a level of uncertainty.
In our opening statement we raised it as an issue that would require some
guidance as to how trustees are going to meet that duty.[25]
The Corporate Super Association expressed its
concerns about the subjectivity of the proposed test and the potential for
ongoing disputation between APRA and various funds over the interpretation of
the test:
Senator CORMANN: Do you have any views about the scale test?
Mrs Goddard: Yes. It is very difficult to know how a trustee
will form a view and it is very difficult to determine whether APRA will agree
with their view. So there is subjectivity in the requirement on the trustee and
we submit that there will be a degree of opinion from APRA as to whether the
trustee's judgment is appropriate. So we think the scale test is going to be a
difficult one.[26]
The Association of Superannuation Funds of
Australia described the wording of the test as problematic, expressed concerns
that the test may produce ‘wrong results’ and strongly argued that the scale
test should be removed from the legislation:
Ms Vamos: We believe the current wording of the scale test is
problematic. On speaking to Treasury, we believe that guidance will be provided
by APRA. In terms of being able to provide for fund members, size of portfolio
and number of members are certainly two factors, but there are other factors as
well. In our view, fund trustees, as part of their best interest duties, have
to look each year at whether or not they are able to provide services in the
best interests of their members. So our initial view is very much that the—and
certainly part of the consultation process—whole scale test may produce the
wrong results.
Senator CORMANN: So what you are implying is that, as the
current scale test definition goes, biggest is necessarily best and that is
wrong. Is that what you are saying?
Ms Vamos: That there were many examples where big is not
necessarily better. Fund trustees and superannuation funds must be accountable
on their long-term performance. They must be accountable on what they provide
to members in terms of retirement outcomes. We want to ensure that this is the
focus of any trustee obligations and any regulation around the superannuation
industry.
Senator CORMANN: You said that the way the current scale test
is defined is problematic. How would it need to be changed or improved? Or do
you think we should do away with the scale test all together?
Ms Vamos: I think there are other ways to get the outcome
that the scale test is trying to achieve. I think it could be removed. The
discussion between the industry and the regulator in terms of how you measure
the long-term performance of a superannuation fund in relation to the
retirement outcomes they are providing their members is where the discussion
should be had. The measures should be part of that. It is part of the
contemplation of the governance requirements.
Senator CORMANN: Sure. We would agree with all of that. There
is no case, really, to introduce the scale test into the trustee obligations,
is there?
Ms Vamos: We think there is the case to introduce performance
testing, but we are uncertain as to whether the scale test will get the right
outcomes in the end.
Senator CORMANN: Beyond what is already in place now and
beyond what is proposed, how would you improve duties around performance
testing?
Ms Vamos: It is not so much how to improve duties. When you
are measuring the long-term performance of a superannuation fund there are a
number of measures that need to be looked at. A lot of those measures could
even be what a number of analysts look at in listed organisations as well. What
those factors should be and what those measures should be are currently being
determined. The minimum is what is the net return to members, sustainability of
a fund in the long-term, being able to continue to provide services, efficiency
of services, quality of communication, ability to provide choice, ability to
provide post-retirement, and whole-of-life investing. They are all factors that
need to be taken into account.
Senator CORMANN: Sure. Would your recommendation to us be that
it would be preferable not to proceed with the scale test as is proposed in the
legislation?
Ms Vamos: Our preference would be to see the scale test
removed, yes.[27]
Mercer also stated at the Committee hearings
that in its opinion the scale test was problematic and should be removed from
the legislation:
Dr Knox: ... There are two areas in the second bill that we
would want to address—and, again, some of them were raised this morning. We
think the scale tests are problematic and may not end up with the best outcomes.
They are very prescriptive and they do not necessarily deliver what may be in
the members' best interests.[28]
Senator CORMANN: Did I hear you say that the current scale
test is problematic?
Dr Knox: Problematic.
Senator CORMANN: Do you think the scale test should be
removed?
Dr Knox: Whilst I can understand where Jeremy Cooper was
coming from in wanting larger funds and so forth, I think with the current
direction of scale the scale test is not needed if the trustees have that
responsibility to act in the member's best interest.
Senator CORMANN: I think that that is a very good point. In a
general sense the trustees have to make judgements on a whole series of things,
so the question really is: why would the legislation seek to prescribe
something that is quite vague really but seems to have this implication that
bigger is best? Is that a fair suggestion?
Dr Knox: Yes, that is fair. There is evidence around the
world from studies that, certainly on the admin side, as funds get bigger,
generally admin fees come down. As you get more funds you get economies of
scale for administration. As funds get bigger you get slightly different
investment opportunities. I think the problem with the prescriptive scale test
as it is at the moment is that it cannot possibly consider every situation.
There will be some small funds operating in a niche market that do a very good
job. If you follow the logic that the scale tests suggest—as you have
suggested: bigger is best—then we would not have credit unions; we would only
have the big four banks. I am not sure that that logic holds. I think we do
need that tension.
It is somewhat interesting that in Australia we have some
very big funds—we also have the self-managed super fund sector, which is at the
other end—but I think there is an opportunity, as long as that fund is
operating well, is
well-governed and is delivering good outcomes to members,
where bigger is not always best and particular niche fund may well do well.
Senator CORMANN: To go back to my original question, then, it
would be better to leave these sorts of judgments to trustees on the basis of
having to act in the best interests of members, rather than to introduce a
scale test.
Dr Knox: Because the scale test is prescriptive and cannot
possibly cover in legislation—
Senator CORMANN: I am just trying to get you to say whether
you think it would be better if we remove the scale test.
Dr Knox: Let's get rid of the scale test.
Senator CORMANN: Thank you. That is what I was looking for.
Mr Partridge: In the end, the marketplace will weed out those
funds that are not going to survive because they do not have the scale
necessary in some form or other.[29]
The Australian Institute of Superannuation
Trustees also called for the removal of the scale test and made the point that
it did not believe there was any direct correlation between fund size and fund
performance:
Mr Haynes: It is not necessarily our preference, but we would
not shed any tears over the removal of the scale test. In an earlier iteration
of the legislation, there were two separate scale tests—one for investments and
one for number of members. Clearly, the number of members, to our mind, has no
relationship whatsoever to the ability of a fund to perform.
Coalition members of the Committee
find that the submissions made by the industry about the scale test are
compelling and do not consider that it is an appropriate test to apply to
default superannuation arrangements.
Although there can often be benefits
that accrue to consumers from investing in large pooled investments, a scale
test for super funds would have a number of negative consequences including the
following:
- It introduces a barrier to entry in the marketplace and therefore
lessens competition;
- It is a wide, subjective test with no guidance of how to
undertake it;
- How would scale measured in relation to net returns of members
and what would happen where a large fund has a poor return but a small
fund produces a good return? It assumes that big is best and that is not always
the case;
- No official data is to be provided to make the comparison; and
- In many cases, mergers are not possible due to taxation matters,
Australian Competition and Consumer Commission resolutions etc.
The Coalition understands the
aspiration that big funds are good for Australia and that there can be
significant benefits in achieving greater benefits from scale. However, we do
not agree with legislatively imposing a duty upon trustees to have regard to
the inherently vague and imprecise notion of ‘scale’. We don’t believe that the
scale test would be workable in the context of a properly functioning default
superannuation system.
Recommendation 5:
That the ‘scale test’ be removed
from the Superannuation Legislation Amendment (Trustee Obligations and
Prudential Standards) Bill 2012.
Intra Fund Advice
Intra fund advice is the provision of
financial advice by superannuation funds to their members.
Currently, the term ‘intra fund
advice’ and the advice provided by various superannuation funds ranges widely
from very general advice, product specific advice, advice on retirement options
or even more specific or individualised ‘holistic’ financial advice.
Today intra fund advice only exists
by an ASIC Class Order exemption.
The Committee received evidence from
a number of participants expressing strong concerns about how intra fund advice
would interact with the MySuper legislation, particularly given that it is only
briefly referred to in the explanatory memorandum of the Bill currently before
the Committee.
These concerns included a risk that
such intra fund advice would lack transparency, lead to some super fund members
cross-subsidising others through the fees they pay and the risk of secret
commissions.
The Financial Services Council was
concerned about the risk that the legislation would allow for a cross subsidy
from some members of a superannuation fund to other members who choose to
access such intra fund advice:
Mr Bragg: We would be uncomfortable if in the third tranche
of this legislation, which is going to define the parameters of intrafund
advice, which can be cross-subsidised amongst the membership of a fund, it
includes the capacity for a fund to issue complex personal financial advice and
then cross subsidise that amongst the membership. Our view would be that the
existing parameters, as we discussed with the Chairman, should be maintained
but not expanded.[30]
The Corporate Superannuation
Specialist Alliance expressed its concerns to the Committee:
We feel strongly that intrafund advice should be restricted
to general advice. It should not include personal advice. Personal advice
should not be cross-subsidised by members of funds and should be paid for
individually. It is not practically possible to provide advice on complex
matters such as transition to retirement without understanding the client's
financial position. It is therefore necessary to follow the correct advice
process of knowing your client. Allowing personal advice to be provided under
the guise of intrafund advice will result in a reduction of consumer protection.
This seems to completely contradict the desired outcomes of FoFA. We would
recommend that where intrafund advice is provided, an explicit fee is charged
rather than hiding the fee within the administration fee. This will make sure
fund members are aware of what they are paying for and are therefore entitled
to receive intrafund advice. If this fee is explicit and is negotiable it could
be used to remunerate advice providers for the provision of general advice and
education. Paragraph 4.12 of the MySuper explanatory memorandum further limits
educational opportunities, as it suggests education must be made available to
every member of a MySuper fund and cannot be, for example, workplace specific.
This suggests that employees of any number of different employers must all be
invited to each educational seminar regardless of their location in Australian
and regardless of the fact that they may be industry competitors. This will
make the provision of education in the workplace basically impossible. It will
only serve to reduce education and therefore financial literacy. We suggest
this is removed as it seems illogical.[31]
It added:
The only way that we would be rewarded for adding services
into the workplace would be through this intrafund fee, of which you are going
to have no control over its value or level. We are hitting a MySuper world that
sounds as though it is going to compete on cost. As soon as you start competing
on cost, it is very tempting to cut back on various fees and minimise the
advice-service component. That then means that we may not be renumerated
sufficiently to be able to deliver the services that we do today—and we are not
going to run them at a loss; we would be forced to withdraw the services. I
cannot see how that is going to benefit when we are the one group out there
that are being proactive rather than reactive in providing services to the
workplace.[32]
...
Frankly, we believe in transparency. We think that the
intrafund fee is effectively going back to the 1980s where fees were all
bundled together and it was a secret commission. We do not understand why that
is being proposed.[33]
The Association of Superannuation
Funds of Australia (ASFA) told the committee that intra fund advice should be
limited:
Senator CORMANN: What is your view on intrafund advice? Do
you think there should be any limitations placed on what intrafund advice can
be provided?
Ms Vamos: Our view is that intrafund advice should be
limited. It is at the very low end of the scale of personal advice. It is, if
you like, an extension of general advice. Our position is very much that it
should be principles based. We do not support a broad, nine-category approach
as currently is being supported. Our view is that, as it does come out of
administration fees, it should be a service that a member of a superannuation
fund would believe they would be entitled to because they have that money in
the fund. So if they have a question about their interest in the fund, the
account balance of their fund, and simple scenarios that can be answered
through the process of calculations and calculators, then we believe it should
be part of the intrafund offering.
Senator CORMANN: So you are in favour of the proposition
that the cost of providing intrafund advice is bundled into the overall
administration fee—that is, it is not transparent—and that it can be charged
across the whole membership, irrespective of whether individual members access
advice?
Ms Vamos: Our view is that all fees should be transparent.
The administration—
Senator CORMANN: So you are not in favour of bundling it
into the admin fee?
Ms Vamos: No, we are definitely in favour of it being part
of the administration fee. We would support the disclosure of, if you like,
where the administration fee pie is, in terms of funds. We have done a lot of
work in this area with Rice Warner. As to the operational costs and the
operational fees charged, only a small amount of that overall fee actually
applies to call centres and intrafund advice. We do support the transparency
where administration fees are applied, as well as where investment fees are
applied.
Senator CORMANN: When people put evidence to us which says
that intrafund advice, the way it is proposed, is completely opposite and
counter the spirit by FoFA, that it is distorted, conflicted, with hidden fees
and hidden payments, with no capacity to opt out, do you not agree with that
characterisation?
Ms Vamos: We do not agree. We believe that, when you look at
the definitions of 'personal advice' and 'general advice', the definition of
'personal advice' is so broad that it captures the type of simple scenario
advice that a member of a superannuation fund believes they are entitled to
because they are a member of that fund.
Senator CORMANN: But why should any member of a fund pay for
the personal advice of other members of the fund that they do not access
themselves?
Ms Vamos: The same argument can be applied in terms of
website access, general advice access, call centre access. The majority advice
provided by superannuation funds is general advice and factual information.
Indeed, as members—
Senator CORMANN: I am not talking about the general advice.
I am talking about the personal advice.
Ms Vamos: Again, when you look at the concept of intrafund
advice, and you look at general advice, we think the better view is that
infrafund advice is general advice that has been extended. Our view is that you
have to limit personal advice and frame it more in terms of holistic financial
planning. But intrafund advice is very much about interest in the fund. Really,
it is definitions of advice that have raised this issue.[34]
Mercer supported the notion that some
personal advice should be permitted in intra fund advice but highlighted that
it was a real challenge to draw the line at how much advice should be
permitted:
Senator CORMANN: What is your view about intra-fund advice?
Should there be limitations on it, or do you think that personal advice should
be freely provided under the guise of intra-fund advice?
Dr Knox: I think our view is that we should be able to go
beyond general advice, but some personal advice is very personal and takes a
lot of effort, and that should be paid for by the individual. The question is:
where on the continuum between general advice and personal advice do you draw
the line?
Senator CORMANN: But why would it be appropriate for the
collective membership to pay for any individual personal advice at all? The
objectives of FoFA are transparency around fees and removing conflicts. If you
look at what we have been told, here you have hidden fees, a lack of
transparency around fees and potential conflicts and you are charging the whole
membership irrespective of whether members take advantage of the advice. They
would seem to be in conflict with each other.
Dr Knox: There are currently, I think, four elements of
intra-fund advice that are permitted to be offered by super funds, with
examples such as insurance and investment choices and learning about different
types of contributions. Our concern is that, if you make every question, apart
from general knowledge, if you like, or general information, subject to a fee,
many members actually will not ask the question. They will ring up the call
centre and ask, 'Do you think I should make salary sacrifice or after-tax
contributions,' and the operator at the other end will say, 'That's going to
cost you $50 to $100,' to which the member will say, 'I won't pay.' We have a
level of intra-fund advice at the moment and we would not reduce it.[35]
Treasury appeared to be uncertain
about the way that intra-fund advice will be treated under the MySuper reforms.
The following exchange reflects both uncertainty and confusion:
Mr FLETCHER: Do you envisage that, under the intra-fund
advice provisions, it will be possible to offer personal advice as opposed to
general advice and have that considered to be intra-fund advice?
Ms Vroombout: Minister Shorten put out a press release on 8
December which outlined the broad parameters of the definition of intra-fund
advice. Yes, that contemplated that it would be both general and personal
advice.
Mr FLETCHER: What kind of personal advice? How detailed
might it be? Does Treasury have a view on that?
Ms Vroombout: We have not got to the detailed drafting yet.
The press release indicates that it would have to be advice that was consistent
with the sole-purpose test in the superannuant industry (supervision)
legislation. Then it notes that, notwithstanding that the advice met that test,
there would be certain sorts of advice that wouldbe excluded from the
definition of intra-fund advice. More complex sorts of advice would be excluded
from the definition. I do not have any more detail than was outlined in the
press release of 8 December.
Mr FLETCHER: Does that mean we can think of three classes of
advice: general, personal not so complex and personal more complex—or personal
below a complexity threshold and personal above a complexity threshold, where
personal below a complexity threshold will be permitted as intra-fund advice?
Ms Vroombout: That is correct.
Mr FLETCHER: Are you able to enlighten us as to what the
complexity threshold will be?
Ms Vroombout: All I can say is that the press release of 8
December outlined, I think it was, four things that would be regarded as
sufficiently complex not to form part of intra-fund advice.
Mr FLETCHER: On the issue of the allocation of the cost of
intra-fund advice, it is the case that, essentially, a member who chooses not
to take intra-fund advice is cross-subsidising those who do.
Ms Vroombout: The nature of intra-fund advice and, I guess,
the purpose of its definition is that it is the sort of advice that can be
collectively charged to the membership.[36]
Coalition members of the Committee
consider that if intra fund advice is to continue to be provided in the future
it should be provided under the same legislative and regulatory framework as
all other financial advice.
Despite intra fund advice clearly
being a type of financial advice there is no definition or scope of such advice
provided in either the MySuper legislation or the government’s Future of
Financial Advice (FOFA) legislation.
There is no limitation placed on what
may constitute intra fund advice and there are no provisions determining who
should pay for such advice in any of the proposed legislation.
Coalition members of the Committee
consider that the complete lack of consideration, definition or restriction of
intra fund advice within both the MySuper and the FOFA legislation is a serious
omission on the part of the government that exposes consumers to severe risks.
This is particularly the case because
intra fund advice would not be subject to the best interests duty being
introduced by the FOFA legislation and because many industry super funds
currently fund such intra fund advice by levying fees for this advice on all
fund members. This would not be permitted if FOFA applied, as FOFA essentially
bans the provision of advice in circumstances where the cost of providing the
advice is not met by a direct and transparent payment from the recipient of the
advice. The policy rationale is that in these circumstances the provider of
advice will be receiving its economic return from sources other than payment
from the recipient (for example, an undisclosed commission from a product
provider) and hence the provider of the advice will be motivated by factors
which are not known to the recipient. Unfortunately, that principle appears to
have been overlooked by the government when it comes to intra fund advice. It
is hard to see any clear policy rationale for applying the principle in one
context but ignoring it in another.
Given the reliance of many industry
super funds on the provision of intra fund advice for marketing advantage and
the attraction of new members, we are concerned that the government has avoided
defining and limiting the scope of intra fund advice because it has bowed to
the interests of the union-dominated industry super funds.
Coalition Committee members strongly
recommend that intra fund advice should be defined in both the MySuper and the
FOFA legislation, that there be express limitations included in the legislation
to ensure that such advice is general in nature only (similar to the provisions
relating to basic banking products) and that any financial advice accessed
within a superannuation fund beyond such general advice be expressly subject to
the best interests duty and be paid for by the person accessing this advice
without any cross-subsidy from other fund members.
Recommendation 6
That the MySuper legislation be
amended to:
1. Provide a comprehensive definition of the term ‘intra fund
advice’;
2. Ensure that ‘intra fund advice’ is general in nature only;
3. Ensure that any financial advice accessed within a superannuation
fund beyond such general advice be expressly subject to the best interests duty
contained in the proposed FOFA legislation;
4. Ensure that any financial advice accessed within a superannuation
fund beyond such general advice be paid for by the person accessing this advice
without any cross-subsidy from other fund members; and
5. Repeal the existing ASIC Class Order exemption as it would be
superfluous once intra-advice is properly defined in legislation.
| Senator Sue Boyce |
Senator Mathias Cormann |
| |
|
| Paul Fletcher MP |
Tony Smith MP |
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