Category: Superannuation

Grattan Institute rejects super industry spin

The Grattan Institute has rejected the ‘fear factor’ of the financial service industry that encourages Australians to stress about their retirement, via InvestorDaily.

A recently released report by the Grattan Institute, Money in Retirement: More than Enough, reveals that most Australians will be financially comfortable in retirement.

The report shows that retirees are less likely than working-age Australians to suffer financial stress and more likely to have extras like annual holidays.

Grattan Institute chief executive John Daley said that the institute’s models showed that Australians would actually be able to retire in comfort.

“The financial services industry ‘fear factory’ encourages Australians to worry unnecessarily about whether they’ll have enough money in retirement,” he said.

The Institute modelling, even allowing for inflation showed that workers today could expect a retirement income of 91 per cent of their pre-retirement income.

Grattan’s report called on the government to scrap the plan to increase compulsory contributions from 9.5 per cent to 12 per cent as most Australians would be comfortable in retirement.

The report instead called for a 40 per cent increase in the maximum rate of Commonwealth Rent Assistance and for a loosening of the Age Pension assets test which would boost retirement incomes for 70 per cent of future retirees.

The Association of Superannuation Funds of Australia denounced the report calling it an unprecedented attack on the retirement aspirations of ordinary Australians.

ASFA chief executive Dr Martin Fahy said the report was about two Australia’s, one with fully-funded, high-earning retirees and the rest with reliance on the state.

“The Grattan Institute wants to dismantle our world class retirement funding system and replace it with a model that has two thirds of the population relying on the Age Pension,” said Dr Fahy.

Dr Fahy also slammed the reports recommendation that the retirement age be raised to 70 and that the government reviewing the adequacy of Australians’ retirement incomes.

The institute’s report did recommend the government review the adequacy of Australians’ retirement income and called for a new standard.

“The Productivity Commission should establish a new standard for retirement income adequacy and assess how well Australians of different ages and incomes will meet that standard. References to the ASFA comfortable retirement standard should be removed,” the report read.

“The ASFA Retirement Standard provides a detailed account of living expenses in retirement.

“The Grattan analysis in effect wants people in retirement not to have heating in winter, not to take vacations, to get rid of the car, and skimp on prescriptions and other out-of-pocket health care costs,” said Dr Fahy.

The report for its part has said that reform is needed by the government to be able to fund aged care and health in the future.

“Unless governments have the courage to make these reforms, future budgets will not be able to fund aged care and health at the same level as today, which is the real threat to adequate retirement incomes in future,” it said.

We need regulators to act in the public interest

From The Conversation.

“Did you think to yourself that taking money to which there was no entitlement raised a question of the criminal law?” Commissioner Kenneth Hayne asked Nicole Smith, who resigned as chair of NAB’s superannuation trustee, NULIS, a little more than a month before she fronted the banking royal commission.

“I didn’t,” Smith replied.

Smith’s evidence related to NAB skimming A$87 million from superannuation accounts by charging 220,000 members “service fees” for which no service was provided. As head of the board of the superannuation trustee, it was Smith’s job to act solely in the best interests of the members. Instead she acted in the best interests of NAB.

Her admissions and the evidence from the royal commission that more than $A1 billion has been taken from superannuation accounts for no service show we need better supervision of the trustees who oversee more than A$2.7 trillion in superannuation assets.

As senior counsel assisting the commission Michael Hodge put it:

Trustees are surrounded by temptation, to preference the interests of their sponsoring organisations, to act in the interests of other parts of their corporate group, to choose profit over the interests of members, and to establish structures that consign to others the responsibility for the fund and thereby relieve the trustee of visibility of anything that might be troubling.

The entrenched practice of retail super funds using superannuation trust funds as profit-making enterprises undermines the integrity of the whole superannuation sector. Focused regulatory action and oversight are imperative to protect it.

Super duties

Super trustees are subject to a range of stringent duties.

There are “equitable” duties, which arise from trustees being fiduciaries – responsible for acting in the best interests of the owners of the assets they manage. As fiduciaries, super trustees must avoid conflicts of interest and account for any profit they make.

As trustees specifically, they must act in the best interests of the beneficiaries and exercise powers conferred to them as trustees (trust powers) with real and genuine consideration.

All trustees are legally obliged to act in the best interests of the people whose money they are entrusted with. Superannuation trustees have an even greater obligation, because of the social importance of superannuation. The High Court has ruled that public expectations mean superannuation trustees have “more intense” obligations than other private trusts.

This is underlined by the “statutory” duties of the Superannuation Industry (Supervision) Act 1993. It states directors of corporate superannuation trusts must perform their duties in the best interests of their beneficiaries, superannuation fund members.

The act also establishes supervision and oversight of super trustees by the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Commissioner of Taxation.

Irregular regulation

Yet clearly this oversight has been failing. The evidence from the royal commission is that many super trustees having been ignoring their duties. They have gone along with rubber-stamping unjustifiable fees purely because their parent institutions wanted the money.

In 2017 the prudential regulator was given the power to directly disqualify directors of superannuation trustee corporations. It already had the power to do so by applying to the Federal Court. Over the past decade, however, it has sought just one disqualification.

The regulator’s deputy chair, Helen Rowell, has argued this is due to APRA trying to protect the public interest, avoiding the risk of a run on a fund. But its inaction has arguably emboldened super trustees to ignore their duties because of the low risk of being penalised.

Previous reform proposals

The royal commission may result in criminal charges against banks and financial institutions. One outcome that must come is stronger oversight of super trustees.

Federal parliament already has before it amendments to the Superannuation Industry (Supervision) Act that include requiring individual super trustees to make annual written assessments about whether fees serve the interests of members. However, the bill has reportedly been shelved.

It is therefore critical the royal commission recommend strong action, including reforms proposed by previous inquiries into the financial services sector.

These include the Financial System Inquiry, which recommended in 2015 that super funds must have a majority of independent directors on their trustee boards. It also proposed new civil and criminal penalties for directors failing to act in the best interests of fund members.

Additional reforms might include:

  • establishing a specific conduct regulator for corporate superannuation trustees
  • making it mandatory for ASIC to prosecute superannuation trustees and related entities (such as banks) for duty breaches, with much higher penalties
  • stronger oversight over responsibilities that corporate trustees outsource to third parties
  • mandatory reporting of corporate fee structures, with regular review to determine if these are justified.

The trust remains the most appropriate legal mechanism to manage savings accumulated over a long time. Much stronger behavioural controls and civil penalties are necessary to ensure super trustees act honestly and in good faith for the benefit of the beneficiaries. That they are, in short, trustworthy.

Author: Samantha Hepburn Director of the Centre for Energy and Natural Resources Law, Deakin Law School, Deakin University

CFS ‘always’ invests members’ cash with CBA: Slaters

Slater and Gordon has taken aim at Australia’s biggest bank as it prepares to take on the retail super funds in a historic class action lawsuit, via InvestorDaily.

The national law firm this week announced the launch of its ‘Get Your Super Back’ campaign and said it will involve a series of class actions with Commonwealth Bank-owned Colonial First State and AMP super likely to be their first targets.

“The firm will allege the big bank-backed super funds failed to obtain for members competitive cash interest rates on cash option funds, and charged exorbitant fees, affecting millions of members who held part or all of their superannuation in bank owned funds,” they said in a statement.

Senior associate Nathan Rapoport from Slater and Gordon told Investor Daily that the firm chose AMP and Colonial to be first as they were good examples of wrongdoing by superannuation trustees.

“The evidence at the royal commission really highlighted how in our view the trustee companies are letting down members and not acting in accordance with quite elementary trust law in Australia,” he said.

Mr Rapoport said that their case against Colonial First State was to be focused on the way that trustees invested members cash.

“Colonial invests that cash with Commonwealth Bank always and it doesn’t shop around and get the best return for members and we believe that’s a very clear and simple case of the trustee not acting in the best interest of its member,” he said.

The case against the AMP is similar but is also focusing on the fees charged by the bank, said Mr Rapoport.

“The evidence we have looked at indicates that AMP funds are charging as much as half a percent per annum than other comparable funds and even though that may not sound like a lot, over a lifetime it really adds up to quite an enormous amount,” he said.

AMP refuted the claims and said any issues with their business had already been fixed.

“We’re committed to acting in the best interests of our superannuation members at all times and acting in accordance with our legal and regulatory obligations.”

AMP said that they were already working with customers to benefit any affected members and to improve member outcomes.

“We have reduced the administration fees on some of our cash investment options to address the issue of negative returns in the small number of funds impacted by this issue. We are also compensating affected customers for lost earnings,” they said.

Commonwealth Bank also released a statement confirming it was aware of the announcement but that they had “not been served with any legal proceedings”.

The case would not end at those two banks; Slater and Gordon are looking to see what other funds had not acted in the best interest of members, said Mr Rapoport.

“There seems to be a trend in the way they [retail funds] invest the cash with their parent banks so there is a good chance that we will be launching a case against many others as well,” he said.

If the class action is broadened, it has the potential to be the largest class action law suit ever undertaken in Australia.

“We estimate that there could be in the order around 5 million Australians that have at least one account with a retail super fund so if we do broaden the case and launch cases against most of the retail funds then that’s the kind of number we are looking at,” he said.

The allegations arise from evidence given to the royal commission into the banking industry and information released in the Productivity Commission report.

The Productivity Commission report released in May found that retail super funds only brought in members 4.9 per cent per annum in contrast to the 6.8 per cent per annum brought in by industry funds.

In fact, the Productivity Commission report found that retail funds frequently underperformed and charged more fees than industry funds.

Sportsbet is currently tipping Commonwealth Bank to pay back the largest compensation with odds of $1.65, followed by ANZ $4.00, Westpac $7.00 and NAB $8.00.

The Australian Prudential Regulation Authority and the FSC declined to comment and, at time of writing, Colonial First State had not responded to media requests.

Class action lawsuit launched against bank-owned funds

Slater & Gordon is launching the ‘Get Your Super Back’ campaign today and says it will involve a series of class actions with Colonial First State and AMP likely to be their first targets.

“The firm will allege the big bank-backed super funds failed to obtain for members competitive cash interest rates on cash option funds, and charged exorbitant fees, affecting millions of members who held part or all of their superannuation in bank owned funds,” they said.

The allegations arise from evidence given to the Royal Commission into the banking industry and information released in the Productivity Commission report.

The Productivity Commission report released in May found that retail super funds only brought in members 4.9 per cent per annum in contrast to the 6.8 per cent per annum brought in by industry funds.

The Productivity Commission report also found that retail funds frequently underperformed and charged more fees than industry funds

Super assets reach $2.7 trillion

Total superannuation assets reached $2.7 trillion at the end of the June 2018, up 7.9 per cent for the preceding 12 months, according to APR, via InvestorDaily.

APRA has released its quarterly superannuation performance statistics for the June 2018 quarter, revealing the Australian super sector has grown to $2,709.3 billion.

Total assets in the super sector increased by 7.9 per cent throughout the 12 months to 20 June 2018.

The $2.7 trillion super pool consisted of $631.6 billion in industry funds, $451.9 billion in public sector funds, $622.3 billion in retail funds, $56.1 billion in corporate superannuation, and $749.9 billion in SMSFs.

The annual industry-wide rate of return for entities with more than four members (i.e. non-SMSF money, equating to $1.76 trillion) was 7.6 per cent. The five-year average rate of return to June 2018 was 7.9 per cent (see below).

Source: APRA

Total assets increased by 3.6 per cent of $65.9 billion over the June 2018 quarter. At the end of the quarter, 51.3 per cent of the $1.7 trillion in non-SMSF money was invested in equities; 31.5 per cent was invested in cash and fixed income; and property and infrastructure accounted for 13.5 per cent.

Asset allocation – June 2018

Source: APRA

 

Time, money and ASIC ‘impeded’ APRA

The main issue with taking legal action against rogue super funds is that the process costs time and money, APRA has told the royal commission, via Investor Daily.

APRA’s Helen Rowell was the first witness to take the stand on Friday 17 August, where counsel assisting Michael Hodge was quick to try and gain insight into APRA’s role as a regulator of the $2.6 trillion superannuation sector.

Mr Hodge asked whether APRA would ever commence litigation against trustees, to which Ms Rowell explained that this is a “potential” action, but that other methods would be preferable, such as an enforceable undertaking.

One of the criticisms that has been made by the Productivity Commission in its draft report of APRA is that the “behind closed doors” nature of its activities is not effective for achieving what Mr Hodge called “general deterrence”.

Ms Rowell disagreed that APRA works behind closed doors but admitted the that no corporate trustee has been required to give an enforceable undertaking in relation to superannuation in the last 10 years.

In her statement, which was referenced by Mr Hodge during his questioning, the APRA deputy chair was asked a question by the Commission to explain any practical limitations or impediments on APRA seeking disqualification orders pursuant to section 126H of the SIS Act.

Ms Rowell’s statement included three impediments.

The first impediment is the resources and expense of gathering sufficient and admissible evidence in the form that would be required by a court. She noted that APRA does not have power to recoup costs of an investigation.

“The second point you make is the legal costs of the court process,” Mr Hodge read. “And then the third point is about the length of time involved with court processes.”

Mr Hodge asked Ms Rowell what the basis is for her judgment that court processes take a long time.

“Our previous experience in dealing with matters through relevant tribunals such as the AAT and observation of other court processes that occur in the wider financial sector,” she replied.

However, Mr Hodge highlighted that APRA hasn’t had any experience dealing with superannuation companies in the courts in the last 10 years.

APRA ‘waiting’ for ASIC

Later, Mr Hodge turned to the question of responsibility. The counsel assisting was eager to identify what action APRA was taking when breaches occur.

“Is there a limitation period on commencing a civil penalty proceeding for a breach of the sole purpose test?”

“I don’t know,” Ms Rowell replied.

Mr Hodge then asked whether APRA had received any suggestion from ASIC that ASIC will commence public enforcement action in relation to ‘fees for no service’.

“I don’t know the answer to that question,” Ms Rowell said.

Mr Hodge asked if it is satisfactory, from the perspective of APRA as a matter of general deterrence, that no proceeding has ever been commenced against a trustee on the basis of a contravention of the sole purpose test where the trustee is deducting money from members’ accounts and paying it to related party advisers who are not providing a service.

“I think it’s too early to form that conclusion because that work is ongoing and APRA has not made any final decisions about what action it may or may not take ultimately in relation to that matter,” Ms Rowell said, adding that APRA is allowing ASIC to complete its work and review.

“When you say APRA is waiting to see what ASIC will do,” Mr Hodge probed, “has there been any consideration at all within APRA in relation to this issue to date?”

Ms Rowell responded: “There has been discussions with individual entities and – on the matter and seeking to get a complete understanding of the issues as they pertain to the individual entities. There would be general discussions occurring at APRAs internal committees about, you know, what the issue was and what was being done to address it, and – and those sorts of things. As I said, I don’t believe that we have made any conclusions at this stage as to what further action, if any, we might wish to take.”

Research suggests bigger banks are worse for customers

From The Conversation.

Yet again this week, the Hayne Royal Commission has brought disturbing news of misconduct toward customers of our largest financial institutions. This time super accounts have been plundered for the benefit of shareholders.

Recent research from economists at the United States Federal Reserve suggests this problem is not unique to Australia. If true, this supports the argument that larger financial institutions should be broken up or face more regulatory scrutiny.

The researchers found that larger banking organisations are more likely than their smaller peers to experience “operational losses”. And by far the most significant category (accounting for a massive 79%) within operational losses was “Clients, Products and Business Practices”.

This category captures losses from “an unintentional or negligent failure to meet a professional obligation to specific clients, or from the nature or design of a product”. When a bank is caught out engaging in misconduct toward customers, it is required to make good to customers – the so-called process of remediation.

It’s a category that perfectly captures the issues under review in the royal commission. Operational losses also include things like fraud, damage to physical assets and system failures.

In recent weeks we have heard a lot about Australian banks having to compensate customers. The cost to the bank is, however, far greater than the dollar value received by customers.

The administrative costs of such programs are significant, and then there are legal costs and regulatory fines.

While no-one feels sorry for banks having to suffer the consequences of their misconduct, regulators monitor these losses due to the possibility that they may increase the chance of bank failure.

Another aspect of the Federal Reserve’s study is the size of the losses. One example is where the five largest mortgage servicers in the United States reached a US$25 billion settlement with the US government relating to improper mortgage loan servicing and foreclosure fraud.

In another example, a major US bank holding company paid out over US$13 billion for mis-selling risky mortgages prior to the 2008 crisis. Settlements of this size have simply not occurred in Australia.

Why larger banks?

One might assume that economies of scale – reduced costs per unit as output increases – also apply to risk management. The larger the organisation, the more likely it has invested in high-quality, robust risk-management systems and staff. If this holds, then a large bank should manage risk more efficiently than a smaller one.

The possibility of unexpected operational losses should then be reduced. Larger financial institutions might also attract greater regulatory scrutiny, which might help to improve risk-management practices and reduce losses.

But the reverse seems to be true, based on the analysis of American banks from 2001-2016.

For every 1% increase in size (as measured by total assets) there is a 1.2% increase in operational losses. In other words, banks experience diseconomies of scale. And this is particularly driven by the category of Clients, Products and Business Practices.

In this category losses accelerate even faster with the size of the bank.

This could be the result of increased complexity in large financial institutions, making risk management more difficult rather than less. As firms grow in size and complexity, it apparently becomes increasingly challenging for senior executives and directors to provide adequate oversight.

This would support the argument that some financial institutions are simply “too big to manage” as well as “too big to fail”. If bigger financial institutions produce worse outcomes for customers, there is an argument for breaking up larger institutions or intensifying regulatory scrutiny.

Is the same thing happening in Australia as in the United States? The case studies presented by the royal commission suggest it could be, but it’s difficult for researchers to know exactly.

Australian banks are not required to publicly disclose comprehensive data on operational losses. APRA may have access to such information, but any analysis the regulator may have done of it is not in the public domain.

Perhaps this issue is something Commissioner Hayne should explore.

Author: Elizabeth Sheedy Associate Professor – Financial Risk Management, Macquarie University

AMP super governance under scrutiny

AMP’s superannuation funds are permitted to underperform for five years before the investment committee is obliged to inform the relevant fund’s board, the royal commission has heard, via InvestorDaily.

The royal commission has been told that a consistently underperforming AMP fund could be underperforming for five years before the board of directors becomes notified.

The royal commission hearings into superannuation continued on Thursday, with AMP Superannuation Limited chairman Richard Allert in the witness box.

Mr Allert faced questioning by counsel assisting Michael Hodge about how AMP management and board addresses poorly performing investment funds.

The royal commission was told that ‘quarterly investment management reports’, which contain information about the performance of AMP’s funds in a given quarter, are put together by AMP’s Group Investment Committee.

However, the board of AMP Superannuation does not receive this report. Instead, it goes to AMP trustee services.

Mr Hodge confirmed with Mr Allert that the report would only be raised with the board if trustee services found an issue with the report, or if there was an “exception”.

“Unless an exception was triggered, then you wouldn’t expect this report to be provided to the board?” Mr Hodge asked.

“Correct,” Mr Allert said.

The royal commission heard that such an ‘exception’ would have three criteria: the first was the ‘identification’ criteria, which meant pinpointing “significant under-performance against peers/benchmarks over rolling 36 month period”.

The second criteria was a period of ‘further investigation’, and the third and final criteria was an exceptions report that was issued “if an investigation remains under investigation … for a period of eight or more quarters”.

“So it would seem as if it would be necessary for an investment to underperform for five years before it would be reported to the board,” Mr Hodge put to Mr Allert.

“No, I couldn’t accept that,” he responded.

After a protest from AMP legal counsel Robert Hollo, who called the question “a little unfair”, Royal Commissioner Kenneth Hayne AC QC interceded and Mr Hodge rearticulated his question.

“Is it possible for an exceptions report to come to the board about investment performance any earlier than where the underperformance has occurred over a five-year period?”

Mr Allert said it was possible. “If there was something that was really bothering the Group Investment Committee and relaying it to the Trustee Services or was bothering our trustee services representative on the GIC, they would alert the board to that fact.”

But this would occur outside of the exceptions framework, the royal commission was told.

One instance where Mr Allert could recall AMP trustee services raising an issue with the board this year was “in relation to products that had a cash element”.

Challenger and HUB24 join forces for annuities on platform

HUB24 and Challenger Limited have announced they are working together to provide Challenger annuities to advisers and clients on the market-leading HUB24 platform.

Challenger annuities will be available to advisers and their clients on HUB24 via the innovative technology of ConnectHUB – a collaboration between HUB24 and their subsidiary Agility Applications.

ConnectHUB allows product solutions to be rapidly and seamlessly integrated and provides advisers and their clients with a complete view of their portfolio. Advisers will be able to purchase annuities for their clients as they would any other investment on HUB24.

The teams at Challenger and HUB24 are now working together to build the solution.

Andrew Alcock, Managing Director of HUB24, said: “We are committed to continually enhancing our platform and providing choice for our advisers and their clients.

“We’re delighted to be working with the team at Challenger who are well-known for providing market-leading retirement solutions to deliver their products to our rapidly growing client base.”

Challenger Chief Executive Officer Brian Benari said: “HUB24 is one of the fastest growing platforms in the market and is recognised for its innovation and customer focused approach.

“This relationship further demonstrates superannuation industry leaders moving to meet the needs of retirees as lifetime income stream products become a mainstream option in retirement.”

Challenger is an investment management company that is focused on providing customers with financial security for retirement. It is Australia’s largest provider of annuities.

The Australian Stock Exchange-listed HUB24 connects advisers and their clients through innovative solutions that create opportunities. The business is focussed on the delivery of the HUB24 platform and the growth of its wholly owned subsidiaries Paragem, a financial advice licensee, and Agility Applications which provides data, reporting and software services to Australian stockbroking and wealth management market. HUB24’s award-winning investment and superannuation platform offers broad product choice and an innovative experience for advisers and investors. Its flexible technology allows advisers and licensees to customise their platform solution to fit their individual business, so they can move faster and smarter. It serves a growing number of respected and high profile financial services companies.

Challenger Limited (Challenger) is an investment management firm that is focused on providing customers with financial security for retirement. Challenger operates two core investment businesses, a fiduciary Funds Management division and an APRA-regulated Life division. Challenger Life Company Limited (Challenger Life) is Australia’s largest provider of annuities.

MLC kept super members in the dark on fees

MLC and its trustee, NULIS, failed to tell superannuation members they could dial back their “plan service fees” to zero, the royal commission has heard, via InvestorDaily.

 

The royal commission’s public hearings into the superannuation sector began yesterday, with NAB executive Paul Carter standing in the witness box.

Counsel assisting Michael Hodge pursued a line of questioning about MLC MasterKey’s plan service fee (PSF), which the company announced it would be “turning off” on 27 July.

Mr Hodge established that once a member was transferred from MasterKey Business Super (MKBS) to MasterKey Personal Super (MKPS), they could call up their adviser to agree on a different fee.

“The member has the ability to negotiate that fee directly with their linked adviser in the personal plan,” Mr Carter said.

After establishing that the agreed-upon fee could be “zero”, Mr Hodge asked what happened if the adviser didn’t agree.

“The member is in control, and so the member if they deem that they would like the fee to be zero, the fee will be zero,” Mr Carter said.

However, Mr Hodge said there was an “issue” with the product disclosure statements (PDSs) produced by NAB/MLC — namely, that they failed to explain to members the fee could be reduced to zero.

“One of the issues that we identified was that the disclosure to members about their ability to dial that fee all the way to zero should have been clearer,” Mr Carter said.

“It had language along the lines of this fee can be negotiated between the member and the adviser.”

To which Mr Hodge responded: “You’ve used the word ‘negotiated’, but there’s no negotiation, is there? The member can just say, ‘I don’t want to pay this any more.’”

NULIS, the trustee for MLC/NAB, announced on 27 July that it would stop charging PSFs from September 2018.

“Do you know why it can’t stop charging those fees until September of this year?” Mr Hodge asked.

“No, I don’t,” Mr Carter replied.