Category: Superannuation

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.

Royal Commission To Examine Superannuation

The Commission has announced that the fifth round of public hearings will be held in Melbourne at the Owen Dixon Commonwealth Law Courts Building at 305 William Street from Monday 6 August to Friday 17 August 2018.

Looks like it will be another interesting ride!  The evidence of the regulators will be interesting.

This round of public hearings will consider how RSE Licensees fulfil their duties to members of regulated superannuation funds and the extent to which structural or governance arrangements may affect the fulfilment of those duties. The hearings will also consider related issues such as selling practices in relation to superannuation, the relationship between trustees and financial advisers, the current legal regime and the effectiveness of regulators.

The Commission presently intends to proceed by reference to the categories of issues set out below. Entities are named in alphabetical order and not the order in which evidence of those entities will be heard.

  Topic Case Studies
1. Duties of RSE Licensees (including structural and governance arrangements, the relationship between trustees and financial advisers and selling practices)
  • AMP Super and NM Super (AMP)
  • Australian Super
  • Catholic Super (CSF)
  • Colonial First State (CBA)
  • Electricity Supply Industry Superannuation (Qld)
  • Host-Plus
  • IOOF
  • Mercer
  • NULIS (MLC/NAB)
  • Onepath and Oasis (ANZ)
  • Suncorp
  • Sunsuper
  • United Super (CBUS)
2. Superannuation funds and Aboriginal and Torres Strait Islander members
  • QSuper
3. Effectiveness of superannuation regulators
  • APRA
  • ASIC

In addition, Counsel Assisting will tender statements from RSE Licensees not named above during the hearings. Further categories of issues, or entities for categories, may be included and the list above will be updated accordingly before the hearings commence.

Nearly half of financial services employees facing ‘ongoing stress’ in their job

The Financial and Insurance Services Industry Profile Report, is an industry snapshot  taken from SuperFriend’s annual ‘Indicators of Thriving Workplace’ survey of 5000 workers. It examines the current state of workplace mental health in the Australian financial services industry and compares it to the national average across all industries.


The study revealed that nearly half of all financial services employees (47%) are experiencing ongoing stress in their job, which is 9% higher than the national average. Further, 44% of those working in the industry say they have left a job due to a poor mental health environment.

SuperFriend Chief Executive Officer, Margo Lydon said: “Not only is financial services a highly competitive industry, but the staff across the industry are often engaging with members and customers during some really tough moments in their lives, such as redundancy, illness, death or major life changes like retirement. All of these moments require staff to be empathetic, supportive as well as know the technical components of their job. This can create pressures and stress if staff are not trained or well supported

“However, a number of organisations have made great improvements to their culture and workplace through a range of programs, by investing in mental health awareness and prevention initiatives including mental health training. It is clearly work in progress for the industry,” continued Ms Lydon.

Improving productivity and positivity in the workplace

Half of those surveyed believe that their employer is making enough time to take action, and a third (31%) describe their employer as the best, or one of the best, in creating a mentally healthy workplace.

According to the study, over 66% of employees in the industry believe that investment in workplace mental health and wellbeing would improve productivity, and 63% believe that it would reduce absenteeism (both of which are 5% above national average).

An additional 62% of respondents believe that investment in workplace mental health and wellbeing would improve staff retention (6% above national result).

“Employers stand to benefit from improving the mental health of their workplace, with bottom line benefits including greater productivity, talent retention and long-term cost savings.

“Particularly with financial services businesses, there is a need for greater focus on preventative measures such as, mental health policies, training for managers and staff, flexible work arrangements and recognition programs which can help to prevent issues from developing in the first place,” Ms Lydon added.

Workplaces that prioritise mental health see positive outcomes across their business

In industries across Australia, thriving and positive workers are more committed to their organisation’s goals, build better relationships with their peers and produce higher levels of output as dedicated employees, according to Ms Lydon.

“Those businesses already implementing best practice for their employees were found to actively encourage employees to identify ways to improve the workplace. More importantly, these business leaders are setting good examples and creating a culture that enables workers to be happy, healthy and productive. They are leaders who are really listening to the needs of their staff,” concluded Ms Lydon.

The Indicators of a Thriving Workplace report found the most successful workplaces have a positive culture. This can be achieved through ensuring managers are committed to promoting mental health and wellbeing of staff, supporting staff effectively through change, building a culture that encourages open discussion about the issues that affect mental health and wellbeing and making sure managers lead by example through setting a good example for a healthy, happy and productive workplace.

SuperFriend partners with all profit to member superannuation funds and life insurers to support improved mental wellbeing practices for their staff and members, through the organisations they work with every day. Its’ work focuses on creating mentally healthy workplaces where every worker, every day can contribute and thrive at work. Since 2009, SuperFriend has been providing skills-based training, using best practice evidence to build the confidence and capability of staff working in financial services industry in their interactions with members.

ASIC accepts court enforceable undertakings from CBA and ANZ over superannuation product distribution

ASIC has accepted court enforceable undertakings from the Commonwealth Bank of Australia and Australia and New Zealand Banking Group under which the banks have agreed to change the way they distribute superannuation products to their customers.

ASIC investigated CBA’s distribution of its Essential Super product and ANZ’s distribution of its Smart Choice Super and Pension product (Smart Choice Super) through bank branches. ASIC found a common practice of offering those products to customers at the conclusion of a fact-finding process about customers’ overall banking arrangements.

CBA’s fact-finding process was called a ‘Financial Health Check’. CBA staff also sometimes helped customers roll over their other superannuation into the Essential Super account at the time of distribution.

ANZ’s fact-finding process was called an ‘A-Z Review’.

ASIC was concerned that the proximity between the fact-finding process and the discussion about Essential Super or Smart Choice Super was leading CBA staff and ANZ staff to provide personal advice to customers about their superannuation.  Branch staff for both CBA and ANZ were only authorised to provide general advice.

Stricter consumer protection laws apply to financial services licensees when their representatives give personal advice about complex financial products such as superannuation than when they provide general advice about those products. This includes the requirement, with personal advice, to give a customer a Statement of Advice and to act in the customer’s best interests. People who give personal advice about complex products are also required to meet higher training standards.

ASIC was concerned that customers may have thought, due to the proximity of the fact-finding process to the offer of Essential Super or Smart Choice Super, that the CBA branch staff or the ANZ branch staff were considering risks specific to the customer when this was not the case.

These court enforceable undertakings prevent CBA from distributing Essential Super in conjunction with a Financial Health Check and ANZ from distributing Smart Choice Super in conjunction with an A-Z Review. They also require CBA and ANZ to each make a $1.25 million community benefit payment. If there is a breach of the undertaking ASIC can, under the ASIC Act, apply for orders from the court to enforce compliance.

CBA chose to suspend the distribution of Essential Super in CBA branches in October 2017.

‘ASIC will continue to proactively monitor how complex financial products such as superannuation are sold,’ ASIC Deputy Chair Peter Kell said.

ASIC’s actions underline the importance for financial services licensees to ensure that customers understand the nature of advice they are receiving about their superannuation.

View the enforceable undertaking

Background

ASIC’s investigation arose following a surveillance conducted in relation to CBA’s distribution of its retail superannuation product, Essential Super and ANZ’s distribution of its retail superannuation product, Smart Choice Super.

These actions are part of ASIC’s Wealth Management Project. The Wealth Management Project was established in October 2014 to lift the standards of major financial advice providers. The Wealth Management Project focuses on the conduct of the largest financial advice firms (NAB, Westpac, CBA, ANZ, Macquarie and AMP).

Super funds struggling with shift to digital

Superannuation funds have made some strides in transitioning to digital platforms and online communication, but the process has been challenging for them, according to Investment Trends; via InvestorDaily.

Researcher Investment Trends’ latest Super Fund Member Engagement report, compiled from surveys of the member services and activities of Australia’s largest 44 super funds, has found that super funds are “still learning to manage” their move to the online space.

“Many super funds are making inroads in the development of their digital member service platform, but the move from internal processing systems to real-time member facing applications has been challenging,” said a statement from Investment Trends.

Investment Trends technology analyst Ian Webster said the report found several super funds encountered various online stumbling blocks.

“This year, we observe many funds struggling with the reliability, consistency and quality issues in the real-time digital-based channels used to support and interact with their members,” he said.

“However, super funds are gradually mastering the challenge of managing these channels more effectively, building upon basic content publishing towards digital channels that provide easy access to services and promote two-way engagement with members.”

Among the top 10 super funds ranked according to overall member engagement score, nine were industry funds, with ANZ Smart Choice representing the only retail fund at tenth place.

AustralianSuper took out first place, followed by Sunsuper, HESTA, QSuper, HOSTPLUS, Rest Super, Cbus Super, Vic Super and NGS Super.

Mr Webster pointed to HESTA, Sunsuper and AustralianSuper which had all made developments to their website and were “shining examples of industry funds adopting a ‘member first’ approach”.

“The last 12 months alone saw a host of interesting developments by super funds, including an increase in the number of fund mobile apps, increased social media activity, and direct engagement through online chat and bot-based applications,” he said.

APRA warns funds about cash options

The prudential regulator has issued a warning to super funds about offering cash options with underlying investments that are not ‘cash-like’ in nature; via InvestorDaily.

In a letter to registrable superannuation entity licensees, APRA deputy chairman Helen Rowell said the prudential regulator had conducted a review that revealed instances where “‘cash’ investment options appear to include exposure to underlying investments that would not generally be considered cash or cash-like in nature”.

According to APRA’s review, it had found that some underlying investments of some cash options included asset-backed and mortgage-backed securities, commercial bonds and hybrid debt instruments, credit-default swaps, loans and other credit instruments.

“These assets do not typically exhibit the characteristics necessary to be considered as cash or cash equivalent,” Ms Rowell said in the letter.

“There were also exposures noted to cash enhanced vehicles without sufficient policy guidance as to the permitted holdings of these vehicles.”

Ms Rowell reminded super funds of their obligations under SPS 530 Investment Governance which states that an RSE licensee must be satisfied it has “sufficient understanding and knowledge of the investment selected, including any factors that could have material impact on achieving investment objectives of the investment option… and the investment is appropriate for the investment option”.

APRA has followed up with a number of super funds identified in the review and will continue to monitor super funds’ cash investment options, Ms Rowell said.

She added that the prudential regulator expected RSE licensees to “consider the content of the letter” and reassess their ‘cash’ investment options that had exposure to non-cash assets where necessary.

The letter comes a month after Ms Rowell appeared before the Economics Legislation Committee where she said “some cash options seem to be returning much higher than we would expect from what you might call a pure cash option and there are others that are returning much less”.

“Our initial work seems to suggest that part of it goes to the types of instruments, if you like, which are in those. They are not just term deposits; they may be enhanced cash, RMBSs or other types of securities that are cash-like but not cash.

“And in other cases it does come down to the level of expenses that are being charged for the management of those cash options. Those are all issues that we are pursuing with the relevant funds where [we] have identified them as being outliers in that regard.”

She also admitted that the superannuation regulatory framework had “room to strengthen” with regards to placing tougher requirements on the ways super funds assessed member outcomes and what they were delivering, as well as the reporting and disclosure that would allow APRA to address these issues more quickly.

How superannuation discriminates against middle income earners

From The Conversation

While all workers benefit from the 9% superannuation guarantee, those on middle incomes benefit significantly less than lower and upper incomes, according to my research.

I ran simulations on the financial assets accumulated over a working life, comparing this to what would have been earned on the same amount saved but invested outside the superannuation system and earning the same rate of return. I’ve added back the last few words here as this is an important assumption in my analysis

People on low, middle and high incomes are all better off under the superannuation guarantee levy. This is due largely to the concessional tax rate (a flat 15%) on income earned in the super fund.

But lower income earners see a lifetime gain 9% higher than for the medium earner. The high income earners receive a gain 8% greater than those on medium incomes.

Ghosts in the system

About 80% of Australian government spending on cash benefits to individuals and families is subject to means-testing. This includes the low income superannuation tax offset (LISTO), as well as unemployment benefits, pensions and family tax benefits.

LISTO provides a refund of the 15% tax paid on the super contributions. It is a way of compensating low earners for the greater sacrifice they make in forgoing current spending in favour of superannuation saving.

However, means-testing of the LISTO and other cash benefits is a double-edged sword. It may promote some level of fairness, but it can also discourage work through high effective marginal tax rates.

This is because benefits are phased out or cut completely once income reaches a certain threshold, costing the person a benefit they had been entitled to. This is essentially the same as paying a tax.

Means-testing of the LISTO is one way in which our compulsory superannuation levy (SGL) discriminates against middle income earners. Only employees with a taxable income up to A$37,000 are eligible for the refund and it’s capped at A$500 per year.

The super tax offset is lost once taxable income exceeds A$37,000, creating a jump in the effective marginal tax rate paid. This means, according to my simulations, the superannuation guarantee levy provides significantly greater gains to low income earners than middle earners over a working lifetime.

And there are a lot of low income earners. In 2016, roughly 2.9 million employees (28% of all employees) were eligible for the LISTO. This figure is probably an underestimate, as the ABS data used here refers to cash earnings while LISTO is based on taxable income.

The top 20%, or 2 million earners, also gain more than middle earners from their superannuation. This is due to the flat 15% tax on super fund earnings, which represents a significant drop from the marginal tax rate that the high income earner would pay for equivalent savings outside superannuation.

A person with taxable income over A$180,000 will pay 47 cents in tax for every additional dollar earned over A$180,000. But the tax payable on additional income from superannuation earnings is just 15%. This represents a 32% concession (47% minus 15%).

What we could do differently

There is no reason why the superannuation guarantee levy should discriminate against one income group over another. We already have a public pension scheme to support retirement of low income earners – there is no need for superannuation to do this.

New Zealand’s super system, KiwiSaver, offers a great example. KiwiSaver is an “opt out” model of superannuation. Employees are automatically enrolled when they are first employed but they can choose to withdraw their savings.

And unlike Australia’s superannuation guarantee, KiwiSaver allows members to suspend their contributions for between three months and five years after one year of membership. KiwiSaver funds can also be withdrawn to buy an owner-occupied house, provided certain requirements are met.

The flexibility afforded by KiwiSaver means that low income earners are not forced to save through superannuation. In turn this means there is less reason to have tax concessions like LISTO to compensate low earners.

The absence of means-testing benefits in Kiwisaver also avoids the high effective marginal tax rates that act as a disincentive to earn higher income through employment.

KiwiSaver contributions and returns are taxed the same as other savings. This eliminates the gains to high earners from the concessional rate of tax on super fund earnings enjoyed in Australia.

The combination of these KiwiSaver features is that neither the low or high earners are advantaged relative to middle earners.

This is one of several aspects where the New Zealand system of taxation and government benefits is superior to Australia’s in terms of disincentives and complexity, while still allowing New Zealand to have slightly less inequality than Australia.

Author: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

Superannuation is still mired in the same old issues

From The Conversation.

The Productivity Commission’s latest report on superannuation asks whether the current system is working for members – and answers firmly in the negative.

The report identifies four factors that can chip away at super fund members’ retirement benefits:

What is also clear from the evidence laid out in the report that the not-for-profit sector, including industry super funds, generally outperforms the retail sector. Generally they offer lower fees and higher returns, although there are some industry funds that rank among the lowest-performing.

Despite recent reforms such as the 2013 launch of MySuper, the superannuation system is still beset with the same problems of rising fees and patchy performance. And there is still no substitute for just hopping on the internet and proactively checking that your super is in the best possible hands.

The situation is made complex by the highly segmented nature of Australia’s superannuation system. Besides the public sector funds, the most significant sectors are the retail sector and the not-for-profit funds, including industry funds (see figure 1.5 here). These sectors compete for as large a slice as possible of the overall pool.

Self-managed superannuation funds are also a rapidly growing sector of the market, however the regulatory framework applied to these funds has some significant differences to the rest of the market.

Tracking your super

Most employees have the right to choose their superannuation fund (although around one million don’t), and if they don’t nominate a fund, employers will pay contributions into a default fund.

As the new report points out (see figure 1.2 here), up to 40% of superannuation members hold multiple super accounts. In some cases this may be a deliberate choice – someone with a self-managed super fund may might, for example, choose to have their employer contributions paid into a conventional fund. But often multiple funds are a consequence of employees being enrolled into a new default fund instead of paying contributions into an existing fund.

A range of tools is now available to help people consolidate their super, so as not to lose any of their savings. In the 2018 federal budget the government announced that it would reduce the paperwork involved in this process by allowing the Australian Taxation Office to consolidate inactive super accounts with balances less than A$6,000.

MySuper

The primary aim of MySuper, introduced in 2013, was to provide a simple default product that meets the needs of members who are not engaged with their superannuation. They have no entry fees, offer simpler insurance and services, and lower administration fees that are charged on a cost-recovery basis.

But although the effects of MySuper are generally positive, the 2013 reforms may also have contributed to the erosion of funds identified by the new review.

This report confirms (see chapter 3, p.127 here) that super fund fees in Australia are among the highest in the OECD, and the upward pressure on fees continues. Just this month, the Commonwealth Bank announced that it would pass the costs of regulation onto some superannuation products.

One of the consequences of introducing the fee charging limitations for MySuper accounts was that the previous member protection standards that limited fees on low-balance accounts was repealed. In the 2018 federal budget the government announced that fees would be capped in respect of certain low balance accounts.

MySuper products must provide also life insurance on an opt-out basis. Insurance in superannuation has also been under scrutiny, with inappropriate or junk policies being included in superannuation. The government has announced proposals to change this to an opt-in system.

This report adds to the evidence that overall the current structure of not-for-profit funds is serving members well. Although it supports proposals to require the trustees of industry funds to increase the number of independent directors, the Productivity Commission highlights the need for a stronger focus on trustee skills and addressing conflicts of interest.

Take responsibility for your super

It is concerning that many of the problems identified by the new report are the same ones that arose in the 2014 Financial System Inquiry, the 2015 Cooper Review, and in the evidence to the Financial Services Royal Commission.

Most of these issues raised have been part of the discussion for the past decade. The fact that they are still on the table shows a level of inertia in the system, and a reluctance by the industry to address its problems.

So how can we, as individuals, protect our retirement nest egg? The key is to engage with the superannuation system, and not just as we approach retirement.

Compare your super fund’s fees and returns with those of the best performing funds, and then choose accordingly. Reduce your fees and insurance premiums by consolidating your accounts, and make sure that any insurance in the fund meets your needs.

The difference at retirement is worth it – up to A$407,000 for a 21-year-old by the time they finish their career.

 

Author: Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin University

Super Is A Lottery – Productivity Commission

The Productivity Commission has released their draft report on the $2.6 trillion superannuation system.  And they have done it again! A powerful ~500 pages of insight which cuts to the heart of the system. They raise some very imp0ortant points which shows the system is a lottery. They call for substantial reform. Five million member accounts are being shortchanged.

We see some similar patterns of behaviour  to those revealed in the current Royal Commission.  Not working for the best outcomes of members. Poor governance. Excessive fees. Poor disclosure and hidden charges and commissions. No wonder more households have chosen self managed super alternatives! They also question the current regulatory framework.

Performance varies thanks to fees

Embedded fees and multiple funds erode returns significantly, especially from “retail” funds. Australians pay over $30 billion a year in fees on their super (excluding insurance premiums).

Fees can have a substantial impact on members — for example, an increase in fees of just 0.5 per cent can cost a typical full-time worker about 12 per cent of their balance (or $100 000) by the time they reach retirement.

Fees charged by retail funds remain relatively high, at least for choice products. Roughly 14 per cent of member accounts appear to be paying annual fees in excess of 1.5 per cent of their balances. Fees can explain a
significant amount of the variation in net returns across super funds. Funds that charge higher fees tend to deliver lower returns, once both investment and administration fees have been netted off. Moreover, at least 2 per cent of accounts are still subject to trailing adviser commissions — despite such commissions being banned for new accounts by the Future of Financial Advice laws.

The Government says this highlights that some superfund operators have their snout firmly in the trough! Many of these reside within the big banks!

There is no shortage of regulation in the super system. Regulation is essential for a complex system holding large amounts of money and characterised by many disengaged members and potential conflicts of interest. But at times the regulators appear too focused on funds and their interests rather than on what members need.

Regulators need to focus more on member outcomes

The key regulators — APRA and ASIC — are doing well in their core duties of prudential regulation (APRA) and financial product and advice regulation (ASIC). There have been improvements over many years, and these will continue with recently proposed reforms to boost each regulator’s toolkit. Legislating an ‘outcomes test’ for MySuper products will give APRA greater scope to lift standards and remove authorisation from funds that are failing to act in the best interests of members (especially on mergers). And ASIC’s new product intervention powers will strengthen its ability to guard against upselling.

However, there is some confusion around the two regulators’ respective roles, given both have long held powers to police bad behaviour by trustee boards. For example, ASIC has traditionally been responsible for regulating conflicts of interest, but APRA has increasingly encroached on this role through its prudential standard setting. While much of APRA’s work is pre-emptive and out of public view, ASIC has traditionally been reactive (responding to misconduct only after the fact) and public. It has become increasingly unclear which regulator has primary responsibility for trustee conduct — with the risk of misconduct falling between the cracks and a lack of clear regulator accountability.

Strategic conduct regulation appears at times to be missing in action. Ideally, this would involve a regulator proactively identifying actual or potential instances of material member harm, investigating the underlying conduct and taking enforcement action in a way that provides a valuable public deterrent to future poor conduct. To date, there has been a deficit of public exposure of poor conduct (and associated penalties) to demonstrably discourage similar behaviour by others — now and in the future.

There are yawning gaps in data

A further area of weakness is how data on the system are collected. The regulators’ data collections are largely focused on funds and products, with a deficiency of member-based data. And there are major gaps and inconsistencies in the datasets held by regulators — such as the returns and fees experienced by members of individual choice products, funds’ outsourcing arrangements and details of the insurance members hold through super. Our funds survey was designed to plug some of these gaps, but — as noted above — many responses fell well short of ‘best endeavours’, which of itself proved revealing .

Regulators have done much to improve the breadth and depth of their data holdings in recent years, but this has been off a low base. Major differences in definitions persist across regulators, and poor quality disclosure by funds appears to go unpunished. Progress has been slow in some areas because of industry opposition (largely on the basis of short-term compliance costs) and the lack of a strong member voice to give impetus to change.

The result is poor transparency, which leaves members in the dark as to what they are really paying for and makes it harder for engaged members to compare products and identify the best performing funds. This suppresses competitive pressure on the demand side, and gives rise to the perverse risk of worse outcomes for members who do get engaged. The lack of transparency also makes it hard for regulators to effectively monitor the system and to hold funds to account for the outcomes they

The draft report makes the following key points:

  • Australia’s super system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees. Currently, structural flaws — unintended multiple accounts and entrenched underperformers — harm a significant number of members, and regressively so. Fixing these twin problems could benefit members to the tune of $3.9 billion each year. Even a 55 year old today could gain $61 000 by retirement, and lift the balance for a new job entrant today by $407 000 when they retire in 2064.
  • Our unique assessment of the super system reveals mixed performance. While some funds consistently achieve high net returns, a significant number of products (including some defaults) underperform markedly, even after adjusting for differences in investment strategy. Most (but not all) underperforming products are in the retail segment. Fees remain a significant drain on net returns. Reported fees have trended down on average, driven mainly by administration costs in retail funds falling from a high base. A third of accounts (about 10 million) are unintended multiple accounts. These erode members’ balances by $2.6 billion a year in unnecessary fees and insurance.The system offers products and services that meet most members’ needs, but members lack access to quality, comparable information to help them find the best products.  Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50 000 — by duplicate or unsuitable (even ‘zombie’) policies.
  • Inadequate competition, governance and regulation have led to these outcomes. Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including the proliferation of over 40 000 products). The default segment outperforms the system on average, but the way members are allocated to default products leaves some exposed to the costly risk of being defaulted into an underperforming fund (eroding over 36 per cent of their super balance by retirement). Regulations (and regulators) focus too much on funds rather than members. Subpar data and disclosure inhibit accountability to members and regulators.
  • Policy initiatives have chipped away at some of the problems, but more changes are needed.
  • A new way of allocating default members to products should make default the exemplar.Members should only ever be allocated to a default product once, upon entering the workforce. They should also be empowered to choose their own super product by being provided a ‘best in show’ shortlist, set by a competitive and independent process.An elevated threshold for MySuper authorisation (including an enhanced outcomes test) would look after existing default members, and give those who want to get engaged products they can easily and safely choose from (and compare to others in the market). This is superior to other default models — it sidesteps employers and puts decision making back with members in a way that supports them with safer, simpler choice.
  • These changes need to be implemented in parallel to other essential improvements. Stronger governance rules are needed, especially for board appointments and mergers.  Funds need to do more to provide insurance that is valuable to members. The industry’s code of practice is a small first step, but must be strengthened and made enforceable.  Regulators need to become member champions — confidently and effectively policing trustee conduct, and collecting and using more comprehensive and member-relevant data.

Written submissions can be made by Friday 13 July 2018.