The superannuation industry has sharply criticised the Government’s proposed changes to improve accountability and outcomes for members in the superannuation system.
The Government recently released draft legislation, which it says will “ensure a modern, vibrant superannuation system”, the Treasury Legislation Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017.
However the superannuation industry is critical of many aspects of the changes, including a new test which doesn’t give enough focus on returns and only apply to a fraction of funds, the new powers for APRA and requirements to host an annual meeting of members.
Under the proposed changes the current ‘scale test’ would be replaced with an ‘outcomes test’. The material released with the draft Bill says that the scale test was designed to ensure members weren’t in a small fund with high costs, but doesn’t compare performance. However superannuation industry bodies have criticised the outcomes test for not being focused enough on net returns.
“The Government’s proposed ‘outcomes’ test risks diluting the vital role of net investment returns in delivering optimal retirement outcomes for superannuation consumers,” said the Australian Institute of Superannuation Trustees (AIST).
“The interests of members must be put first. This means that what members actually receive (net returns) must be given priority. The outcomes assessment does not give sufficient weight to the net returns,” said AIST.
“We are concerned that the proposed annual MySuper outcomes assessment reduces the focus on pursuing long term net returns in MySuper products, and submit that this is at odds with the objective of MySuper.”
“What really matters to members is the amount of super they receive when they retire. Net returns must be the number one consideration for any outcomes assessment,” said AIST CEO Eva Scheerlinck.
Industry Super Australia, which says net returns “must be at the centre of any appropriateness assessment of superannuation products”, is highly critical that the outcomes test will only apply to MySuper products.
“The vast majority (83 percent) of bank-owned and other retail superannuation assets are held outside MySuper and will be excluded from the requirement,” says Industry Super Australia, in its submission.
“If there was a genuine interest in improving the outcomes for consumers, then the reform would be sector neutral and equally apply to choice products.”
AIST also calls for the new outcomes test to apply to both MySuper and Choice superannuation products.
“AIST continues to voice its concerns that the Choice sector is continually being ‘let off the hook’ in terms of both reporting and disclosure, with a resultant underperformance in optimising members’ retirement savings,” says the AIST submission.
“Choice investment options have more money invested in them than MySuper, yet on average they underperform and cost more,” said Ms Scheerlinck.
“In a compulsory super system, best practice and standards should be delivered for all super consumers.”
“Similarly, AIST argues that proposed enhancements to APRA’s direction powers and its penalty regime should apply to the Choice sector as well.”
New APRA powers
The industry bodies are also concerned by the new, broad, powers for APRA.
“We note that the scope of APRA’s directions powers would be greatly expanded and certain criteria such as ‘necessary in the interests of beneficiaries’ are very broad and we consider that they should be narrowed by appropriate qualification,” says the Association of Superannuation Funds of Australia (ASFA), in its submission.
Industry Super Australia says the new APRA powers are designed in such a way as to not be applicable to the bank-owned and “bank-owned and other vertically integrated retail super funds”.
“The reform package would increase the regulatory burden on industry and other not-for-profit super funds, yet allow bank-owned and other retail funds to resist scrutiny and reform.”
“The reform package is an example of both the Government’s inability to impose real reform on the big banks, and its determination to shoulder industry and other not-for-profit funds out of their way.”
“The draft legislation would substantially expand APRA’s powers. The breadth of the expansion, the sensitivity of the powers to discretion, and the fact that some of the powers are not prudential in nature mean that the powers could achieve both good outcomes as well as bad ones, with little public safeguards to ensure the former.”
Annual Members’ Meetings (AMMs)
The draft legislation would require super funds to hold Annual Member Meetings, like Annual General Meetings (AGM), to “discuss the key aspects of the fund and provide members with a forum to ask questions about all areas of the fund’s performance and operations”.
ASFA says it “strongly supports” super fund members being able to raise questions about the running of their fund, but “believes that the desired benefits could be obtained with significantly less disruption and at a lower cost using a different and more efficient method such as a web-based bulletin board”.
“ASFA considers that this proposal needs to be treated with some caution given any benefit is likely to involve considerable costs.”
ASFA notes that fund members can be spread across Australia, and it may be more cost effective to run the meeting via a webinar, or to hold multiple meetings.
“The fact that superannuation fund members have no voting rights means there are substantial differences between an AGM and the proposed annual members’ meeting. The proposed annual members’ meeting of RSEs [Registrable Superannuation Entities] does not contain any matters for the approval of members as a collective. As this is the main purpose of holding an AGM this calls into question the benefit of holding a meeting, especially when considered against the costs involved.”
AIST says: “We support the requirement for AMMs, however the Bill is potentially too prescriptive and this risks stifling innovation. We stress that funds should be given the freedom to choose the most appropriate engagement strategy with their members.”
“Providing a means for members to engage with the people managing their super is a good way to identify those issues which are of most interest to members,” Ms Scheerlinck said.
“However the requirements for AMMs must be flexible so meetings can be appropriately structured for different membership needs and with minimal cost burden.”