Modernising the super system: Recommendations from the PC report on superannuation

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The 700+ pages in the Productivity Commission’s report on superannuation hold a treasure trove of insights for policy makers, regulators and super funds. We can only hope everyone takes note and makes improvements that flow through for all Australians.

It is worth us all taking note of some of the recommendations that have been concluded from the Productivity Commission’s research. Some of the recommendations will likely never see the light of day, perhaps for political or practical reasons, and those that do might be 5 or 10 or more years away.

In the meantime, Australians may still be in the wrong funds, getting charged fees that are too high, and getting returns that are too low. They may also have too many accounts or have insurance policies that are not appropriate.

Note that this article includes the full list of recommendations from the report. For an abbreviated list that is more appropriate for consumers, and includes suggested steps for you to take action, see SuperGuide article Super’s next shake up? Productivity Commission gets tough.

You can also see a list of key problems and issues raising in the PC report.

1: Default once: only default members without an account

Default superannuation accounts should only be created for members who are new to the workforce or do not already have a superannuation account (and who do not nominate a fund of their own).

To facilitate this, the Australian Government and the ATO should continue work towards establishing a centralised online service for members, employers and the Government that builds on the existing functionality of myGov and Single Touch Payroll. The service should:

• allow members to register online their choice to open, close or consolidate accounts when they are submitting their Tax File Number on starting a new job
• facilitate the carryover of existing member accounts when members change jobs
• collect information about member choices (including on whether they are electing to open a MySuper account) for the Government.

There should be universal participation in this process by employees and employers. It should be fully in place by no later than the end of December 2021.

2: A ‘best in show’ shortlist

A single ‘best in show’ shortlist of up to 10 superannuation products should be presented to all members who are new to the workforce (or do not have a superannuation account), from which they can choose a product. Clear and comparable information on the key features of each shortlisted product should also be presented. The shortlist should also be easily accessible to all members at any time, including when starting a new job.

Members should not be prevented from choosing any other fund (including an SMSF). Terms in enterprise and workplace agreements that restrict member choice should be invalidated.

Any member who does not have an existing account and who fails to make a choice of fund within 60 days should be defaulted to one of the products on the shortlist, selected via sequential allocation.

The ATO should embed the shortlist and accompanying information into the centralised online service.

The first ‘best in show’ shortlist should be in place by no later than the end of June 2021.

3: Independent expert panel for ‘best in show’ selection

The Australian Government should establish an independent expert panel to run a competitive process to develop the ‘best in show’ shortlist. This panel should select from products submitted by funds that meet a clear set of criteria (established and published beforehand by the panel) and that are judged as likely to deliver the best outcomes for members over the long term, with high weight placed on investment strategy and performance. All APRA regulated superannuation funds should be free to participate in the ‘best in show’ selection process, regardless of ownership or sponsor (including government owned funds).

In setting the criteria and selecting products, the expert panel should be guided by three legislated guiding principles.

• Products should be chosen based on the fund’s likelihood of providing the best outcomes for members in the accumulation phase, taking account of risk.
• Products chosen should be particularly suitable for members who have typically defaulted but should also be highly suitable products for all members.
• The panel should always seek to ensure a competitive dynamic exists between funds, without compromising the integrity of the ‘best in show’ list.

The panel should have flexibility to select up to 10 products, with the exact number at the discretion of the panel based on the merit of each product and what is most tractable for members, while maintaining a strong competitive dynamic between funds for inclusion on the shortlist.

The panel should be comprised of independent experts who are appointed through a robust and independent selection process and held accountable to the Government through adequate reporting and oversight.

The process should be repeated, and the panel reconstituted, every four years. No more than half of expert panel members should carry over from one selection period to the next, and no individual member should remain on the panel for more than two terms.

4: Elevated MySuper and choice outcomes tests

The Australian Government should legislate to require all APRA regulated superannuation funds to undertake annual outcomes tests for their MySuper and choice offerings. These outcomes tests should include:

• a requirement for funds to obtain independent verification, to an audit level standard, of their outcomes test determination, at least every three years (starting with the first test)
• clear benchmarking requirements for all MySuper and choice investment options.

This benchmarking should include a requirement for all investment options to be compared with a listed investment benchmark portfolio tailored to their asset allocation (with exceptions only to be granted on an ‘if not, why not’ basis). APRA should issue clear and specific guidance on the construction of these benchmark portfolios (drawing on the methodology established by this inquiry). Options that fall short of this benchmark portfolio by more than 0.5 percentage points a year, on average, over a rolling eight year period should be subjected to a 12 month period of remediation or, if remediation is not possible, withdrawn from the market, with members transferred by funds to a better performing option. Any remediation or transfer activity should be subject to close oversight by APRA.

The Government should provide APRA with the power to stop a fund from launching new investment options or accepting new members into existing options subject to remediation until that remediation is complete.

APRA should also be given the power to revoke the fund’s MySuper authorisation or direct the fund to withdraw the choice option where remediation is not successful in the required timeframe or a voluntary withdrawal of the product from the market does not occur. In these circumstances, APRA should oversee a process of transferring the affected members to another suitable fund, including on a temporary sub fund basis where necessary, provided that APRA has determined that the transfer is, on balance, likely to be in the best long term interests of the members of both funds. Should no fund be willing to accept the members, APRA should appoint an independent acting trustee with a remit to wind up the fund.

The outcomes tests should form part of the new APRA standard to require fund wide assessments of member outcomes.

Funds should be required to complete their first (annual) elevated outcomes tests by no later than the end of December 2020 for MySuper products, and no later than the end of June 2021 for choice investment options.

5: Cleaning up the stock of unintended multiple accounts

The Australian Government should seek the passage of legislation to require the auto consolidation of superannuation accounts with balances under $6000 and 13 months or more of inactivity. Trustees should be required to transfer these accounts to the ATO for auto consolidation with a member’s matched active account.

The Government should make explicit that this process should capture accounts held in Eligible Rollover Funds. These funds should be wound up within three years, with APRA oversight.

The Australian Government should increase the balance threshold for auto consolidation over time, unless there are compelling reasons not to. The Government should also review the policy framework for lost and unclaimed superannuation accounts with the aim of streamlining the framework and ensuring it works in harmony with the auto consolidation mechanism.

6: A member friendly dashboard for all products

The Australian Government should require funds to publish simple, single page product dashboards for all superannuation investment options.

ASIC should:

• prioritise the implementation of these dashboards for choice investment options to achieve full compliance by the end of 2019
• only grant an exemption for an option or set of options from the dashboard requirement on the basis of evidence under the principle of ‘if not, why not’
• revise the dashboards to simplify the content and provide more easily comprehensible metrics (drawing on robust consumer testing) by the end of 2019
• immediately publish all available MySuper and choice dashboards on its MoneySmart website, with the information clearly and readily accessible from the area of myGov that allows for consolidation of accounts.

The Australian Government should also require all superannuation funds to provide their members with the corresponding dashboards when a member requests to switch from a MySuper product to a choice option within the fund.

7: Delivering dashboards to members

The Australian Government should require the ATO to provide a link to the relevant (single page) product dashboard(s) on a member’s existing account(s) via its centralised online service. Links to each single page product dashboards for the ‘best in show’ products should also be presented on the centralised online service.

8: A clearer definition of ‘advice’ and disclosure of approved product lists

The Australian Government should immediately amend the Corporations Act 2001 (Cth) to ensure that the term ‘advice’ can only be used in association with ‘personal advice’ — that is, advice that takes into consideration personal circumstances.

The Government should also immediately require Australian Financial Service Licensees to disclose to ASIC, in relation to superannuation products:

• the number of products on their approved product list (APL)
• the proportion of in house products on their APL
• the proportion of products recommended that are in house
• the proportion of products recommended that are off APL.

ASIC should publish this information annually.

ASIC should also conduct selected audits of the information received to facilitate assessment of the effectiveness of advisers in meeting clients’ best interests.

9: Evaluation of financial literacy programs

The Australian Government should comprehensively and systematically evaluate the programs it funds that aim to improve the financial literacy of Australians. Such a review would help to better target funding to those programs evaluated as effective and to defund those that are not. This could be done through a review of the National Financial Capability Strategy, which could also include State and Territory Governments evaluating such programs in their own jurisdictions.

10: Reassess the need for a retirement income covenant

The Australian Government should reassess the benefits, costs and detailed design of the Retirement Income Covenant — including the roles of information, guidance and financial advice — and only introduce the Covenant if design imperfections (including equity impacts) can be sufficiently remediated.

In conjunction with this reassessment, the Australian Government should also:

• consider cost effective options, including possibly extending the Financial Information Service to provide retirees with access to a one off, impartial information session to help them navigate complex retirement income decisions
• explore the business case for investing in digital technology that assists people’s financial decision making.

11: More useful information for Pre Retirees

The Australian Government should prompt all superannuation members when they reach 55 years of age to visit the:

• ‘Retirement and Superannuation’ section of ASIC’s MoneySmart website
• Department of Human Services’ Financial Information Service website.

12: Stronger safeguards on SMSF Advice

The Australian Government should:

• require specialist training for persons providing advice to set up an SMSF
• require persons providing advice to set up an SMSF to give prospective SMSF trustees a document outlining ASIC’s ‘red flags’ prior to establishment
• extend the proposed product design and distribution obligations to SMSF establishment.

13: Roll out the Consumer Data Right for superannuation

The Australian Government should automatically accredit superannuation funds to be eligible to receive (following member consent) information held by banks under the Open Banking Initiative. The Government should also roll out the new Consumer Data Right to superannuation in parallel with implementation of the elevated outcomes tests (recommendation 4).

14: Limit all fees to cost recovery and ban trailing commissions

The Australian Government should require that all fees charged by APRA regulated superannuation funds are levied on a cost recovery basis. Using fees to cross subsidise between members should be prohibited. These rules should be implemented and enforced by regulators in such a way that avoids gaming by funds and does not pose new barriers to member switching.

The Australian Government should ban trailing financial adviser commissions in superannuation, to take effect as soon as practicable.

15: Opt in insurance for young and inactive members

The Australian Government should seek the passage of legislation to make insurance through superannuation opt in for members under 25 years of age, and to require trustees to cease all insurance cover on accounts where no contributions have been made for the past 13 months (unless the member provides express permission that the cover is to be retained).

In addition to these proposed legislative changes, exemptions to the under 25 opt in restriction should only be granted if the trustee can demonstrate to APRA that opt out disability or income protection insurance would be in the best interests of a specific cohort of younger members.

16: Insurance balance erosion trade offs

APRA should immediately require the trustees of all APRA regulated superannuation funds to articulate and quantify the balance erosion trade off determination they have made for their members in relation to group insurance, and make it available on their website annually.

As part of this, trustees should clearly articulate in their annual report why the level of default insurance premiums and cover chosen are in members’ best interests. Trustees should also be required to provide on their websites a simple calculator that members can use to estimate how insurance premiums affect their balances at retirement.

17: A binding and enforceable insurance code of conduct

The Australian Government should immediately establish a joint regulator taskforce to advance the Insurance in Superannuation Voluntary Code of Practice and maximise the benefits of the code in improving member outcomes. The taskforce should:

• monitor and report on adoption and implementation of the code by funds
• direct and monitor enhancements to strengthen the code, particularly implementation of standard definitions and moving to a short form annual insurance statement for members
• direct the industry to take further steps for the code to meet ASIC’s definition of an enforceable code of conduct, and to give ASIC an enforcement role under the code.

Both ASIC and APRA should be members of the taskforce, with ASIC taking the lead. The taskforce should annually report findings on industry progress on the code.

The code owners should be given two years to strengthen the code and make it binding and enforceable on signatories. At this point, adoption of the code should become a condition of holding a Registrable Superannuation Entity Licence for all superannuation funds that offer insurance.

18: Independent inquiry into insurance in super

The Australian Government should commission an independent public inquiry into insurance in superannuation. This inquiry should evaluate the effectiveness of initiatives to date, examine the costs and benefits of retaining current insurance arrangements on an opt out (as opposed to an opt in) basis, and consider if more prescriptive regulation is required.

It should also look at the intersection of insurance in super with other schemes (such as workers’ compensation) and consider how best to provide assistance to people in the event of illness and injury, including whether opt out insurance through superannuation is the most efficient and equitable way to do so.

This insurance inquiry should be initiated within four years from the completion of this inquiry report.

19: Regulation of trustee board directors

APRA should amend its prudential standards to be prescriptive in:

• requiring trustees of all superannuation funds to have and use a process to effectively assess their board’s performance relative to its objectives and the performance of individual directors, and to disclose this process annually
• requiring all trustee boards to maintain a skills matrix and annually publish a consolidated summary of it, along with the collective skills of the trustee directors
• requiring trusts to have and disclose a process to seek external third party evaluation of the performance of the board (including its committees and individual trustee directors) and capability (against the skills matrix) at least every three years. The evaluation should consider whether the matrix sufficiently captures the skills that the board needs (and will need in the future) to meet its objectives, and highlight any capability gaps. APRA should be provided with the outcomes of such evaluations as soon as they have been completed
• requiring all trustee board directors to have a professional understanding of the superannuation system and investment decision making, gained either through industry experience or formal training
• defining what constitutes an ‘independent director’, based on the definition currently in the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017.
  The Australian Government should ensure that there is no legislative impediment to APRA defining what constitutes an ‘independent director’, or to superannuation funds appointing independent directors to trustee boards (with or without explicit approval from APRA). It should also give APRA powers to interpret and enforce the definition of an independent director.

20: Disclosure of merger activity

The Australian Government should require trustee boards of all APRA regulated superannuation funds to disclose to APRA when they enter a memorandum of understanding with another fund in relation to a merger attempt. For mergers that ultimately do not proceed, the board should be required to disclose to APRA (at the time) the reasons why the merger did not proceed, and the members’ best interests assessment that informed the decision. APRA should also be empowered to prevent mergers that are not in members’ best interests.

The Australian Government should also legislate new powers and penalties to explicitly enable ASIC to pursue action against trustee directors for misconduct in relation to mergers.

21: Capital gains tax relief for mergers

The Australian Government should legislate to make permanent the temporary loss relief and asset rollover provisions that provide relief from capital gains tax liabilities to superannuation funds in the event of fund mergers and transfer events.

22: Definition of the best interests duty

The Australian Government should pursue a clearer articulation of what it means for a trustee to act in members’ best interests under the Superannuation Industry (Supervision) Act 1993 (Cth). The definition should reflect the twin principles that a trustee should act in a manner consistent with what an informed member might reasonably expect and that this must be manifest in member outcomes. In clarifying the definition, the Government should decide whether to pursue legislative change, greater regulatory guidance, and/or proactive testing of the law by regulators. It should be informed by the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

23: Australian Prudential Regulation Authority

APRA should focus more on matters relating to licensing and authorisation, ensuring high standards of system and fund performance. It should (in addition to recommendations 4, 16 and 19):

• supervise and enforce the obligations of the licences and authorisations it grants
• require all APRA regulated superannuation funds to conduct formal due diligence of their outsourcing arrangements, at least every three years, to ensure the arrangements provide value for money. Each fund should provide a copy of the assessment to APRA (including the fees paid and the comparator fees)
• require all APRA regulated superannuation funds to include a clause in material service contracts with outsourced providers that obliges the provider not to do or take any action that adversely affects members’ interests
• report annually to the Council of Financial Regulators on funds’ progress with implementing the elevated outcomes tests and on fund merger activity
• undertake a systematic assessment of the costs to funds of the thousands of legacy products in the superannuation system. If the evidence demonstrates that they represent a significant cost in accumulation, APRA should further refine trustees’ obligations for member transfers so these products can be rationalised
• embed product level reporting within its reporting framework as soon as practicable (no later than 18 months) to enhance visibility of actual member outcomes across all APRA regulated funds and to bring reporting for the choice segment into line with the MySuper segment. APRA should also expedite efforts to address inconsistencies in reporting practices.

The Australian Government should set an explicit ‘member outcomes’ mandate for APRA in its regulation of superannuation.

24: Australian Securities And Investments Commission

ASIC should focus more on the conduct of superannuation trustees and financial advisers, and on the appropriateness of products (including for particular target markets) and disclosure. It should (in addition to recommendations 6 and 8):

• proactively set and enforce standards for the meaningful disclosure of information to members on superannuation products and insurance policies (in addition to product dashboards). Information should be simple, comparable and easy for members to understand
• require all superannuation funds to publicly disclose to current and prospective members the proportion of costs paid to service providers that are associated with related party outsourcing arrangements
• proactively investigate (questionable) cases where mergers between superannuation funds stalled or did not proceed, and report to the Council of Financial Regulators on its enforcement against trustee directors who breach their duties by not pursuing a merger when it would be in their members’ best interests
• undertake recurring thematic reviews on financial advice in superannuation, including advice in relation to choice platform products and SMSFs.

25: Clarify regulator roles and powers

The Australian Government — with the benefit of this inquiry report and that of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry — should clarify the roles of APRA and ASIC in relation to superannuation. In doing so, it should consider the suitability of each regulator’s powers, the suitability and strength of penalty provisions for misconduct, and whether there are any undesirable constraints on either regulator engaging in strategic conduct regulation.

26: APRA capability review

The Australian Government should immediately initiate the independent capability review of APRA, which it had previously agreed to do. This review should also examine how efficiently and effectively APRA operates to achieve its strategic objectives in relation to superannuation, including:

• the capability of APRA to adequately supervise and regulate the superannuation system in line with its current responsibilities and those proposed in draft legislation (as well as future responsibilities arising from the implementation of recommendations in this inquiry), including a focus on capability in enforcement
• identification and analysis of immediate and forward looking priorities and risks
• the use of legal powers and enforcement tools, including the pursuit of test cases and effective coordination with ASIC and other regulators in this regard
• the skills, capability and culture of the organisation, including the number of staff dedicated to regulating superannuation and their capabilities
• internal governance and accountability mechanisms
• engagement and information sharing with other regulators, especially ASIC
• the use of data collection and analytics
• future resourcing needs.

The review should be completed and published during 2019.

27: Superannuation data working group

The Australian Government should establish a permanent superannuation data working group, comprised of APRA, ASIC, the ATO, the ABS, the Commonwealth Treasury and the new member advocacy body (with Treasury taking the lead). This group should:

• identify ways to improve the consistency and scope of data collection and release across the system, with a focus on member outcomes
• evaluate the costs and benefits of reporting changes, including strategies for implementation
• identify areas where legislative or regulatory change may be necessary to support better data collection
• report annually to the Council of Financial Regulators on its progress, and on the data analytics capabilities of each regulator.

28: An independent member advocacy body

The Australian Government should, as a priority, provide adequate ongoing funding to support an independent superannuation members’ advocacy and assistance body.

29: Ongoing review of the super system

The Australian Government should:

• require APRA and ASIC to jointly produce a State of Superannuation report every two years on the performance of the superannuation system, including outcomes relating to investment performance, fees, low balance inactive accounts, merger activity and the elevated MySuper and choice outcomes tests. This report should also detail progress by the industry and regulators to implement Government policy changes and address performance and member harm issues identified in this inquiry report
• commission an independent review, every five years, of the effectiveness of the MySuper and choice elevated outcomes tests at meeting their objectives, and whether they are being suitably applied by APRA to remove underperforming funds and options from the super system
• commission an independent public inquiry, every ten years, of the superannuation system, including a review of the criteria used to assess ‘best in show’ products.

30: Independent inquiry into the retirement incomes system

The Australian Government should commission an independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system, including the net impact of compulsory super on private and public savings, distributional impacts across the population and over time, interactions between superannuation and other sources of retirement income, the impact of superannuation on public finances, and the economic and distributional impacts of the non indexed $450 a month contributions threshold. This inquiry should be completed in advance of any increase in the Superannuation Guarantee rate.

31: A steering group to oversee implementation

The Australian Government should prioritise the implementation of this inquiry’s recommendations by establishing a Steering Group of Departmental and agency heads to oversee the implementation. This group should comprise the Secretary of the Department of the Prime Minister and Cabinet, Secretary to the Treasury, Chairs of APRA and ASIC, and the Commissioner of Taxation.