The Federal Government is promising to shake-up the superannuation industry, which it calls fragmented, costly, complex and suffering from a lack of member engagement. In accepting all but one of the Financial System Inquiry’s recommendations, new legislation will be introduced to improve efficiency and competition in the sector. Increased member engagement, development of new income stream products and comprehensive governance and conflict of interest reforms are also on the Government’s agenda.
The immediate outcome of the FSI is the Productivity Commission being tasked with:
- developing criteria to assess the efficiency and competitiveness of the superannuation system (with a focus on fees and after-fee returns for members);
- to develop alternative models for a formal competitive process for allocating default members to products; and
- once the MySuper reforms have been fully implemented, a further review on the efficiency and competitiveness of the superannuation system.
In addition, the Federal Government will develop legislation to remove impediments to product development for retirement income products to increase consumer choice and to provide better protection against longevity and other risks.
While the Federal Government has already acted on the FSI’s recommendation to improve superannuation governance by increasing the number of independent directors on the board of trustees (on which we have previously reported), the Federal Government has agreed to introduce criminal penalties for trustee directors who fail to exercise their duties in the best interests of members or who use their position to gain an advantage for themselves or others to the detriment of members.
The timeline for reform is as follows:
- Develop legislation to improve governance and transparency in superannuation.
- Progress the Retirement Income Streams Review.
- Task the Productivity Commission to immediately develop and release criteria to assess the efficiency and competitiveness of the superannuation system and to develop alternative models for a formal competitive process for allocating default fund members to products.
- Develop and introduce legislation to enshrine the objective of the superannuation system.
- Consult on legislation to facilitate trustees of superannuation funds providing pre-selected comprehensive income products for retirement.
- Implement legislation to introduce director penalties.
- Consult on legislation to improve member engagement, consistent with the recommendations in the Inquiry.
- Monitor leverage and risk within the superannuation system.
The Federal Government has rejected the FSI’s recommendation to remove the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds. The Government will, however, task the Council of Financial Regulators and the Australian Taxation Office to monitor leverage and risk in the superannuation system and report back to Government after three years. After all relevant data is collected, consideration will be given to whether changes to the borrowing exception are appropriate.
Please click here to access the Federal Government’s response to the Financial System Inquiry.