The Productivity Commission's (PC's) final report into the efficiency and competitiveness of the superannuation system: Superannuation: Assessing Efficiency and Competitiveness - Inquiry report was released to the government on 21 December 2018 and publicly released on 10 January 2019.
The report found that inadequate competition, governance and regulation in the superannuation sector has led to a number of weaknesses including prevalent high fees, unintended multiple accounts, underperformance of certain funds and lack of competition in the default fund system.
The report makes 31 recommendations to address these issues (increased from the 22 recommendations made in a draft report released in May 2018 See: Governance News 04/06/2018). It also sets out a 'transition road map' with indicative timeframes for implementing some of the report recommendations over the period December 2019 to December 2023.
In a statement, the Treasurer said that the government would 'carefully consider the recommendations' and will await the findings of the Financial Services Royal Commission's final report (expected on 1 February) before finalising its response. According to media reports, both Labor and industry have expressed concerns about some report recommendations, in particular, the 'best in show' recommendation.
A high level overview of the report findings, recommendations and indicative timeframes is below.
Some Key Findings
- There is a lack of competition in the default segment and there 'are signs of unhealthy competition in the choice segment (including product proliferation)'. Many funds lack scale, with 93 APRA‑regulated funds — half the total — having assets under $1 billion.
- The default segment outperforms the system on average, but the way members are allocated to default products has meant many (at least 1.6 million member accounts) have ended up in an underperforming product, eroding nearly half their balance by retirement.
- Much scale, and the associated benefits (lower fees/higher returns) associated, remains elusive with too few mergers.
- There is evidence of 'excessive and unwarranted fees' in the super system. Reported fees have trended down but a 'tail' of high‑fee products remains.
- Regulations (and regulators) focus too much on the interests of funds and not members. Subpar data and disclosure inhibit accountability to members and government.
- 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 PC identified mixed performance across funds with some funds consistency achieving high net returns while others, both default and choice funds, were found to underperform. Most (but not all) affected members were in retail funds.
- There is a lack of access to clear information: The system offers products that meet most members’ needs, but members lack simple and salient information and impartial advice to help them find the best products.
- Not all members get value out of insurance in super. Many see their retirement balances eroded by duplicate or unsuitable policies.
Overall, the report found that 'Fixing some of the worst problems in the current superannuation system would bring substantial benefits. If there were no unintended multiple accounts (and the duplicate insurance that goes with them), members would have been collectively better off by about $2.6 billion a year. If members in bottom quartile MySuper products had instead been in the median of the top quartile performing MySuper products they would collectively have gained an additional $1.2 billion a year'.
Recommendations to 'modernise' the superannuation system and indicative timeframes
Below is an overview of the report recommendations and recommended timeframes for implementation (where indicated in the report).
- Recommendation 1: Default superannuation accounts only created once for new workforce entrants. 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. Timeframe: The system should be fully in place no later than the end of December 2021.
- Recommendation 2: A single 'best in show' shortlist of up to 10 superannuation products should be developed and presented to all members who are new to the workforce (or do not have a superannuation account), from which they can choose a product. 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. Timeframe: The first ‘best in show’ shortlist should be in place by no later than the end of June 2021.
- Recommendation 3: The government should appoint an independent expert panel should be to run a competitive process to develop the 'best in show' shortlist. The panel should be comprised of independent experts appointed through a 'robust and independent' selection process and the panel should be reconstituted every four years. The panel should have flexibility to select up to 10 products, with the exact number at the panel's discretion.
- Recommendation 4: Elevated MySuper and choice outcomes test for all APRA-regulated funds: The government should legislate to require all APRA regulated superannuation funds to undertake annual outcomes tests for their MySuper and choice offerings. The outcomes tests should include: a) 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); and b) clear benchmarking requirements for all MySuper and choice investment options (with consequences for failing to meet benchmarking requirements). Timeline: 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.
- Recommendation 5: Clean up unintended multiple accounts through auto-consolidation: The 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.
- Recommendation 6: Introduce new requirement for funds to publish simple and single page product dashboards for all superannuation products. Timeline: ASIC should prioritise the implementation of these dashboards for choice investment options to achieve full compliance by the end of 2019.
- Recommendation 7: Access via the centralised online service: The ATO should be required to provide a link to the single page product dashboard on a member’s existing account on its centralised online service.
- Recommendation 8: Clarification of the term 'advice'; disclosure of approved product lists (APLs).
- The definition of 'advice' in the Corporations Act 2001 (Cth) should be amended to clarify that the term can only be used in association with 'personal advice' ie advice that takes into consideration personal circumstances.
- Australian Financial Service Licensees should also be required to disclose information in relation to approved product lists (APLs) to ASIC. ASIC should conduct selected audits of the information received to facilitate assessment of the effectiveness of advisers in meeting clients’ best interests.
- Recommendation 9: Evaluate financial literacy programs: The government should evaluate government funded financial literacy programs to those that are most effective. This could be done through a review of the National Financial Capability Strategy.
- Recommendation 10: Reassess need for the Retirement Income Covenant. The government should reassess the benefits, costs and detailed design of the Retirement Income Covenant and only introduce the Covenant if 'design imperfections (including equity impacts) can be sufficiently remediated.' In conjunction with this, the government should also explore the business case for investing in digital technology to assist people's financial decision making and consider cost-effective options for providing retirees with access to a one-off impartial information session to assist them in navigating retirement income decisions.
- Recommendation 11: Better guidance 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 and the Department of Human Services’ Financial Information Service website.
- Recommendation 12: Stronger 'safeguards' for SMSF advice. The 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; and extend the proposed product design and distribution obligations to SMSF establishment.
- Recommendation 13: Roll-out Consumer Data Right for superannuation: The 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).
- Recommendation 14: Ban trailing financial adviser commissions in superannuation, and fees charged by APRA-regulated superannuation funds to be levied on a cost-recovery basis. The government should require that all fees charged by APRA regulated superannuation funds are levied on a cost recovery basis and ban trailing financial adviser commissions. Timeline: Trailing commissions to financial advisers should be banned 'as soon as practicable'.
- Recommendation 15: Insurance through superannuation should be offered on an opt-in basis for members under 25 years of age and trustees should be required to cease all insurance cover on inactive accounts ie where no contributions have been made for 13 months (unless the member provides express permissions that the cover is to be retained.
- Recommendation 16: APRA-regulated funds should be required to 'articulate and quantify' insurance balance erosion trade-offs to APRA. 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.
- Recommendation 17: The government should 'immediately' establish a joint regulator task force to advance a 'binding and enforceable' Insurance in Superannuation Voluntary Code of Practice. 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. Timeline: The code owners should be given two years to strengthen the code and make it binding and enforceable on signatories. After two years, adoption of the code should become a condition of holding a Registrable Superannuation Entity (RSE) Licence for all superannuation funds that offer insurance.
- Recommendation 18: The government should commission an independent public inquiry into insurance in superannuation. The 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). Timeline: The insurance inquiry should be initiated within four years.
- Recommendation 19: APRA should be more prescriptive in its requirements of trustee board directors: APRA should amend its prudential standards to be prescriptive in: a) requiring effective board performance and individual directors assessment processes to be in place, and to be disclosed annually; b) requiring all board to maintain and annually publish a 'consolidated summary' of a skills matrix and the 'collective skills of trustee directors'; c) requiring trusts to have and disclose a process to seek external third party evaluation of the performance and capability of the board (against the skills matrix) every three years, the results of which should be provided to APRA; d) requiring trustee board directors to have a 'professional understanding of the superannuation system and investment decision making' either through industry experience or formal training; and e) defining what constitutes an ‘independent director’, based on the definition currently in the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017.
[Note: The definition of 'independent director' in the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017 excludes individuals with a current or recent relationship with the RSE licensee or related bodies corporate and organisations representing employer sponsors and members. The explanatory memorandum states that under the definition in the Bill, those who would not be considered independent include: those who are substantial shareholders of the RSE licensee; those who have, or have had, within the last three years, a material business relationship with the RSE licensee; or those who have served as a director or executive officer of the RSE licensee. See: Explanatory Memorandum]
In addition, the Report recommends that APRA should be given powers to interpret and enforce the definition of an independent director.
- Recommendation 20: Disclosure of merger activity and new powers for the regulators: 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. Where mergers do not proceed, the board should be required to disclose to APRA (at the time) the reasons why it 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. In addition, the government should legislate new powers and penalties to explicitly enable ASIC to pursue action against trustee directors for misconduct in relation to mergers.
- Recommendation 21: Capital gains tax relief for mergers: The 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.
- Recommendation 22: Clarification of the trustee's duty to act in the best interest of members in the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). 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'.
- Recommendation 23: Areas of focus for APRA: APRA should focus more on matters relating to licensing and authorisation, ensuring high standards of system and fund performance. The government should set an explicit ‘member outcomes’ mandate for APRA in its regulation of superannuation.
- Recommendation 24: Areas of focus for ASIC: 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.
- Recommendation 25: Clarify the roles of APRA and ASIC in relation to superannuation with the benefit of the final report and that of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. 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.
- Recommendation 26: Immediately initiate and independent capability review of APRA. The review should also examine how effectively and efficiently APRA operates to achieve its strategic objectives in relation to superannuation. Timeline: The review should be completed and published during 2019
- Recommendation 29: The government should establish a permanent superannuation data working group, comprised of APRA, ASIC, the ATO, the ABS and the Commonwealth Treasury. The group should be required to report annually to the Council of Financial Regulators on its progress on improving the consistency and scope of data collection and on the data analytics capabilities of each regulator.
- Recommendation 28: The government should establish a government funded superannuation members' advocacy and assistance body.
- Recommendation 29: Ongoing review of the superannuation system
- APRA and ASIC to produce a joint report every two years on the performance of the superannuation system;
- 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.
- Recommendation 30: The government should commission and independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system. This should be completed in advance of any increase in the superannuation guarantee rate.
- Recommendation 31: The government should establish a steering group of departmental and agency heads to oversee the implementation of the report recommendations. The group should include 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.
Response to report recommendations
Government's response to the Report
Treasurer Josh Frydenberg said in a statement that the government would carefully consider the recommendations, and would await the recommendations of the Financial Services Royal Commission before issuing a formal response to the PC's report. He added that a number of recommendations in the report 'endorse' government reforms currently before parliament, which he called on Labor to support.
[Source: Treasurer Josh Frydenberg media release 10/01/2019]
APRA's response to the report recommendations
- The Australian Prudential Regulation Authority (APRA) issued a statement welcoming the release of the report. Deputy Chair Helen Rowell said many of the findings and recommendations in it aligned closely with APRA’s ongoing focus on ensuring superannuation funds delivered quality, value-for-money outcomes for their members. In particular, Mrs Rowell said that she is 'particularly pleased to see the Productivity Commission back our [APRA's] call for parliament to pass legislation that would give APRA greater powers, including to direct superannuation licensees to take specific actions, such as merging or winding up should that be in the best interests of members'. Mrs Rowell added that APRA would consider the report, together with the Financial Services Royal Commission’s final report and the Government’s subsequent response, as part of its review of priorities for supervision of the superannuation industry for the next few years.
[Source: APRA media release 10/01/2019]
'Best in Show' recommendation reportedly remains controversial
According to media reports, the most controversial recommendation appears to be the 'best in show' proposals about which both industry and the Labor party reportedly have concerns.
- Labor has reportedly said that it is opposed to both the best in show recommendation and to the recommendation to delay the increase in retirement contributions to 12% The AFR reports. Reportedly Treasury spokesman Chis Bowen said that the 'best in show' recommendation is of concern because 'a fund that might be well performing at one particular time might not be well performing in the future years' and also because selecting just 10 funds could undermine competition between funds.
[Source: [registration required] The AFR 10/01/2019]
- The ACTU has reportedly expressed concern about the 'best in show' proposal on the basis that it would operate to 'block working people from being represented in the system which manages their money, while handing a huge amount of power to financial regulators which the ongoing Banking Royal Commission has demonstrated are grossly ineffective at shielding working people from banks which regulatory put profit before their own customers. Any attempt to dismantle this world-class model would inevitability damage the performance of these funds.'
[Source: [registration required] The Australian 10/01/2019]
- ASFA and AIST: The Association of Superannuation Funds of Australia (ASFA) has reportedly also expressed disappointment that the best in show recommendation was retained in the final report as has the Australian Institute of Superannuation Trustees (AIST). ASFA CEO Martine Fahy is quoted in The Australian as stating that 'ASFA is disappointed that the Productivity Commission has doubled down on the so called "top 10 best in show" as a mechanism for allocating default super. AIST CEO Eva Scheerlinck is quoted as saying that the report's 'proposal for a top ten default list is a blunt mechanism that will be needlessly disruptive and fails to address the more serious problem of underperformance in the wider super system'.
[Source: [registration required] The Australian 10/01/2019]
- FSC: Financial Services Council CEO Sally Loane reportedly expressed concern that the best in show proposal would stifle competition, particularly for new entrants to the market.
[Source: The New Daily 10/01/2018]
- SMSF Association issued a statement welcoming the release of the final report recommendations and expressing support for the recommendation for higher standards of SMSF advice rather than a minimum balance approach for establishing SMSFs. SMSF Association CEO John Maroney agreed with the Commission that setting a minimum balance requirement for establishing SMSFs would be a 'blunt tool' compared with improving SMSF advice standards.
[Source: SMSF Association media release 10/01/2019]
The AFR reports that the government is considering allowing the Future Fund (or another public wealth management entity) to offer low fee superannuation accounts and be eligible to accept default members as a means of enhancing competition in the sector. According to The AFR, the superannuation industry, unions and the Labor Party are likely to oppose a government default fund taking away money that currently flows into retail and industry funds.
[Source: [registration required] The AFR 12/01/2019]