On 5 July 2010, the then Minister for Financial Services, Superannuation and Corporate Law released1 the final report2 of the ‘Cooper Review’ into the governance, efficiency, structure and operation of Australia’s superannuation system (Report).
This is the fourth issue of our special Superannuation Alerts: Review of Cooper. This article deals with transparency and integrity of the system which are primarily discussed in Chapters 4 and 6 of the Report.
What are the current issues with the lack of transparency in the superannuation system?
The Report identifies the main factors which contribute to the lack of transparency in the superannuation system. These factors are as follows:
- insufficient incentives for trustees to be transparent about outcomes such as fees, costs and investment returns
- the inherent difficulty in comparing the different types of superannuation which are available
- complexity arising from the outsourcing of many functions
- a ‘cultural and attitudinal barrier’
- inadequate disclosure requirements and a lack of effective enforcement, and
- disclosure requirements which have focused on members as ‘investors’.
Further, the Report notes the following deficiencies with existing financial reporting information:
- inadequate accounting standards for superannuation
- the limitations with whole of fund performance data
- inadequate access to investment performance information, and
- the lack of consistency in the way fund information is calculated and disclosed.
What changes would be required to improve transparency in the superannuation system?
Overall the Report has ‘concluded that the current model of consumer sovereignty in super, with member autonomy underpinned by complex disclosure, is not optimal. The requirement that disclosure be ‘clear, concise and effective’ has not worked in superannuation’.
The Report notes two possible ways to improve transparency in the superannuation system; ‘a change of attitude on the part of participants, or a tougher regulatory stance’ and recommends the latter.
The Report concludes that greater transparency in itself will not be a sufficient solution. The suggested reforms include the introduction of the simple MySuper product, as well as less complicated fee structures, more targeted disclosure and simpler and more standardised information to members. Further, the Report emphasises the need for trustees to better understand and monitor the fees and charges applied to their members.
The Report recommends new ‘outcomes reporting standards’ to be developed by APRA in consultation with ASIC. These standards would identify the different types of information which should be made available to the different types of stakeholders in the superannuation system, including:
- an ‘overlay’ to the existing accounting standards to facilitate consistent and comparable reporting of investment performance and costs at the investment option level
- investment return performance data to be published by APRA for all MySuper products
- a new government website which includes superannuation information and resources
- investment option performance data to be published by all funds showing investment returns and costs at the investment option level with ‘cost categories’ used for the purposes of benchmarking. The Report recommends seven cost categories be developed and reported to APRA based on the major functions of a superannuation fund; administration, advice and distribution, corporate overhead, investment management, legal and compliance, member insurance and taxation. The Report gives example costs under each category in Appendix 2 to Chapter 4 of the Report, and
- APRA to be the sole public sector agency responsible for collecting data from APRA funds for all public purposes, while the ATO should continue to collect data on SMSFs.
Further, the Report recommends that investment option information be standardised by:
- requiring disclosure of a standardised measure of the uncertainty or volatility associated with the return when past performance is reported
- disclosing all costs and fees on a pre-tax basis
- calculating investment returns on both a gross basis and also net of all costs and taxes and displayed in a standard format
- requiring a standardised disclosure format for gross investment returns, costs, investment returns net of all costs and taxes for investment options for 1, 5 and 10 year periods. This information should be easily accessible on the fund’s website.
The Report states that current ‘quality and usefulness of the disclosure [on investment strategies] is limited, resulting in a lack of trustee accountability on the performance of investment options. There is need for improvement’. The Report recommends the development of a simple ‘product dashboard’, which in essence would be a standardised methodology for disclosure of investment option information in any PDS, advertising material or online. The product dashboard would include a return target and a risk target or range of possible 10-year outcomes expressed on a net basis. It is recommended that APRA develop an outcomes reporting standard to detail the requirements for the product dashboard.
Finally, changes are recommended to the way in which funds report to APRA and the Report proposes that trustees who offer MySuper products should be required to participate in APRA-approved benchmarking surveys.
What are the current issues with the lack of integrity in the superannuation system?
The Report does not identify any fundamental flaws in the integrity of the superannuation system. In addressing the ‘integrity’ of the system, the Report is primarily concerned with maintaining confidence in the system and avoiding any ‘system’ failures. The Report makes the following observations regarding the main areas for improvement:
- the current arrangements concerning capital requirements are inadequate in light of the consolidation of the industry, and
- the crucial role of the large superannuation administrators leaves the industry exposed in the event of ‘operational collapse’.
What changes would be required to improve integrity in the superannuation system?
The key recommendations of the Report for improving integrity of the superannuation system are:
- new capital standards for non-public offer trustees and revised capital standards for public offer trustees of superannuation funds on a risk-weighted basis including the use of operational risk reserves
- APRA licensing of superannuation administrators and commercial clearing houses
- trustees should be required to use a superannuation administrator which is licensed by APRA for any administration function which is covered by the outsourcing operating standard but trustees should remain liable to members in the first instance for any outsourced administration errors,
- the liquidity risk of a superannuation fund should be addressed in the trustee’s risk management plan, and
- the protection of members’ benefits and regulation of the financial position of defined benefit funds should be enhanced by focusing regulation on coverage of vested benefits and not on coverage of minimum requisite benefits. Further, the Report recommends a time period be specified for a defined benefit fund in an unsatisfactory financial position to be restored to a satisfactory financial position. Currently, no timeframe is specified unless the fund is technically insolvent.
What do trustees need to start thinking about now?
If the Report becomes law, greater onus would be placed on trustees in respect of members’ fees and charges. Trustees should review their existing outsourcing, investment and internal arrangements and ensure that they fully understand and can justify each existing fee and charge which is passed on to members.
The Report picks up and reignites the growing momentum for standardised fee disclosure and simplified fee structures. Trustees of superannuation funds need to be mindful of these likely developments in planning for the future.