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Unravelled: Superannuation and the Government's response to the FSI

6 November 2015

Written by Partners Michelle Levy and Geoff Sanders

The Government's response to the FSI's superannuation recommendations is, as with much of the rest of the responses, somewhat safe (and, as a result, arguably disappointing). As with the Inquiry's recommendations, it shifts from the sublime to the ridiculous – on the one hand it deals with the really central question of what our superannuation system is for, to the other of extending choice of fund to the small number of employees who are currently excluded because they are covered by State awards and enterprise agreements. In between, it is going to ask the industry to sort out retirement incomes (with some legislative loosening) and the Productivity Commission to sort out costs and competition.

We dig a little deeper into some of the key responses below.

The superannuation objective

The Government promises to enshrine the objective of the superannuation system in legislation by the end of 2016. Do you remember the Charter of Superannuation Adequacy and Sustainability? In 2013, the then Finance Minister, Bill Shorten, established a 'Charter Group' to develop a Charter that would: 'enshrine the core objectives, values and principles of our superannuation system for the long term'.

And Minister Shorten also wanted to establish a 'Council of Superannuation Custodians' to protect the integrity of the superannuation system, and to ensure that policy settings and legislation were consistent with the Charter. The Minister said that, together: 'The Charter and Council will ensure that Australia's superannuation system is protected and enhanced for future generations'.

There was a discussion paper, round tables, submissions and a report. The Charter Group recommended the following objectives for the Australian superannuation system:

  • provide an adequate level of retirement income;
  • relieve pressure on the age pension; and
  • increase national savings, creating a pool of patient capital to be invested as decided by fiduciary trustees.

But the report was followed by a new government and the announcement of the Financial System Inquiry and the Charter and Council were never really mentioned again. Now, perhaps, that work will be dusted off, and what the Government may well find is that it is going to be quite hard to agree on an objective for the superannuation system. And when it does, the real question will be how will it help? Will it really stop the ongoing changes to the taxation of superannuation or give us more confidence in the system?

For example, there is no suggestion that there should be anyone monitoring whether policy changes and legislation are actually consistent with the enshrined objective of the superannuation system and there won't be any consequences if they are not (it is very unlikely that the legislation will come with a civil penalty order for the Minister that introduces inconsistent legislation to Parliament).

Having said this, it would be good to have a clear statement of the objective of the superannuation system; it should help with discussions about tax reform, product design and it might even answer the vexed question of whether superannuation funds should continue to be able to borrow. The Government says that it will not accept the FSI's recommendation to ban borrowing and that, instead, it will monitor borrowing by funds over the next three years.

Efficiency and competition

In the meantime, the Government will ask the Productivity Commission to develop and release criteria to assess the efficiency and competitiveness of the superannuation system immediately, and develop alternative models for a formal competitive process for allocating default fund members to products.

There is a lot in this small statement (and a lot more work for the Productivity Commission) and, taken at face value, this has the potential to be the only truly revolutionary policy coming out of the entire FSI process.

In particular, the Government appears to be pessimistic about MySuper and Stronger Super's ability to reduce fees and costs, as well as the impact its own changes to the composition of superannuation trustee boards will have on returns. It says: 'more needs to be done to reduce fees and improve after-fee returns for fund members'.

The proposal from the Inquiry to achieve this was radical – it would do away with the selection of a superannuation fund for default members from the industrial relations sphere altogether and, instead, proposed that new entrants to the workforce be allocated to a superannuation fund at the time that they get a TFN, with those lucky funds selected based on some form of centralised competitive tender or auction process.

This is no doubt an idea that, if implemented, could substantially change the nature of superannuation in this country and it is interesting that the Government prefaces the undertaking by saying it 'agrees' with the FSI's recommendations on the point. However, this is one area where the Government appears to have gone further than merely agreeing with the Inquiry's recommendations – the recommendation was in fact to look at alternative models only if fees and costs had not reduced and net returns had not increased by 2020 as a result of the MySuper reforms.

Time will tell if there remains the political will to make such significant changes to the industry in the face of what is likely to be a highly engaged superannuation industry which may well argue (and not, in our view, without justification) that the Inquiry's findings on the competitiveness of the Australian system's fees and costs are perhaps not as clear cut as they were made out to be.

Retirement incomes

In our view, a more pressing issue than the need to introduce further changes to the industry to deal with fees, costs and defaults during the accumulation phase of super is the need to refocus on the other, largely forgotten, part of superannuation – retirement income products.

On retirement incomes, the Government proposes by the end of 2016 to consult on legislation to 'facilitate' trustees of superannuation funds providing 'pre-selected comprehensive income products for retirement', and will work to remove the impediments to product development in this area.

This is really the hardest issue and it is not really one created by legislation or one that can be fixed by legislation – it is all about adequacy. All of the facilitation in the world won't give retirees the account balances they need to pay for a comfortable income in retirement and old age. Right now, most people retire with woefully inadequate superannuation account balances – with averages for men around the $200,000 mark and much less for women. Lower fees and costs and better net returns will help, but they are not enough on their own either.

That said, the renewed focus on retirement products is welcomed and our hope is that this, together with the removal of the barriers (or perceived barriers) to more effective and innovative retirement income product creation, will stimulate a new wave of retirement products (and, just as importantly, greater engagement from the retiring public with those products).

Other articles in this edition of Unravelled

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What does the Government's response to the FSI mean for banks?
The short answer is: it depends on which kind of bank you are. The Financial System Inquiry's final report and the Government's response mean a lot for ANZ, CBA, NAB and Westpac, particularly given their significant residential mortgage portfolios. They also mean a lot for Macquarie. As for the rest of the banks, they are likely to see the ramifications for the major banks as their own gain. Read more>>

Government says 'Yes ASIC'
The FSI recommended that the Government 'Introduce an industry funding model for Australian Securities and Investment Commission (ASIC) and provide ASIC with stronger regulatory tools'. This recommendation (No.29) covers two topics that ASIC has pursued on a number of occasions, including in its submissions to the FSI. The first is ASIC's preference to move to an industry funding model; and the second is ASIC's recommendation that penalties under ASIC-administered legislation be increased. Read more>>

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