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Unravelled: Productivity Commission's report on superannuation – an odd mix of recommendations

2 February 2019

Written by Senior Regulatory Counsel Michael Mathieson

Before we are crushed by a heavy tome on Monday afternoon, I would like to say something about the recommendations in another heavy tome – the Productivity Commission's report on superannuation. The recommendations are an odd mix.

Some of the recommendations are uncontroversial – for example, recommendation 5 (cleaning up the stock of unintended multiple accounts). Some are distinctly modest – for example, recommendation 11 (more useful information for pre-retirees). And some are unlikely to repay further attention – for example, recommendation 2 (a 'best in show' shortlist).

The recommendations I am interested in range from the worthy to the downright bizarre. Let's start with the bizarre.

Limit all fees to cost recovery (recommendation 14)

I had to read this recommendation a few times. But it still says that the Australian Government 'should require that all fees charged by APRA-regulated superannuation funds are levied on a cost-recovery basis'. I am not sure how this recommendation could be implemented without abolishing retail funds. I suspect that shareholders in the relevant organisations would not be very interested in fees that are levied on a cost-recovery basis. It would certainly render largely obsolete the issues associated with vertical integration that have so occupied the inquisitors at the Royal Commission.

Let's turn to a worthy recommendation.

Reassess the need for a retirement covenant (recommendation 10)

Having been a keen follower of the retirement income debate for some time, I confess to shaking my head when the Government announced its proposal to introduce a retirement income covenant. The Productivity Commission appears to be similarly perplexed. It is one thing to accept that the retirement phase of the superannuation system is underdeveloped. It is another thing altogether to believe that a retirement income covenant provides a solution.

The Commission also recommends an independent inquiry into the retirement income system and says this should be completed ahead of any increase in the SG rate (recommendation 30). The retirement income system has certainly never been assessed in the same depth, and with the same rigour, as the pre-retirement superannuation system – and it is not obvious why it shouldn't be.

Let's turn back to the bizarre.

Definition of the best interests duty (recommendation 22)

The legislative duties of a superannuation trustee in 2019 are a Frankensteinian monstrosity. This is, to a large extent, the result of well-intentioned non-lawyers taking it upon themselves to, ahem, do a little law reform. (By contrast, I am not a doctor and so I do not give medical advice.) The Productivity Commission has failed to resist the temptation. It says the best interests duty 'should reflect the twin principles that a trustee should act in a manner consistent with what any informed member might reasonably expect and that this must be manifest in member outcomes'. As Sir Garfield Barwick (in retirement) memorably remarked when the High Court handed down its decision on section 92 of the Constitution in Cole v Whitfield in 1988: 'What a load of rubbish'.

OK, back to the worthy.

Clarify regulator roles and powers (recommendation 25)

This recommendation calls for the roles of ASIC and APRA in relation to superannuation to be clarified. While the aim is worthy, it is not clear how it would be achieved. The roles of ASIC and APRA in relation to superannuation were canvassed in detail in submissions from ASIC, APRA and Treasury to the Royal Commission. Those submitters appear to favour an expanded role for ASIC but not a reduced role for APRA. There is not much in the submissions on 'clarification' of the roles; there is more on accepting that the roles will overlap. None of those submitters favoured a new regulator specific to superannuation. It is hard to believe that the Royal Commission will treat those submissions without a degree of scepticism – but that is as much as I am prepared to say before Monday.

Finally, a recommendation that may not be worthy or bizarre but is certainly a little odd.

A clearer definition of 'advice' (recommendation 8)

The Productivity Commission would like the use of the word 'advice' to be restricted to situations involving 'personal advice'. Presumably this restriction would only apply in the context of financial products. I accept that applying the label 'advice' to some communications that fall within the definition of 'general advice' can cause confusion for those lucky enough not to spend their working days wrestling with Chapter 7 of the Corporations Act. But I am not sure that this issue is as significant as two other issues – namely, the distinction between financial product advice and information that is not financial product advice; and the distinction between personal advice and general advice (or whatever else you might prefer to call it). I have little doubt that Justice Gleeson of the Federal Court would agree that these two other issues are significant and more difficult than they should be.

And with that, I hope you have a good weekend and that your computer does not crash at 4.10pm on Monday.

Other articles in this edition of Unravelled

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