Media Release: Industry Super Network welcomes MySuper safeguards

Industry Super Network has welcomed the introduction of the MySuper Core Provisions Bill which sets out the basic architecture for default superannuation funds from July 2013.

Read the Media Release here.

Industry Super Network welcomes MySuper safeguards

Industry Super Network has welcomed the introduction of the MySuper Core Provisions Bill which sets out the basic architecture for default superannuation funds from July 2013.

Read the Media Release here.

Fixing the industry’s plumbing

The SuperStream reforms are a once in a generation opportunity to improve the industry’s administrative systems. But they also represent a major strategic and business challenge for super funds.

The SuperStream package of reforms being introduced as part of the Government’s Stronger Super response to the Cooper Review should not be dismissed as a dull set of administrative and compliance changes, according to Superpartners Manager Strategy & Policy and member of the SuperStream Working Group, Hans van Daatselaar.

‘It is not just a straightforward administration problem as these complex reforms affect all the stakeholders in the super industry from members through to funds and service providers,’ he says.

‘This is a significant structural change to the way the industry works today and it will lead to a very different super industry in the future, with the interactions between various groups being quite different. It is a big mistake for industry participants – and funds in particular – not to start preparing now but to wait until the final details are decided.’

Challenging existing business models

Hans believes the SuperStream reforms need to be discussed at executive and board level as they represent a major strategic challenge for funds.

‘Funds need to have detailed discussions with their industry partners (such as their administrators) so they can work out how the fund’s future is likely to look and so they can consider both the opportunities and challenges flowing from these reforms,’ he explains.

‘Most funds will face significant strategic challenges from the removal of duplicate and lost accounts and this may make it necessary to change their business and pricing models. Ultimately the changes will be in the best interests of members.’

Although the SuperStream reforms are designed to remove inefficiencies in the super system, Hans emphasises they are not administrative tinkering, but will usher in significant structural changes. They are also closely linked to the other Stronger Super reforms. ‘They can’t simply be analysed and considered on their own, as they are closely linked to the MySuper reforms,’ he says.

Strict milestones for the process

According to Hans, one of the biggest issues currently facing the SuperStream reform process is time constraints, as the reforms need to meet the milestones set by the Government.

‘We do not have a lot of time and we are currently working through the policy areas to finalise them so the process can move on to the design and implementation phases,’ he explains.

‘We need to get clarity around the policy and then see it through Parliament before implementation can commence. With the Federal Government providing significant support for the reforms, it is important the industry moves swiftly, as the current political environment may change.’

Dr Sacha Vidler, ISN Chief Economist and also a member of the SuperStream Working Group, agrees these are significant and challenging changes for the super industry and believes they form part of the suite of reforms – including FOFA and MySuper – necessary to boost industry efficiency ahead of the planned increase in the Superannuation Guarantee (SG).

‘Although the SuperStream reforms deal with the less interesting aspects of the super industry, they are vital in getting the foundations right before we move ahead with a lift in the SG rate to 12%’ he says.

‘It is important for the industry to be in control of this difficult reform process. While improving adequacy is important, the industry will not be in a good position to deal with the higher SG if we do not have more efficient and streamlined administrative processes.’

Finding out more

Both Hans and Sacha urge industry stakeholders to get involved in the SuperStream process and find out more from the members of the SuperStream Working Group.

‘Funds need to talk to people on the Working Group to get an understanding of what the landscape will look like so they can start doing some scenario planning on the key strategic issues and how they apply to their fund,’ Hans says.

‘Given the resources being invested into IT by banks and insurance companies at the moment, the not-for-profit sector needs to think carefully about what this will mean in terms of resourcing adequacy – both financial and human,’ Hans notes.

For more information about the SuperStream consultation process and the members of the SuperStream Working Group, see the Stonger Super website.

For more details about SuperStream, contact Sacha Vidler at svidler@industrysuper.com.

Hans van Daatselaar maintains a blog on superannuation administration trends and issues.

Governance moves forward

ISN has long argued that there is a need for improved governance arrangements in the superannuation industry. Superannuation will form the major part of retirement savings for most Australians and it is important that the community has confidence in the regulatory framework surrounding superannuation.

The Super System Review (the Cooper Review) recommended a number of improvements to governance arrangements within the superannuation industry and in December 2010 the Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten released the Government’s Stronger Super response. Whilst rejecting some recommendations, including those that would interfere with equal board representation, the Government accepted a number of recommendations of the Review and commenced a process of industry consultation.

ISN was represented on the Peak Stronger Super consultation group and its Governance industry consultation working group. The Governance working group has reported to the peak body and its views will now form the basis of the peak group’s recommendations to Government.

Office of ‘trustee-director’

There is industry consensus that the proposal for the establishment of a new statutory office of trustee-director was on balance not required due to the considerable infrastructure already in place including a series of direct measures to address issues.

There are a number of obligations on trustees and directors of corporate trustees that find their root in common law, tax law and elsewhere in addition to the duties imposed by the SIS Act and the Corporations Act. The view is that it would be more appropriate to deal directly with issues that have been raised via direct measures such as:

• amendments to existing regulations;
• the introduction of new Prudential Standards on conflict of interest ;
• the establishment of a gift and benefit register; and
• the prohibition on trust deeds requiring the use of specific service providers.

Operational risk requirements

The Working Group supported the use of operational reserves to address operational risks with a supportive APRA Prudential Standard. This would be developed after industry consultation that would allow time to rebuild reserves and outline factors that would determine individual trustee or fund risk requirements.

Safe harbour provisions

The Cooper Review recommended the inclusion of safe harbour provisions for trustees that would see no civil liability on a trustee that discharges its selecting and monitoring investment options. There is consensus that there were alternatives to safe harbour provisions via a provision in the investment strategy covenant that would require appropriate due diligence and monitoring by trustees and provided this was met, protection would flow. It was agreed that APRA, in consultation with the industry, would develop a Prudential Standard regarding due diligence and ongoing monitoring, which would provide a high standard of good governance.

Performance Fees

The industry has agreed that there should be a principles based approach to the establishment of performance fee standards. These principles could be included in a Prudential Standard and would ensure an appropriate relationship between performance and fees. If adopted, this would allow variations in performance fees when targets have not been reached.

Voting prohibitions

As the Government did not support the Cooper recommendation that the SIS Act be amended to require 1/3 of trustees of equal representation boards to be independent, the related recommendation to prohibit any voting prohibitions on independent trustee-directors is of less significance. With few practical examples where directors are prohibited from voting on matters, the industry did not see the need to change existing arrangements. In the event the Government does require a change to these arrangements, there will be little impact.

Investment strategy

The Government has accepted the Cooper Review’s recommendations that three additional covenants be added to those include in s52(2) of the SIS Act. The changes would require trustees to consider the:

1. ‘expected costs of the investment strategy, including those at different levels of any interposed legal structures and under a variety of market conditions’;
2. ‘the expected taxation consequences of the investment strategy’; and
3. ‘the availability of valuation information’ (although there was a recognition that the inclusion of ‘timely and ‘independent’ valuation information would pose practical concerns and that these practical issues should be considered. The group also questioned if the requirement would apply to all classes of investment.

These changes are likely to be added to existing covenants in the SIS Act, but could be reflected in a Prudential Standard.

Superannuation complaints & provision of reasons for decision

There is industry agreement with the extension of the time period in which a complaint can be made to four years to allow alignment with the Superannuation Complaints Tribunal processes for certain matters. It was also agreed that reasons for decision relating to discrete matters affecting an individual should be provided to improve transparency.

Binding death benefit nominations

There are difficult legal and public policy issues to be balanced when dealing with binding death benefit nominations. Whilst recognising that there are equity issues associated with binding death nominations, the group did not support the recommendation that binding death benefit nominations be invalidated by ‘life events’, such as marriage or divorce, due to difficulty in defining these events.

Further work in this area is required by the industry to ensure appropriate provision for beneficiaries without placing the trustees in the position of arbitrator.

Providing Administrative Power to APRA to impose fines as an alternative to criminal prosecution

There is no opposition to the imposition of fines as an alternative to criminal prosecution where the breach was clear cut and not likely to be the subject of disputed fact or subjective considerations. APRA would have the discretion not to impose a fine and a fund the ability to challenge the fine in court. The imposition of a fine may also be the subject of a public notification, most likely via APRA’s web site. However, it was agreed that there are some breaches that would warrant a criminal prosecution given their serious nature.

Portfolio disclosure issues

The industry agrees in-principle with the public disclosure of a fund’s investment portfolio. The cost of any detailed disclosure would need to be balanced against the benefit to members, potential members, the industry and regulators. There will be further discussion with APRA on how this balance can be achieved.

For more information about governance visit the StongerSuper website.

Where to now with Cooper?

Following the Government’s detailed response to the Cooper Report in December 2010, the first initiatives from the Report will be implemented in 2011. The initial task for funds and the super industry will be working through the implementation detail of the SuperStream Tax File Number (TFN) initiative.

Treasury is expected to release a timetable for industry consultation on the SuperStream changes in late January or early February.

Use of a member’s TFN as a unique account identifier from 1 July 2011 was flagged as a priority during the election campaign. Therefore, Treasury is expected to consider this issue as a matter of urgency. Most funds currently do not use members’ TFNs for this purpose, which means significant planning will be required by Government, industry and the ATO.

The consultation process on other aspects of the Cooper reforms, such as MySuper default funds will also get underway in the first half of the year. While the timetable for implementation of these initiatives is more generous than with TFNs, the consultations will require detailed participation and oversight. An additional transitional period prior to the initiatives becoming mandatory has also been flagged.

During 2011, a lengthy consultation process will also commence on other aspects of both the SuperStream and MySuper reforms. If the Future of Financial Advice (FOFA) consultation process is any guide, there will be numerous complex issues for the industry to work through both practically and politically.

For more information about SuperStream and the TFN changes, contact ISN’s Chief Economist, Dr Sacha Vidler, svidler@industrysuper.com