AIST Policy News - 27 July 2018

AIST Policy News - 27 July 2018

Royal Commission to examine broad range of super issues

Representatives from 14 super funds are set to appear at the upcoming Round Five hearings of the Royal Commission, with a broad range of topics to be covered.

The hearings - due to commence on Monday August 6 in Melbourne and run over two weeks -  will hear evidence from both profit-to-member and retail funds as well as the regulators.

The Commission has said it will focus on how funds fulfil their duties to members and the extent to which structural or governance arrangements may affect the fulfilment of those duties. It will also consider related issues such as selling practices in relation to superannuation, the relationship between trustees and financial advisers, the current legal regime and the effectiveness of regulators.

The list of entities appearing is available on the Royal Commission Round Five page.

In addition, the Commission has indicated it will tender statements from other funds during the hearings. It has also noted that further categories of issues, or entities for categories, may be included and the list of entities appearing may be updated accordingly before the hearings commence.

A further round of hearings on insurance will be held in September, where the Commission might focus on different funds.

AIST urges Productivity Commission to address underperforming Choice funds

AIST has strongly engaged with the Productivity Commission about its draft superannuation report, highlighting that the Commission has failed to recommend any way to address the identified problem of underperforming funds in the retail sector.

In two submissions and in direct representations to the Productivity Commission, AIST has noted that despite finding that default funds offered by profit-to-member funds generally outperformed over the long-term, the Commission has sidestepped consideration of measures to address the serious problem of underperforming ‘Choice’ funds, instead focusing on re-engineering the default space.

AIST agrees with the Commission that there is no place for long-term underperforming funds in the default space. However, we believe that enhancing the current Fair Work Commission default selection process and increasing APRA’s scrutiny of under-performing funds would be the most efficient, appropriate, and importantly, the least disruptive way to address this issue.  We opposed the ‘best in show’ default proposal.

Appearing before the Commission in the Melbourne hearings, AIST CEO Eva Scheerlinck and AIST Head of Advocacy, Ailsa Goodwin, said there was no case for going back to the drawing board with the existing default system.

Agreeing on the need to address the serious issues of multiple accounts and a tail of underperforming funds, Ms Scheerlinck said rather than dismantle a default system that had overwhelmingly delivered for members, a better approach would be timely and targeted action to fix each of these problems in turn.

AIST has noted that multiple accounts, balance erosion by fees and underperforming funds are being addressed by APRA’s Member Outcomes Assessment Test and new ATO services. In relation to the consolidation of accounts, we argue that this should be enhanced by legislation supporting direct fund-to-fund consolidation of lost super, rather than by the wholesale transfer of more inactive accounts to the ATO. We have explained how unnecessarily duplicated accounts can be removed from the superannuation system as part of an integrated online process without the major disruption proposed by the Productivity Commission.

Our submission also provided detailed responses on:

  • Fees and costs
  • Members’ need and engagement
  • Insurance in superannuation
  • Fund and system governance

A copy of our main submission can be read here. A copy of the transcript to the Productivity Commission hearings, which includes AIST’s opening statement, can be read here.

ASIC releases expert review on fee and cost disclosure

AIST has welcomed the release this week of a comprehensive report into the fee and cost disclosure regime for superannuation funds.

The report– prepared by independent expert, Darren McShane at the request of the Australian Securities and Investments Commission (ASIC) – vindicated many of AIST’s concerns with the existing fee and cost disclosure regime for superannuation funds.

The release of the independent and very comprehensive report comes after four years of intense industry debate and consultations about ASIC’s RG 97 guidelines on fee and cost disclosures.

The report acknowledges there are challenges and inconsistencies with ASIC’s disclosure regime and recommends a framework that will apply more rigour to decision-making on fee and cost disclosure.

Importantly, the report has noted that the complexity of fee disclosure with platforms makes it very difficult for consumers (and industry stakeholders) to understand the cost implications and compare products. It recommends four additional enhancements to disclose requirements for platforms - an important step towards greater transparency of the fees and costs involved in these arrangements.

The report also recommends that ASIC introduce comparative tools to better support consumers in their decision-making. This includes a recommendation for ASIC to explore the development of a user-friendly online portal to allow individuals to compare fees and costs.

AIST has been actively involved in the industry-wide consultation process and looks forward to reviewing the findings in detail with ASIC and other key stakeholders.

AIST will shortly distribute a detailed summary of Darren McShane’s findings.

Funding of AFCA must avoid cross-subsidisation

AIST has warned that the funding model of the newly-established Australian Financial Complaints Authority (AFCA) must avoid any cross subsidisation by super funds.

In our submission to AFCA on the authority’s proposed funding models, AIST says it is essential that AFCA is appropriately funded to ensure it can provide an effective and efficient dispute resolution service to consumers and scheme members.

We note it would be unacceptable, inequitable and unfair if members’ retirement savings were used to fund the resolution of disputes unrelated to superannuation, such as complaints against banks and financial advisers.

AIST’s submission also raises concerns about a lack of transparency in AFCA’s proposed funding models for three different stages covering transition, interim and long-term funding.

We have requested that AFCA release detailed cost projections for each dispute resolution stream to enable super funds to better understand how members’ savings are going to be used and how much will be collected from each industry sector providing the funding.

 Other key points raised in the submission include:

• The need for more clarity around AFCA’s cost recovery model;

• The need for AFCA to provide a breakdown in funding across staff, complaints handling, technology and other operational areas;

• The importance of AFCA allowing the industry sufficient time to response on any funding proposal in the future.

More efficient for funds rather than ATO to consolidate inactive accounts: AIST at Senate hearing

AIST has raised concerns about the Government’s Protecting Your Super Bill which is currently in front of the Senate.

Appearing before the Senate Economics Legislation Committee last week, AIST’s senior policy manager, David Haynes, questioned the efficiency of the Australian Tax Office being tasked with consolidating all inactive accounts.

The Government’s super package of reforms includes a requirement for funds to transfer all inactive super accounts under $6000 to the ATO for automatic consolidation.

Mr Haynes argued that direct fund-to-fund consolidation would be a more efficient process and less confusing for members. This would involve funds with an inactive account being compelled to transfer that account to the fund where the individual has an active account. Instead of the member’s balance going to the ATO, the money would go directly from fund A, with the inactive account, to fund B, with the active account. Only in instances where a member does not have an active account would it be appropriate for that money to go to the ATO.

On measures in the Bill relating to insurance, Mr Haynes noted that AIST strongly supported measures to reduce balance erosion due to insurance premiums, but that funds should be given the flexibility to offer opt-out insurance to young members between the ages of 21 and 25 years where the fund’s membership characteristics demonstrates this would be appropriate. As the Bill currently stands, all funds will be compelled to offer opt-in (rather than opt-out) insurance for the new accounts of members aged under 25 years.

Mr Haynes also raised AIST’s concerns about measures in the Bill to cap fees, noting that such requirements could give rise for unscrupulous product offerors to manipulate the fees they disclose.

A transcript of all the evidence presented to the Senate Committee hearing can be found here.