Default funds and shadow shops

Industry Super Australia (ISA) last year made much of the banks offering employers "inducements" to choose a bank-related superannuation product as the default fund for their employees. Now, the Australian Securities and Investments Commission (ASIC) has signalled it may shadow-shop the issue.

ASIC Commissioner, Greg Tanzer, late last month revealed changes to the regulator's MoneySmart website providing guidance to employers on the selection of default funds encouraging them to consider a range of factors when deciding about a default super fund for employees, including fees, investment options offered, fund performance and insurance.

Tanzer then used a media statement to "encourage employers to be very wary of trustees offering them inducements to pick their funds".

"Employers should not choose a default fund on the basis of an inducement. I strongly encourage employers who are concerned they may have been offered an inducement that is illegal to contact ASIC," the statement said.

Tanzer then went on to say that ASIC would continue to monitor the area of employer inducements "and may consider undertaking shadow shopping exercises to gain a better understanding of the employer experience when dealing with superannuation trustees and their associated businesses".

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"Where we find evidence illegal inducements have been offered, ASIC will not hesitate to take action," he said.

When the ISA and, indeed, ASIC refers to "inducements" offered to employers with respect to choosing default superannuation funds, it is generally regarded as referring to discounts and concessions offered with respect to other bank-related products such as business loans and insurance.

However, when the matter of such inducements was raised with ASIC officials during a Parliamentary Committee, the regulator made clear that industry funds themselves might not be without sin.

"ASIC has undertaken further review work following these issues being brought to our attention by ISA," ASIC said in answer to a formal question on notice from Labor Senator, Sam Dastyari.

"We are working closely with [the Australian Prudential Regulation Authority (APRA)] on this. Our review extends beyond the banks identified in the initial ISA complaint as we do not think the practice of trustees and others offering benefits to employers is necessarily limited to bank-affiliated trustees. It does not appear to be uncommon for employers to be offered benefits across retail and industry funds' sectors."

In other words, if ASIC were to pursue a shadow shop exercise on the question of whether inducements are being offered, some of the superannuation funds represented by the ISA might equally find themselves under the spotlight.

The regulator then went on to point out that "many of the ‘inducements' that may be offered, particularly those offered directly to members (such as fee reductions or better insurance benefits for members) are not inducements for the purposes of s68A of the SIS Act".

"Similarly, there are exemptions to allow certain ‘inducements' to be offered — such as loans to employers by banks on a commercial arms-length basis and clearing house facilities," it said.

The ASIC answer said that based on its work to date and analysis of s68A, "we are aware that proving that a benefit was provided ‘on condition' that an employee join the fund could be difficult. That is, the inducement is not simply linked to the employer's selection of the fund as a default fund. But also upon the employer's employee(s) joining the fund"

If, ultimately, ASIC does decide to pursue a shadow shopping exercise into employer selection of superannuation default funds, industry fund executives may also need to ensure they have their houses in order.

Then, too, there is the question of enterprise agreements which industrially compel employers to ensure their employees are members of particular industry funds.