Ironing out the wrinkles in the Budget’s new super approach

There was so much the financial planning industry might have hoped for from the 2020 Federal Budget, not least the tax deductibility of financial advice and greater clarity around the future of the Financial Adviser Standards and Ethics Authority (FASEA) but, in the end, it was all about superannuation.

The only significant financial services inclusion in the Federal Budget proved to be the Government’s Your Future, Your Super package which is scheduled to be implemented by 1 July, 2021, meaning that there will be yet another Federal Budget before it actually becomes law.

And, already, there are loud calls from the broader financial services industry about the need for significant consultation around the Government’s new superannuation policy position in circumstances where some of the underlying assumptions have already been proved not to add up.

Those assumptions have been drawn from the somewhat vague findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the recommendations of the Productivity Commission following its review into superannuation.

Not unimportantly, the Government’s Budget policy formula is also broadly consistent with a submission put to it by the Financial Services Council (FSC) emanating out of that organisation’s Accelerating Economic Recovery document developed earlier this year.

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So, what did the Treasurer, Josh Frydenberg announce on Budget night?

According to Frydenberg, the new Your Future, Your Super package which commences on 1 July, next year, “will improve the superannuation system by:

• Having your superannuation follow you: preventing the creation of unintended multiple superannuation accounts when employees change jobs.
• Making it easier to choose a better fund: members will have access to a new interactive online YourSuper comparison tool which will encourage funds to compete harder for members’ savings.
• Holding funds to account for underperformance: to protect members from poor outcomes and encourage funds to lower costs the Government will require superannuation products to meet an annual objective performance test. Those that fail will be required to inform members. Persistently underperforming products will be prevented from taking on new members.
• Increasing transparency and accountability: the Government will increase trustee accountability by strengthening their obligations to ensure trustees only act in the best financial interests of members. The Government will also require superannuation funds to provide better information regarding how they manage and spend members’ money in advance of Annual Members’ Meetings.

One of the foundations of the Government’s policy position is the Productivity Commission’s (PC’s) 2018 report ‘Assessing the efficiency and effectiveness of superannuation’ authored in part by former PC deputy chair, Karen Chester who is now a deputy chair of the Australian Securities and Investments Commission (ASIC).

A central element of that PC report was a revamping of the default selection system with the PC’s own synopsis of its recommendations being as follows:

• Members should only be defaulted once, and move to a new fund only when they choose. Members should also be empowered to choose their own super product from a ‘best in show’ shortlist, set by a competitive and independent process. This will bring benefits above and beyond simply removing underperformers.
• All MySuper and choice products should have to earn the ‘right to remain’ in the system under elevated outcomes tests. Weeding out persistent underperformers will make choosing a product safer for members.
• All trustee boards need to steadfastly appoint skilled board members, better manage unavoidable conflicts of interest, and promote member outcomes without fear or favour.
• Regulators need clearer roles, accountability and powers to confidently monitor trustee conduct and enforce the law when it is transgressed. A strong member voice is also needed.

Sound familiar? It should. There is significant congruence between the PC’s 2018 position on superannuation and the Government’s new policy approach.

However, the difficulty for the Government is that the PC’s proposals had already been revealed as being flawed at the time of their initial release in 2017 and their final public release in January 2019.

And the single most significant flaw is the continuing reality that there is no certainty that the superannuation fund which was deemed to be the top performer in January 2019 would have maintained that position 12 months’ later in January 2020.

Indeed, Money Management’s sister publication, Super Review, in September 2019 ran the numbers on what would happen if the Federal Government adopted the PC’s recommendations with the analysis covering which funds would have made it into a “best in show” superannuation top 10 across three six-months periods – December 2017, June 2018 and December 2018.

That analysis showed that only two funds made it onto the list across all three periods.

In the wake of the Government’s Budget announcement superannuation fund actuaries have run similar exercises and found similar outcomes across one, three, five and 10-year timeframes with the disturbing bottom line that members who selected the best-performing MySuper product in 2018 would have found themselves better off in 87% of other products in the intervening period.

What the actuaries also found was that, while the rule is that “past performance is no indicator of future performance”, people selecting superannuation funds would have been on safer ground selecting a fund based on its relative performance over 10 years rather than one, three or even five years.

This, of course, would give the advantage to industry funds which have been acknowledged across all data bases as having outperformed the retail funds over the long haul.

Deloitte superannuation partner, Russell Mason, also suggests that the Government’s stapling approach appears to play into the hands of the funds which represent the first port of all for young people entering the workforce such as big retail industry fund, REST or liquor and hospitality industry fund, HostPlus.

“People might end up pursuing careers in the law or banking but it is not unusual for them to start their lives packing shelves at Woolworths or pulling beers at the local pub,” he said. “That means that their first fund selection might be either REST or HostPlus and stapling means they would then need to make a distinct choice with respect to another fund such as LegalSuper or UniSuper.”

For its part, major superannuation investment consultancy, JANA, has pointed to unintended consequences flowing from the Government’s approach.

JANA principal consultant, Matthew Griffith, suggests that imposing an annual performance test and blocking underperforming funds from taking on new members has the potential to reduce innovation and promote index-hugging  on the part of superannuation funds.

“We fear that the drive to be within 0.50% of an index benchmark will result in an “averageness” mindset that might blunt enthusiasm for adopting points of difference which may be truly beneficial to members over the longer term,” he said.

Deloitte’s Mason also suggests that the benefits delivered to members by superannuation funds is about more than just investment returns, with factors such as insurance inside superannuation needing to be taken into account, particularly with respect to people working in dangerous occupations.

It is these factors which have prompted the major superannuation industry organisations such as the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST) to strongly urge the Government to allow significant consultations before proceeding with the changes.

ASFA chief executive, Dr Martin Fahy, said that in the absence of the release of the Retirement Income Review and the lack of specificity in the Budget papers, it was unclear how the changes would work in practice or what the implications would be for competition, efficiency and incumbents in the sector.

“We need to avoid reducing the complexity of MySuper to a singularity without any reference to the nuance of member preferences and long-term fund performance,” he said.

Fahy said the devil would be in the detail and that ASFA was committed to working with the Government on the issue.

AIST chief executive, Eva Scheerlinck also bemoaned the lack of detail in the Government’s proposals and urged consultation.

“We are concerned that millions of members could be stapled to an underperforming fund with the scheme relying on disclosure to get people to switch to a better fund,” she said. 

“We know from research – including that produced recently by ASIC – that mandated disclosure and warnings have been proven to ineffective in influencing consumer behaviour. Moreover, relying on disclosure only to influence behaviour puts the onus on consumers, rather than the regulators, to deal with underperformance.”

“We have seen how poorly disclosure works in the electricity market, where consumers remain for years on uncompetitive pricing plans, despite being warned that there are better deals elsewhere. 

“It also needs to be noted that not all super funds are the same, even high-performing ones. That is, some are specifically tailored to workplaces in particular high-risk workplaces, and the stapling proposed does not address the risk of changing industries and having insurance that is no longer appropriate. 

“Moreover, stapling to one fund for life will provide even greater structural incentives for marketing super to young, disengaged Australians where they could be sold into potentially underperforming funds. And if you are stapled to a dud fund, it won’t matter how many workplaces you go to, you will still be in a dud fund, whereas under the existing default system, most disengaged workers will be automatically placed into a default fund, which on average outperforms.

“In a compulsory super system, good disclosure is essential, and this includes providing simple, accessible tools for consumers to make informed decisions about their super.

But for all the shortcomings of disclosure described above, naming and shaming won’t go anywhere near to fixing systemic underperformance in our super system, which is a job for the regulators. 

“So, there is a real danger when you are stapling people to a product and relying only on disclosure alone to protect their interests.”
In the meantime, superannuation fund executives will not have been reassured by the alacrity with which Australian Prudential Regulation Authority (APRA) deputy chair,

Helen Rowell sought to tie the Government’s Budget measures to the authority’s performance heatmap approach in circumstances where funds are still questioning the accuracy of the formula.