What does it mean for you?
Are super funds in for the biggest reorganization of the industry in more than two decades?
Plans to enshrine in legislation that the purpose of the superannuation system is to generate “retirement income”, as distinct from accumulating savings, is not just legalese but a shift that could shake up the industry and drive some funds out of business.
Last week the Turnbull government launched a discussion paper ahead of plans to have a definition of superannuation written into law for the first time. The move has been welcomed by the retail, industry and self-managed factions of the sector – although debate remains over the exact wording.
Former union boss and industry superannuation fund director-turned-KPMG partner Paul Howes said the effect of formalising such a seemingly obvious truth should not be underestimated.
“Redefining the objectives of the super system, to change the focus from accumulation to de-accumulation, is set to be a massive shift with a huge impact on how products and services in the market are designed, sold and regulated,” Mr Howes said. “If it is done it could provoke the biggest set of challenges and opportunities to industry since compulsory contributions were introduced in 1992.”
Paul Howes Photo: Louie Douvis
Assistant Treasurer Kelly O’Dwyer said the government supports the definition recommended by the 2014 financial system inquiry led by former Commonwealth Bank boss David Murray: “To provide income in retirement to substitute or supplement the age pension.”
Formalizing “retirement income” as the purpose of super would place an imperative on funds, which have historically managed accumulation accounts, to run more-complex pension account divisions.
The government has already said it will accept another recommendation of the Murray inquiry – to force all funds to offer a “comprehensive income product for retirement” to all retiring members.
“Market-leading funds have already begun dealing with the issue of how to retain members in retirement, but defining super as something that must provide an income in retirement would force the whole industry to shift focus,” Mr Howes said. “There is certainly the potential that the challenge of having to develop and manage more-sophisticated retirement income products could drive consolidation at a number of the smaller APRA-regulated funds.”
A more formal focus on securing retirement income could also challenge the traditional understanding of how super funds meet their prudential obligation to choose investments based solely on what is in their members’ best interest.
“In the past certain groups have pushed for super funds to be forced to invest in asset classes considered to be in the national interest, such as domestic infrastructure or venture capital,” he said.
Independent Senator Glenn Lazarus posted on Facebook this month that he had asked the head of an industry-funded review into governance in the non-profit super sector, Bernie Fraser, to expand the scope to consider how super funds could increase investment in Australia.
“Quite rightly, that push has always been rejected because it conflicts with the obligation to make investment decisions based solely on what was in the best financial interests of their members,” Mr Howes said. “That’s unlikely to change but a more expansive definition of securing retirement incomes could lead to funds considering investments based on a combination of both the financial and strategic interests of their members.”
He said aged care, affordable housing, or healthcare facilities were all assets where in the future funds might consider investments according to not just the direct financial return but how these assets might contribute to a more secure and confident retirement for their members.
Meanwhile, the former head of the ACCC has accused superannuation funds of preying on the financial illiteracy of Australians.
The former head of the competition regulator has accused superannuation funds of encouraging complexity and stifling competition to keep fees lucratively high.
Players in the industry preyed on financial illiteracy to prop up their business models, the former Australian Competition and Consumer Commission chairman told The Australian Financial Review‘s Banking & Wealth Summit. That feeds into a simmering row over whether for-profit super funds owned by banks should be better able to compete with industry-aligned funds for a slice of the default sector.
One of the problems is that few people seek independent financial advice when it comes to nominating their super fund. Eighty per cent of employees opt for whichever default super provider their employer nominates.
Historical and industrial factors mean industry super funds get the lion’s share of this default money. The theory is that more competition for default provider status will result in better products and lower fees.
At present, default funds are chosen by the Fair Work Commission. But critics believe the commission is stacked by the Left and is therefore inclined to select industry funds as default providers.
The federal government has asked the Productivity Commission to look at a competitive tender process.
It has also introduced legislation that will make it unlawful for enterprise agreements to mandate employees use a particular super provider.
Ms Howes said industry super funds had been the beneficiaries of a “protectionist policy” that guaranteed they received the lion’s share of default money.
At Altitude Wealth Solutions, we encourage you not to put the fate of one of your biggest assets into a default category. Always seek financial advice how to get the best out of your super. Contact us today to find out more.