Where are we up to with the Super System Review?

In recent weeks, two preliminary reports have been issued as part of the Super System Review (‘Cooper Review’). The final report is due to be submitted to the government by 30 June. As part of the very transparent approach taken by the Cooper Review, the release of these preliminary reports together with earlier reports and one further preliminary report to come give the industry a good idea of what the final recommendations will be like.

The first recent report deals with back-office administration of superannuation. The report contains entirely sensible suggestions about better use of e-commerce in superannuation. The report is not controversial and met with broad agreement from the industry when it was released, although the recommendations for tax file numbers to be used more extensively will challenge existing sensitivities over the use of personal identifiers.

The second report contains recommendations which are far reaching and could revolutionise the superannuation  industry as we know it. Responses to it have been polarised and politicised. However, the premise on which the report is predicated, providing a simple and cost-effective superannuation product for the vast majority of Australian workers, can hardly be criticised. 

Phase Two Preliminary Report

On Monday 22 March 2010, the Cooper Review released its Phase Two Preliminary Report SuperStream: Bringing the Back Office of Super into the 21st Century¹, which focuses on the 'back office' of the superannuation system. The focus of the Report is on improving efficiency and minimising costs. The Report identifies seven main problems with the current back office of the superannuation system:

1. a lack of industry data standards 
2. multiple technology platforms 
3. manual and disparate processes  
4. a lack of a robust member identifier  
5. the high number of employers who are required to contribute to multiple funds  
6. misalignment of pay and contributions cycles, and  
7. overly complex switching and consolidation of superannuation entitlements.

Following are the key preliminary recommendations made in the Report:

• Improve data quality from employers by requiring employers to provide adequate information in order to satisfy their superannuation guarantee obligations or imposing a fixed administrative penalty on an employer who fails to provide adequate information when making contributions.  
• Reduce administration costs through standardised data transmission, such as mandating the use of prescribed forms. There is also support for the use of the TFN as a universal identifier.  
• Encourage more efficient use of technology and e-commerce to reduce transaction costs. This would be done by encouraging more extensive use of e-commerce facilities through the imposition of a fee for those who make contributions other than in electronic form and by requiring licensed trustees to provide e-commerce facilities to all employers. The Panel advocates the use of ‘straight-through processing’ with appropriate risk control and the development of ‘Standard Business Reporting’ compatible standards. 
• Recognise the importance of the large corporate administrators and clearing houses. The Panel will give further consideration to whether superannuation administrators should be licensed by APRA and recommends that clearing houses be required to provide linked member and funding data to superannuation funds. 
• Extend the use of personal information, particularly TFNs, to promote efficiency in the superannuation system. This would include allowing TFNs to be used to link contributions and rollovers with member accounts.
• Improve portability and consolidation of accounts. This would include requiring the ATO to develop an electronic means to display all of the superannuation funds relating to an individual, validation of TFNs by fund administrators and clearing houses upon establishment of a new member account along with checks to ascertain whether unclaimed money is held for that member and simplification of the mechanisms for rollovers. Further, it is proposed that member protection rules be abolished and the RSE licence for each trustee of an eligible rollover fund be subject to a condition that the trustee actively attempt to cross match members with active superannuation funds.

Second Phase One Preliminary Report

On 20 April 2010, the Cooper Review released the Second Phase One Preliminary Report MySuper: Optimising Australian superannuation.² Phase One of the Review deals with governance of the superannuation industry.

As detailed in the corresponding media release,³ this report ‘provides more detail on the choice architecture outlined by the Review Panel in its Phase One preliminary report Clearer Super Solutions⁴ released late last year. ‘MySuper’ is the new name for the universal fund concept proposed in that report’. MySuper forms only one part of the ‘choice architecture model’ proposed by the Review Panel.

The aim of MySuper is to provide a ‘simple, cost-effective product with a diversified portfolio of investments for the vast majority of Australian workers (shown to be above 80% of members) who are invested in the default option in their current fund’. The Panel believes that MySuper would also be an attractive option for presently engaged investors due to the proposed greater transparency, comparability and economies of scale combined with the ongoing protection afforded by the traditional trustee obligations and lower costs. The Report emphasises that ‘MySuper has nothing to do with establishing a single national default fund’; instead, it is a product which existing superannuation fund trustees can provide through either ‘a separate fund or an identifiable pool of assets within an existing superannuation fund’.

General principles

It is proposed that trustees would need to obtain a MySuper APRA licence. Further, there would be the following additional regulatory requirements for MySuper products:

Soft principles

Three new ‘high level, principles-based’ trustee duties would be inserted in the SIS Act and could not be diluted, being the following:

• the trustee would need to provide members with an investment strategy which optimises their financial best interests having regard to the overall cost and net investment return over the long term  
• the trustee would need to design ‘a single investment strategy with an appropriately diversified allocation of growth and defensive assets’, and 
• the trustee would need to consider, on an annual basis, whether its MySuper product has sufficient economies of scale on its own. Mergers or pooling of MySuper members or products may be required.

Hard principles

A MySuper product would need to:

• accept all types of contributions allowed by law 
• use electronic disclosure and e-commerce 
• ensure no direct or indirect cross-subsidisation of costs between products 
• provide a post-retirement product 
• limit fees, including no entry or contribution fees, exit fees only on a cost recovery basis, buy and sell spreads limited to demonstrable costs and switching fees to be paid to the fund only. All fee schedules and discounts would need to be explicit and not subject to negotiation or rebates.

It is also proposed that MySuper products would have to provide death insurance at a default level on an opt-out basis and provide the ability for members to elect higher levels of cover. Trustees would also have the option of offering members voluntary insurance for total and permanent disability and salary continuance.

In terms of disclosure, it is proposed that because of the simplicity of a MySuper product, as well as the central duty of the fund trustee in overseeing a MySuper product, there would be reduced member disclosure obligations. In fact it is proposed that product disclosure statements would not be required.

Advice

• Advice in relation to MySuper products could not be bundled with personal advice and could only be provided upon member request. 
• Trustees of MySuper products must provide access to intra-fund advice, with costs shared across MySuper members or charged to those who use the service. 
• Advice would be on a fee-for-service basis for personal financial advice sought by MySuper members outside the intra-fund model. This fee would be negotiated between the member and the adviser and could not involve trailing commissions or ongoing payments. Fees for advice about superannuation would be able to be paid from the member’s account. There would be a requirement to renew such arrangements annually.

Default funds

• Accumulation funds would need to offer a MySuper product in order to be an employer’s default fund for SG Act purposes. 
• Defined benefit funds would automatically be default funds for SG Act and award purposes and would generally fit into the MySuper model given that members with defined benefits ‘are protected in a way broadly consistent with a MySuper product’.  
• Hybrid funds with an accumulation division which is used to satisfy an employer’s superannuation guarantee obligations would be required to offer a separate MySuper product in order for the fund to be a default fund for SG Act purposes.

This article was written by Natalie Gullifer, Partner and Beth McConnell, Senior Associate, Melbourne.

Endnotes

1. Super System Review Phase Two Preliminary Report, SuperStream: Bringing the Back Office of Super into the 21st Century 
2. Super System Review Second Phase One – Preliminary Report, MySuper: Optimising Australian superannuation
3. Media Release, 20 April 2010 
4. Super System Review Phase One Preliminary Report, Clearer super choices: matching governance solutions

More information

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