Review of Cooper

On 5 July 2010, the Minister for Financial Services, Superannuation and Corporate Law released¹ the final report² of the Cooper Review into the governance, efficiency, structure and operation of Australia’s superannuation system (Report).

The Report states its core purpose as being the optimisation of retirement incomes for members. The focus of the Report is on members as opposed to what is said to be the current industry focus on products. The Report also calls for a greater focus on the overall efficiency and transparency of the superannuation system.

There are many aspects to the Report, including 177 individual recommendations and 10 lengthy chapters of discourse.

One of the most fundamental aspects of the recommendations involves a redesign of the superannuation system in accordance with a new ‘choice architecture model’, a central plank of which is the proposed new MySuper product. Under this model, there are four categorisations of members:

1. MySuper for disengaged members who do not make an express choice regarding their superannuation and also for those members who actually elect to be a MySuper member. MySuper would be a low cost ‘no frills’ product with a single diversified investment strategy, basic insurance options, traditional trustee obligations and a limited role for external advice.
2. Choice for engaged members who wish to bear substantial responsibility for their choice of fund and investment. Choice products would rely upon more effective and transparent disclosure and could charge higher fees based on more precise allocation of fees to Choice members for the services and products which each member actually selects.
3. SMSFs. The Report does not recommend significant changes to this sector of the superannuation industry, although it recommends changes in approach to penalties, breaches and some aspects of investments, and also some changes which would affect auditors of SMSFs. 
4. ERFs for lost members who are disconnected from their superannuation and would continue to receive a high level of protection in the superannuation system.

In this update, we focus on what the MySuper product and Choice investment options would look like in practice and what trustees need to start thinking about should the Cooper Review recommendations become law.

MySuper

Why would a trustee offer a MySuper product?

Under the proposed new model, MySuper products would be the only products able to be nominated as a default fund for SG Act purposes and under industrial awards. In other words, if a trustee wants its fund to be able to receive default SG contributions for members, it will need to have a MySuper product available.

The Report envisages that a superannuation fund could have a MySuper product as well as a Choice product—so a trustee does not have to elect solely one or the other, and does not have to maintain two separate funds as both products can be offered within the one superannuation fund. However, it might be that a trustee chooses to offer only a MySuper product or only a Choice product.

What about defined benefit funds?

The design of the MySuper product is premised on MySuper being an accumulation product. However, the Report does deal with how defined benefit funds fit into the choice architecture model.

The first principle is that a ‘pure’ defined benefit fund will automatically qualify as a ‘default’ fund for SG Act purposes in respect of the defined benefit provided to members. In other words, a pure defined benefit fund does not have to meet the MySuper product requirements.

If a defined benefit fund is a ‘hybrid’ fund, the accumulation part of the fund would need to satisfy the MySuper product requirements in order for the fund to be accepted as a default fund, unless the accumulation benefits are not necessary to meet the relevant employers’ SG obligations. Further, if a member has both defined benefits and accumulation benefits within a hybrid fund, and the accumulation benefit is not necessary to meet the employer’s SG Act obligations, then the MySuper product requirements do not need to be met for the accumulation part of the fund.

How would a product qualify as a MySuper product?

The Report envisages that trustees could modify existing default funds and default investment options to comply with the MySuper product requirements.

A MySuper product would need to comply with the particular trustee duties and objective criteria which apply to MySuper products. These are as follows:

Trustee duties

• No investment options: The trustee would need to formulate and give effect to one diversified investment strategy at an overall cost aimed at optimising fund members’ financial best interests over the longer term. Formulation of the investment strategy would be the sole responsibility of the trustee. The strategy need not be a single investment strategy across the whole membership, but could be several different investment strategies for different groups of members (eg like age-based default strategies for different age groups of members).
• Annual consideration of scale: The trustee would need to determine on an annual basis that the MySuper product has sufficient scale to deliver optimal benefits to members.

Objective criteria

The objective criteria for MySuper products outline the key areas for a trustee to consider in determining whether their superannuation product would qualify as a MySuper product, including the following:

• The trustee of a MySuper product would need to hold a ‘MySuper’ class of RSE licence.
• The trustee of a MySuper product would need to accept all types of contributions permitted by law.
• Buy/sell spreads could only be charged to MySuper members to the extent that they reflect actual transaction costs.
• Switching fees could only be charged where those fees are paid to the fund and not to the trustee.
• All fee schedules and discounts would need to be explicit and not subject to negotiation.
• No performance based investment management fees could be paid to the trustee unless the fee complied with a new ‘performance fee standard’.
• A PDS would not be required for a MySuper product. Information regarding the MySuper product would be available online or on request and member benefit statements would continue to be sent.
• A MySuper product would be a whole of life product and must offer a retirement income stream product.
• MySuper products must be regularly benchmarked in accordance with APRA-approved benchmarking surveys that would measure their relative efficiency against peers in a number of key areas.
• A trustee of a MySuper product would need to provide intra-fund advice to members directly or through an AFS licensee. The cost of the advice must comply with the sole purpose test and could be shared by all the MySuper members or charged to those who use the service. This intra-fund advice could be provided on a pro-active basis to members at certain key stages of life but could not be used to encourage members to transfer to higher cost products.

Are there any other limitations on a MySuper product?

The Report envisages that there would generally only be one MySuper product in each RSE. However, where there are multiple branded products offered within one single RSE legal structure (eg a master trust), a MySuper product would be permitted under each brand name. A trustee of a master fund would only be able to offer one MySuper product to an employee of each employer.

Where a trustee offers more than one product, it would be appropriate for the MySuper and Choice products to constitute one fund and be regarded as a single pool for administration, investment and underwriting purposes. However, a MySuper product would require separately audited accounts.

There are further proposed limitations and requirements for MySuper products, including:

• Investment: Trustees must devise a separate investment strategy for post-retirement members in a MySuper product.
• Insurance: Death and TPD insurance must be provided on an opt-out basis in a MySuper product. There would be no minimum specified level of cover. Offering salary continuance cover would be optional with the trustee. Any other type of insurance would be prohibited.
• Movement: There would be few barriers to a MySuper member choosing to move their superannuation but there would be legislative protections for members who receive financial advice to do so. Also, a MySuper member couldn’t easily be moved involuntarily unless to an ERF or under legislative requirements such as auto-consolidation or temporary resident arrangements.
• Flipping: The practice of automatically ‘flipping’ a member from one division of a fund to another, for example, a transfer to the fund’s personal plan on termination of a member’s employment, would be subject to new limitations (eg, a member could only be ‘flipped’ from one MySuper product in a master trust to another MySuper product in another division of that same trust).
• Retirement forecasts: MySuper products will be required to present retirement benefit forecasts.

Choice

Why would a trustee offer a Choice product?

A Choice product would essentially be the continuation of a current product. A Choice product would have greater freedom in the investment and insurance choices it offers members as well as advice and retirement products.

What limitations would be placed on a Choice product?

It is proposed that:

• Investment: A trustee of a Choice product would offer more than one investment option which allows a member to obtain a diversified asset mix if they choose. But where a Choice member chooses to be undiversified, the trustee is under no obligation to assess the investment strategy chosen by the Choice member.
  
  A trustee of a Choice product would be subject to new express duties in selecting and monitoring investment options and a trustee who has discharged these duties in selecting and monitoring investment options would not be exposed to civil liability where a member suffers damage from circumstances affecting the investment option such as illiquidity, diminution in value or failure.
• Insurance: As is the case now, in a Choice product, death and TPD insurance could be provided on an opt-out or opt-in basis or not at all. Offering salary continuance cover would be optional. However, any other type of insurance would be prohibited.
• Retirement forecasts: The Report notes that in the longer term the Panel would like to see retirement projections as a feature of Choice products.

General changes relevant to both MySuper and Choice products

Although one might think that MySuper is the new product with many new restrictions and rules and a Choice product would be essentially what we have now, in fact the Report proposes many changes across the board which (if implemented) would apply to both types of products. These proposed new changes are summarised as follows:

• Trustee governance: A new office of ‘trustee-director’ would be established with all duties set out in the SIS Act. These duties would require the trustee and the trustee-director to act solely for the benefit of members.
  
  Equal representation would no longer be mandatory. Where the trustee board does not have equal representation, the trustee board would require a majority of ‘non-associated’ trustee directors. If there is equal representation, then a third of the trustee directors must be ‘non-associated’.
  
  The trustee board would need to demonstrate on an annual basis that it has an appropriate collective skill set.
  
  A ‘Code of Trustee Governance’ would be developed, with an annual audit required as to the trustee’s compliance with the Code.
  
  There will be significant new restrictions to deal with conflicts of interests for trustee-directors personally and at the product level.
  
  A trustee would be required to provide a member with reasons for its decision in relation to a member’s formal complaint.
  
• Entry and exit fees: MySuper and Choice products would not be able to charge entry fees and could only charge exit fees on a cost recovery basis.
• Advice: Neither advice to members, other than intra-fund advice, nor advice to employers could be bundled with any superannuation product.
  
  Any advice to a member could only be provided on request, and with the member’s written consent required if the cost of the advice is to be deducted from the member’s account. The member must renew the advice service each year on a renewal notice from the adviser.
  
  The cost of any advice to an employer could not be borne by members, whether directly or indirectly.
• Commissions: No up-front or trailing commissions or ongoing payments could be paid by a trustee of a MySuper or Choice product in respect of superannuation advice or any other products or services provided to members.
• Insurance: The premium for any insured benefits for MySuper or Choice members could not include any up-front or trailing commissions.
  
  Trustees would have a statutory duty to manage insurance with the sole aim of benefiting members, including an obligation to devise and implement an investment strategy which details the types of insurance to be offered and the default and maximum levels of cover to be offered.
• Disclosure: There would be a greater focus on consistent and comparable reporting which is easily accessible by members and prospective members.

No doubt, if implemented, the ‘choice architecture’ recommendations in the Report will lead to large-scale change in the superannuation industry. The challenge will be for the transition to be smooth and cost effective over the medium- to long-term—both for members and trustees.

Shortly, we will be issuing further updates which deal with other aspects of the lengthy Report in further detail.

Endnotes

1. Media release, ‘Government Releases Cooper Review Into Superannuation’ 
2. Super System Review Final Report

More information

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