Review of Cooper – SuperStream

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).

This is the third issue of our special Superannuation Alerts: Review of Cooper. This alert deals with SuperStream which is primarily discussed in Chapter 9 of the Report.

SuperStream is ‘the name the Panel has chosen to describe its ideas about enhancing the current ‘back office’ of super’. The driving force for these recommendations is the estimated $1 billion in costs savings throughout the industry which could be passed on to members.

Trustees are reminded that their duty to act in the best interests of members ‘extends to their strategic oversight of the administration function’. Overall, the Report is critical of the lack of understanding and passivity of some trustees and their staff regarding e-commerce and engagement with the intricacies of administration.

What are the main back office problems identified in the Report?

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 being required to contribute to multiple funds
6. misalignment of pay and contribution cycles, and 
7. overly complex systems for switching or consolidation of superannuation entitlements.

What changes would be required to the back office of superannuation funds?

Quality of data

The Report states a ‘key to reducing costs in the super industry, without reducing service, is for funds to get the correct contribution allocated to the correct member in a single account without manual processing’. The challenge is how to make it happen.

The recommendation is that employers be compelled by legislation to provide adequate information when making contributions or either be liable to pay an administrative penalty or be seen as failing to meet their superannuation guarantee obligations. Where inadequate information is provided, it is also proposed that the monies be sent to the ATO as unclaimed money.

The information required from an employer would vary depending on whether the amount being paid is a first contribution for that employee or a subsequent contribution. As an interesting aside, one of the items which the Report suggests be collected by the employer and given to the super fund is the employee’s mobile phone number because ‘[s]trong anecdotal evidence is emerging that the mobile phone number is the strongest form of personal identification and stays attached to the owner more durably than street addresses or other forms of identification’. There is also support for the use of the TFN as a universal identifier.

The Report further recommends that if an employee elects not to give his or her TFN to the employer, the employer can give what information it has to the ATO and the contribution then counts for superannuation guarantee purposes, but the money goes to unclaimed money. This would, effectively, make it compulsory for an employee to give their TFN.

A related recommendation is to mandate a uniform format for delivery of data by mandating the use of prescribed forms.

Efficient use of technology and e-commerce

The Report states that the ‘strong consensus of submissions is that e-commerce—the linked electronic transmission of data and money—is a major potential source of efficiency gains, leading to improvements in members’ retirement benefits’.

As a result, the Report recommends:

• after a reasonable transition period, a fee be imposed on employers who make contributions other than in electronic form accompanied by sufficient details to adequately identify the member, and
• requiring administrators to have a licence with a condition that they have the capacity to provide e-commerce facilities to all employers.

The Cooper Review Panel believes that all APRA-regulated funds should have the capacity to transact with all participants using EFT and advocates the use of ‘straight-through processing’ (which is processing and completing data and monetary transactions from start to finish using electronic systems without any manual intervention) with appropriate risk controls.

It is further recommended that Treasury should convene a working group to advance the development of ‘Standard Business Reporting’ (SBR) compatible standards ‘that provide for linked personal and financial data transmission and facilitate related software development’. SBR is an initiative by the government to reduce the burden of reporting to government.

Administrators and clearing houses

The Report recognises the importance of the large administrators and clearing houses and recommends in Chapter 6 that administrators and standalone commercial clearing houses should be licensed by APRA and subject to prudential supervision. This is due to the concentration of administration in the superannuation industry and the significance of the impact should an administrator or clearing house collapse for some reason.

Further, the Report recommends that all clearing houses be required to provide linked member and funding data electronically to superannuation funds within two business days of receipt of clean data.

Tax file numbers

The Report recommends extending the use of TFNs to promote efficiency in the superannuation system. This would include amending relevant legislation to allow TFNs to be used to:

• link contributions and rollovers with member accounts
• verify TFNs of each new member with the ATO 
• verify member identification in relation to each requested rollover to a SMSF, and
• encourage consolidation of accounts.

The Report also advocates that Treasury identify and assess the privacy impact of the above recommendations.

Portability, small/inactive accounts, lost members and ERFs

The Report recommends improving the portability and consolidation of accounts by:

• permitting trustees to automatically consolidate member accounts without member consent where multiple accumulation accounts within a single fund share a common TFN and member surname and where those accounts have not been established by deliberate elections of the member concerned
• requiring the ATO to develop an electronic means to display all of the superannuation funds and accounts relating to an individual
• validation of TFNs by fund administrators and clearing houses with the ATO upon establishment of a new member account along with checks to ascertain whether unclaimed money is held for that member at that time, and 
• simplifying the mechanisms for rollovers.

Contributions

With respect to contributions, the Report recommends that:

• employers be required to remit salary sacrifice contributions and superannuation guarantee contributions no less frequently than a member’s after-tax contributions (which is monthly)
• the timing of superannuation guarantee payments be adjusted after SuperStream is implemented to be aligned with employers’ payroll cycles
• employers report on each payslip the breakdown of the type of contributions made over the pay period, and
• the ATO be the sole regulator responsible for compliance with all aspects of superannuation contributions.

What do trustees need to start thinking about now?

The potential cost savings of standards-based e-commerce is the main focus of Chapter 9. Trustees can implement many of these changes now—there is no requirement to wait for legislative change.

For example, the Report notes the existence of swimEC, a ‘superannuation, wealth and investment management e-commerce program developed jointly by the superannuation and managed funds industries’ but also that ‘the adoption of the swimEC standards has been low across the industry because they are not mandatory’. The Report also notes it is ‘expected that the adoption of standards-based e-commerce could provide cost reductions in excess of 20% for specific transactions, or industry-wide cost savings of up to $660 million with full-industry adoption of the swimEC standards’.

In the light of the issues raised in the Report and trustees’ interest in reducing costs for members, trustees should undertake a review of their overall approach to the administration function to see where cost savings can be made. This may involve the trustee questioning whether its current outsourcing arrangements are appropriate.

However, trustees should exercise care and diligence in making any changes to their current administration. The Report is also critical of trustees who ‘have tended to focus excessively on the costs of administration, without sufficiently recognising the risks to members associated with inadequately resourced administrators’.

Consequently, trustees should be focused on cost savings, but at a more complex level than merely extracting the cheapest deal. Trustees should ensure that they are acting in the members’ best interests as a whole when they review their current pricing structure and outsourcing arrangements.

Endnotes

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

More information

For information regarding possible implications for your business, contact