Superannuation providers expect the Abbott government to announce an overhaul of the Australian super industry before the end of the year, but they disagree on how far it should go.
A report in the Australian Financial Review on Wednesday indicated that the Murray Inquiry into the financial system will recommend sweeping changes to superannuation, including new rules for appointing trustees and a widening of the number of fund products that employers can offer staff.
Former assistant treasurer Arthur Sinodinos flagged these reforms in a policy discussion paper that he issued last year, and most superannuation providers are expecting significant changes to the system.
However, they are divided on whether the government’s reforms are likely to benefit members of super funds.
The government has raised the possibility of increasing the number of “independent” trustees on super boards.
Members may be blocked from super boards
There is some speculation that the government might also prohibit members and union representatives from being trustees.
Industry Super Australia, the body representing industry super funds, is opposed to this proposal as is the Australian Institute of Superannuation Trustees.
“Industry super funds have a balance of union and employer organisation representation on the board and their scrupulous attention to their members’ interests is reflected in their strong and sustained outperformance over retail funds, typically owned by the banks,” said ISA’s deputy chief executive Robbie Campo.
“The ‘representative trustee model’ used by industry super funds is consistent with the way pension funds are governed across the developed world.”
The banks’ preference for a ‘free for all’ where bank employed financial planners and business bankers sell compulsory super at workplaces will reduce the integrity of Australia’s super system and ultimately consumer confidence. – Robbie Campo
AIST chief executive Tom Garcia supports increasing the number of independent directors on superannuation boards, but believes member representation should stay.
“Member representation has a proven track record of providing great outcomes for members, which is why this system of governance is currently prevalent in numerous countries where there are pension funds,” he said.
“International evidence also points to employee or member representation providing a better alignment with members’ interests.”
Support for independent board members
The Financial Services Council, the body that represents retail super funds such as National Australia Bank’s MLC subsidary, supports the tightening of selection criteria for superannuation trustees.
The FSC recently introduced a new standard that requires retail funds to appoint only independent directors to super fund boards.
“All directors should be independent from the entity providing the product and sponsors of those products such as employers, executives, and unions,” said FSC’s policy director Andrew Bragg.
“Since the beginning of July it has been compulsory for our members to disclose whether they conform to our new standard.”
The fight over ‘default’ funds
Another controversial area earmarked for reform by the Abbott government relates to the rules governing the selection of funds that are recognised as “default” options.
Under existing arrangements, most employers make super payments to a so-called “default fund” which is specified in an occupational award.
Employers make super payments into the default fund when employees do not select their own superannuation product.
In most cases, the default fund is an industry super fund such as First Super or Australian Super, rather than a retail fund offered by the major banks.
Under the government’s proposal, employers will be able to select from a wider range of default funds, including more retail super funds.
The FSC, which has been lobbying for such a change, argues that it would boost competition in superannuation and broaden choice.
In response to suggestions that such a reform might also cause workers to miss out on the benefits of low-cost super funds, Mr Bragg said: “The concern is well founded and the way the market is currently constructed members are missing out on those benefits.”
However, Ms Campo warned that the proposal could lead banks to throw incentives at employers to offer their super products to workers.
“It will infect super with the incentive-driven selling which has caused so much consumer detriment in financial advice,” she said.
“The banks’ preference for a ‘free for all’ where bank employed financial planners and business bankers sell compulsory super at workplaces will reduce the integrity of Australia’s super system and ultimately consumer confidence.”
The Murray Inquiry is due to release its final recommendations before the end of the month.