26 Jun 2012

Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2011

Mike's Speeches in Parliament Comments Off on Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2011

Mr SYMON (Deakin) (26th June 2012 21:15): I speak in support of the Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2011. This legislation will introduce a new simple, low-cost default super product called MySuper. Treasury projections show that the superannuation system is expected to grow to $6.1 trillion by the year 2035. The future of Australia’s retirement savings is bound up in the superannuation system, a system of course introduced by a Labor government. The intent of this bill is to ensure that this money is managed effectively and efficiently on behalf of members and in their interests. This bill is based upon the recommendations of the Cooper review into superannuation, a review that was instigated by the federal Labor government in 2009.

As we know, compulsory superannuation was introduced in 1992. This review was designed to check on the progress and effectiveness of the architecture of the current system. The review investigated a number of key aspects of Australia’s superannuation system including governance solutions, back-office arrangements, commissions, fees, lost superannuation and default funds. In its final report, the Cooper commission recommended the establishment of a low-cost default fund for workers who did not identify choice in their superannuation. In making its case for this reform, the Cooper review noted there were a number of issues in Australia’s superannuation system that needed to be addressed.

The Cooper review said members’ interests were not always paramount in system design and regulatory settings. Efficiency was left in the hands of market participants. Members perceived superannuation as too complex and opaque and there is an overall lack of transparency and comparability of superannuation products. Default members are not adequately protected and can find themselves paying for services they do not need or request and, on some occasions, that they may not receive. Trustees may not always be focused on acting for the benefit of members and maximising members’ retirement incomes in an efficient and cost-effective way.

The final report of the Cooper review contained 177 recommendations covering 10 broad areas of reform. The government response to the final report of the Cooper review is to support or support in principle 139 of the 177 recommendations. Further consultation was undertaken with the stakeholders on the implementation of reforms and the government announced its final response to the Cooper review on 21 September 2011.

This bill takes one of the key recommendations of the Cooper review—that is, to establish a low-fee default fund for Australia’s superannuation system and make it a reality. By creating a simplified super product, MySuper, into which contributions are paid if the employee does not express a choice about which fund their superannuation contributions are paid, the full benefits of the long-term accrual of super can be enjoyed by more working people. MySuper is proposed to have specific parameters with respect to investment strategy, administration and other fees, trustee obligations and disclosure. MySuper will have a single diversified investment strategy and a standard set of fees generally available to all members. New standards will be put in place that providers of MySuper products must meet including no entry fees, entry or exit fees limited to cost recovery, a ban on commissions and conflicted remuneration structures in retail distribution, and advice in line with the government’s financial advice reforms. Also new duties that require super fund providers to deliver value for money or be stripped of their licence by the regulator—a single, simple and easy to understand investment option designed to maximise a person’s retirement income, which is what super should always be about. Finally, there is a standardised reporting requirement so that super reports come out in plain English.

From 1 October 2013, employers must make contributions to a MySuper product for employees who have not chosen their fund. All new superannuation payments in this default situation will be commission-free from that date. By 1 July 2017, funds will need to transfer existing default balances to a MySuper account.

Very often a member does not choose the fund to which they belong. New employees typically become a member of their employer’s default fund. In most cases this is a standard balanced superannuation option. Roughly 80 per cent of members are in such a default option. The Cooper review made the recommendation to establish a low-cost default superannuation fund based on the evidence that the vast majority of superannuation members were in their default funds and were not necessarily aware of the different fee structures of funds. In some cases, fund members may be paying substantially more in fees than is necessary and that can have an enormous impact on the balance of the member’s fund when retirement does come around. For example, someone at the age of 30 with a $20,000 super balance and currently earning $50,000 a year would have an extra $51,000 at retirement if they switch from a fund with a two per cent annual fee to a fund with a one per cent annual fee.

Compulsory contributions do not come directly out of members’ pockets and nor do the fees or charges. As such, it is likely that people receiving super under the super guarantee are much less price aware and much less likely to make a decision based on price or cost as to where their super goes. In addition, the level of product complexity, the lack of information and transparency about fees and performance means that it is a major challenge to choose a fund based on fees. MySuper will create a default fund that precludes practices such as hidden commissions and excessive exit fees. By referring to the Morningstar superannuation database it can be seen that a number of superannuation funds have exit charges of somewhere up to three per cent, four per cent or, in some cases, five per cent. Exiting a fund with a five per cent exit fee has a substantial impact on retirement. An example would be a $500,000 nest egg. That could be as high as $25,000 on exiting the fund. MySuper will preclude exit fees that are based above actual costs. I struggle to think that it would cost that much to exit from a fund, but of course every fund is different. Some may say that is the case.

There are also annual fees charged by superannuation funds to administer the funds under their control. At the moment it is a real challenge even for those who do know a bit about the subject to compare fees and charges. The Midwinter Fee Index can be used to compare funds. This index is a calculation that determines the average impact of fees on a platform over a common period, taking into account all the ongoing fees and entry fees to calculate the average cost. On comparing the annual fees using this index, some retail funds charge as much as 2.37 per cent per annum. A particular fund that charged that amount was the IOOF MultiMix balanced growth fund, which charged that amount in the 2010-11 year. This figure compares with other superannuation funds charging as little as 0.45 per cent per annum. That example is a UniSuper balanced fund.

For those who say that higher fees are paid as retail funds generate better returns, the facts do not actually substantiate this. APRA, the Australian Prudential Regulation Authority, in examining the issue of fees and returns found that over the period 1996-2006 retail funds provided average returns 1.4 per cent lower than industry funds and 2.2 per cent lower than all not-for-profit funds. APRA found that differences in fees and commissions were the single largest factor contributing to the different level of performance.

Treasury has estimated that the net impact of MySuper on the superannuation balance of a typical member will be around an additional $32,000, but for some superannuation members the benefit of being in a MySuper fund will be substantially more. This reform to introduce MySuper is supported by the industry. For instance, the Industry Super Network noted:

… the introduction of the first tranche of MySuper legislation was an important milestone in protecting the super savings of millions of Australian workers who are losing savings as a result of excessive fees and poor net returns.

The Association of Superannuation Funds of Australia adds to this:

ASFA sees merit in the intended objective of delivering a simple, cost-effective product with a diversified portfolio of investments that delivers good performance designed to cater for the large number of Australians who prefer to delegate the task of investing their superannuation to fund trustees.

The Australian Chamber of Commerce and Industry, in their submission to the Parliamentary Joint Committee on Corporations and Financial Services—the committee that conducted the inquiry into this bill and reported in March 2012—said:

ACCI supports the MySuper goals of reducing account costs, making costs more transparent, improving the basis for inter-fund comparison, and providing improved member protection. ACCI recognises that many employees are not well positioned to be actively engaged in making investment decisions, and an appropriate superannuation system must recognise this.

The introduction of MySuper is one of several superannuation related changes either proposed or implemented by the federal Labor government. Other significant changes include progressively lifting the superannuation guarantee rate from nine per cent to 12 per cent by 2019-20. This increase will occur over a seven-year period starting from 1 July 2013, when superannuation will rise to 9.25 per cent and reach 12 per cent by 1 July 2019. This initiative will mean that a 30-year-old on an average income will retire with an additional $108,000 in their superannuation balance and a 20-year-old on an average income will retire with an additional $200,000.

The SuperStream package of measures will improve the efficiency of back office administration of superannuation funds through the use of data and payments standards. An automatic consolidation of superannuation, which will see lost and inactive accounts with balances under $1,000, will consolidate into the member’s current active account. This will help to ensure workers are not missing out on their total superannuation amounts or have multiple funds with fees eating away at their retirement balance.

It has been estimated by Treasury that there is around $13 billion of what is called ‘missing superannuation’. This government initiative will reduce the amount of superannuation balances that are not being used as effectively as they could be. If a worker has lost track of superannuation gained whilst working in a previous job then it is common for this superannuation to sit idle and gradually be reduced over time as fees make their mark on it This reform will mean that people are more easily reunited with their lost superannuation.

It was in 1992 the federal Labor government introduced the superannuation guarantee, which established what is now the national compulsory superannuation scheme. Super contributions started at three per cent and increased gradually up to nine per cent by 2002. Today, because of the introduction of compulsory superannuation, the total savings pool in superannuation is worth more than $1.3 trillion to the nation.

Australia’s superannuation system is the world’s fourth biggest pool of funds under management. Compulsory superannuation has not only provided for Australians in their retirement; it has also provided a pool of funds for investment to create jobs and in some ways help protect our country from global shocks such as the global financial crisis.

MySuper products will have a single diversified investment strategy. They will have to be offered at a standard set of fees generally available to all members; but this will not stop businesses from getting a better deal. Employers will be able to negotiate with funds for discounted administration fees for their employees, reflecting the administrative efficiencies for the fund in dealing with the one employer. Any discounted fees will have to be reported to APRA and disclosed by the fund. In addition, funds will be able to offer employers with more than 500 employees a MySuper product tailored to the needs of the particular workforce, including the investment strategy, member services and fees. The details of all separately tailored MySuper products will be required to be reported to APRA.

MySuper will reduce high fees but retain enough flexibility in the system for workers to find low prices in products that suit them. By 2017 the vast majority of super balances will be commission-free and low-fee funds based in a MySuper account. This new MySuper reform will make super simple as it is a straightforward and cost-effective superannuation product that can be easily compared with other products. Research by Deloitte estimates that by 2030 there will be around $6 trillion of assets within the superannuation system. This massive pool of funds will be better managed with lower fees and better returns due to MySuper.

But most importantly, MySuper will help Australian workers maximise their retirement balances. As I said at the start of this contribution, that is what super is really all about. It is about making sure that working people, when they finish their working lives, have a decent income in retirement. I commend this bill to the House.

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