The Australian government is attempting to push through Parliament legislation that would selectively benchmark the performance of superannuation funds – but has given up its intention to override investment decisions made by super funds.
The breadth of reform proposed in the Your Super Your Future Bill has caught the industry by surprise, leading some to ask whether it is a form political payback.
The Coalition government failed to uncover wrongdoing by industry funds during its 2019 Royal Commission into the financial services industry. It has since waved through the next mooted increase in the mandated super guarantee levy, lifting the rate from 9.5 to 10% from July.
The government says it is seeking to foster choice. The new bill proposes performance benchmarking, both to expose poor-performing funds and to prohibit super funds from offering incentives to employers (to encourage them as default funds).
The government will also introduce “stapling” of member accounts to reduce inefficiencies where members have multiple accounts. This move alone is expected to save members about A$17.9bn (€11.4bn) over 10 years in fees.
However, opposition to the draft bill, unveiled in April, has grown.
The super industry, some employers and the Law Council of Australia, claim that, in framing its bill, the government has selectively adopted recommendations put forward by its 2019 Productivity Commission. These followed a comprehensive inquiry by the Commission into the super industry.
However, condemnation of the government has not been universal. The Financial Services Council of Australia, which represents for-profit superannuation, along with entities representing small business, are supportive.
Peter Burn, chief policy adviser at the Australian Industry Group, says virtually every submission to Senate hearings into the proposed new bill supported the high-level objectives. But, he says, the draft bill as it stands deviates from its stated intentions, with the government picking aspects that suit its political agenda.
Justin Arter, CEO of CbusSuper, the A$60bn industry fund, told IPE: “Cbus supports the objectives of the Your Future Your Super package – which are to remove the system of multiple accounts and underperforming super funds. “Unfortunately, the stapling proposal currently being proposed will not achieve these worthy objectives.”
Arter says the stapling proposal will be an administrative nightmare because it will require small businesses to manually manage their employees’ varying accounts across the multiple funds they will be stapled to. “That is why there is an increasing chorus of voices from across politics and industry calling for the bill to be scrapped or comprehensively amended,” he says.
Although the concept of stapling is good, Burn adds, the risk under the new bill is that, unless workers make a conscious choice to go with a particular fund, they could be trapped in a poor-performing one for life. He points to the Productivity Commission report, which says 15% of new workforce entrants who do not exercise choice are defaulted into poorly-performing funds.
However, Burn allows that through job rotation, a person has a less than 1% chance of putting money into an under-performing fund, by the third job.
Eva Scheerlinck, chief executive of the Australian Institute of Superannuation Trustees (AIST), says the issue is sequencing.
The bill proposes to start stapling straight away, she says, and, in so doing, will lock a “couple of million Australian workers” into under-performing funds.
“We think the problem of underperforming funds should be dealt with first. All products should be performance-tested from the beginning, so that there is true accountability and transparency for every Australian worker.”
Missing the target
The government’s approach to benchmarking fund performance has also faced criticism.
Scott Connolly, assistant secretary of the Australian Council of Trade Unions (ACTU), says the Bill singles out “MySuper” products – the default for most employees – for performance testing against benchmarks.
At the end of March 2021, MySuper represented A$850bn of the A$3.1trn in super funds. The rest of the super contributions are held in “choice” products, offered by mainly for-profit retail funds and used by self-managed super funds.
Connolly says retail funds and lower-performing funds will not be performance-tested – at least for now. “If you are going to benchmark product performance, why does it not apply across the whole marketplace?” he asks.
He describes the government approach as “scandalous”, and accuses it of being “ideologically-driven to destroy the better-performing part of the industry”.
As Arter sees it, best public policy should mitigate unintended negative consequences. The interaction of stapling and insurance for the 2.7 million workers in the riskiest occupations must be taken into consideration in progressing the Your Future Your Super Bill, he says.
Insurance within superannuation is a safety net for millions who may not be able to take out insurance cover, especially for those working in hazardous occupations, he says.
With insurance policies covering 556,000 members, CbusSuper has one of the world’s largest group insurance contracts.
Another issue had been the “kill switch”, to be introduced to give the treasurer the power to direct a fund to disinvest from an investment and to penalise that fund for making what they deem “unsuitable expenditure”.
“The Bill would have enabled governments to override decisions by funds to approve legitimate expenditure and investments even when the fund had established that the expenditure or investment was in the best financial interests of the beneficiaries,” says Arter.
Scheerlinck says removing this provision did nothing to address other flawed measures that would deliver immediate and direct consumer harm, adding that AIST and others had argued this measure was flawed and an unprecedented overreach.
The government listened when parliamentarians, including its own members, voiced concern over the veto power on investment.
The treasurer removed the provision to get the bill through the Lower House. There is considerable doubt that there are sufficient votes in the Upper House for the legislation to become law.