The MySuper product - a simple, default investment strategy aimed at most investors - forms part of the government’s Stronger Super reform package, which is aimed at boosting retirement incomes across the industry. The reform package is the biggest shakeup of the local pension industry in decades and threatens to reshape the industry’s competitive landscape, which is dominated by commercial retail funds and not-for-profit industry funds.
However, the Association of Superannuation Funds of Australia (ASFA) is lobbying the government to extend the mandatory October 1, 2013 start date - when employers must begin making contributions to MySuper on behalf of employees - to July 1, 2014.
“This is a massive administrative issue and people forget that when there’s a big change like this, there’s massive amounts of education that has to take place,” ASFA chief executive Pauline Vamos says. It fears that employer contributions will be unable to be processed by pension funds, and investors will miss out on potential investment returns as their administrative systems are brought up to speed.
ASFA, which represents 90% of the Australian pension industry, recently released research that showed concerning low levels of employer and fund member preparation for the implementation of MySuper. Pension fund trustees, stymied by the slow rollout of legislation, have only recently begun putting new MySuper business plans in place.
Key question marks still remain around the legislation including the government’s decision to not provide capital gains tax (CGT) relief to pension funds which are considering merging.
ASFA has estimated that mergers without CGT relief could wipe out between 1.5% and 2.6% of investors’ pension savings because fund losses racked up during the global financial crisis will be crystallised. Australian funds considering merging, include the A$4.6bn CareSuper and A$1.6bn Asset Super pension funds.
“This uncertainty is untenable,” Vamos says. “With the deadline of putting your MySuper application nearing and the uncertainty of capital gains tax you’re getting a lot of time wasted on processes that may not be needed. This is not responsible regulation.”
Major commercial fund and pension managers such as BT Financial Group (BTFG) and Colonial First State (CFS) have also raised concerns about the MySuper legislation, which was recommended by the government’s Cooper review more than 18 months ago.
BTFG has recommended the government’s regulator, the Australian Prudential Regulation Authority (APRA), not be required to license every MySuper product and that trustees should not have to wind up existing pension brands as a result of the legislation. CFS has raised concerns fund investors may be forced to pay higher fees once they cease employment - a practice known as “flipping”.
It also remains unclear how fees for MySuper products, which implement lifecycle investment strategies may be charged: the industry remains concerned that investors nearing retirement in lower-cost defensive assets will be subsidising younger investors in more aggressive investments.
Meanwhile, another recommendation of the Cooper review is set to cause another potential shakeup of the Australian pension industry.
The government’s Productivity Commission will review the processes by which default funds are nominated in awards (which set minimum employment standards such as wages) to assess whether the selection process is both open and competitive.
Awards typically specify a limited number of not-for-profit industry funds, which are run by employers and unions. Retail fund representative body the Financial Services Council (FSC) backed the review of the current arrangements, which have effectively locked out the A$351bn retail fund sector from managing a significant portion of the Australian population’s retirement savings. FSC Chief Executive Officer John Brogden says: “Currently, the only way default funds can be added to an award is through the recommendation and agreement of employer groups and unions - an inadequate process that is riddled with conflicts of interest.”
“Many union and employer group representatives who decide which funds will be listed in awards are themselves trustees of the superannuation funds they recommend.
Nonetheless, the vast majority of the top-performing Australian pension funds have been industry funds. The top 10 performing funds over the five years ended January 2012 were either industry funds or corporate pension funds, according to research house SuperRatings.
Industry funds have outperformed retail funds due to their lower fees and higher allocations to alternative assets such as infrastructure.
Once the MySuper legislation is enacted, all default funds specified in awards will need to be MySuper products. Overall pension fund costs are expected to fall under the MySuper regime although Mercer, which advises funds and also runs corporate pension plans, has warned that some fees may rise.
The enquiry began in February and is expected to run for up to eight months.