Gareth Hall

The arbitrary transfer of thousands of personal superannuation accounts to MySuper is already underway and members have absolutely no recourse for any investment losses or life insurance lost as a result.

Corporate Super Specialist Alliance (CSSA) Treasurer, Gareth Hall, said part of the MySuper legislation requires ‘flipped members’ – those who were in a corporate superannuation plan but who are now in a personal superannuation plan – to be transitioned to a MySuper fund by 1 July 2017. “However, APRA has told at least one fund that member accounts which are receiving ongoing contributions have to be transitioned to MySuper now.”

Mr Hall said he spoke with one member who had a superannuation balance of $126,000 and $1,672,000 death and total and permanent disability (TPD) insurance. “He was about to go on extended leave overseas and would have missed the opportunity to opt in to retain his account,” Mr Hall said. “If this member had been arbitrarily transitioned into a MySuper fund, his current insurances would have been cancelled.”

When made aware of the issue, Mr Hall said the member was outraged and elected to remain in his current fund. “Imagine the disastrous outcome for his family if the cover had been cancelled and something went wrong. We believe many members are not aware of the problem and consequently are losing millions of dollars in insurance cover, cover which they may never be able to obtain again.”

MySuper legislation provides no recourse if investors lose a benefit as a result of the compulsory move to My Super. “If these ex-corporate superannuation members do not state that they wish to keep their superannuation arrangements as is, they will all be transitioned,” Mr Hall said. “How can any Government legislate the removal of such important benefits from taxpayers, and offer them absolutely no avenue for compensation?”

With a required notice period of three months, at least one large fund manager has been contacting members to alert them to the problem. “They have had huge success in keeping members in existing arrangements, because these members are engaged with their super and know their arrangements are right for them,” Mr Hall said. “It doesn’t make sense that the first people being transitioned into a MySuper arrangement are those who are the most engaged. Our gravest concern is what will happen to members who are not engaged. What if they have changed address or are on leave and are not able to be contacted? They will just lose out.”

Mr Hall said before the introduction of MySuper legislation, the Death, TPD and Salary Continuance insurance arrangements of members transferring from an employer plan remained intact within personal accounts, as did the members’ investment selection.

“Despite our having brought this issue to the attention of both the Labor and Liberal Governments on a number of occasions, the recommendations from the Senate Committee do not address the issue, nor do they address the conflicted remuneration dilemma that results from corporate superannuation specialists providing advice to their clients,” Mr Hall said. “There are still flaws in the interaction of the Future of Financial Advice (FoFA) reforms and the MySuper legislation that are causing these problems. They need to be fixed – fast.”

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Employer financial services need to remain under FoFA: CSSA

The Corporate Super Specialist Alliance (CSSA) is seeking a Future of Financial Advice (FoFA) regulation so that employers and fund members can continue to receive the financial services they need in relation to their company super funds.

CSSA President, Douglas Latto said employers and policy committees need to ensure their members receive competitive benefits and features at a competitive price.  “Fund members need access to general advice and information to help them improve their life insurance decisions and retirement savings outcomes,” he said. “Corporate super specialists have a long history of providing these very important services and we need to make sure we can continue to deliver them.”

Mr Latto said that faced with the obligation to choose an alternative superannuation fund in order to comply with MySuper, employers now need access to low-cost financial advisory services more than ever. “Once MySuper starts, thousands of companies will be looking for advice to help them select a default fund for their employees,” he said.

The CSSA made submissions to both Treasury and to the former Ministers for Financial Services and Superannuation seeking this regulation to enable the ongoing provision of services to employers. No decision was received prior to the Federal election.

“We put forward a solution which we believe is in the best interests of corporate super fund clients and, with a change of Government, we are now urging Treasury and the incoming Assistant Treasurer Arthur Sinodinos to consider our recommendations,” Mr Latto said.

Mr Latto also said that without a regulatory solution, corporate super specialists will have to stop providing their services to employers and corporate super fund members. “This would have devastating consequences for the funds which now enjoy a range of services at the employer level; at the policy committee/representative body level; at the individual super fund member level and at the collective member level,” he said.

Mr Latto said a regulatory solution is necessary following the decision to decline the CSSA’s request for a No Action Letter from the Australian Securities and Investments (ASIC).

“Advisers have been placed in a position where it is impossible for them to avoid breaching the conflicted remuneration provisions if they provide services to both employers and employees and this needs to be resolved in the best interests of all fund members,” he said.

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CSSA President, Douglas Latto said the move has been prompted by a letter to the CSSA from the Australian Securities and Investments Commission (ASIC) which formally declined the CSSA’s request for a no-action letter in relation to structural issues with respect to the conflicted remuneration provisions of the Future of Financial Advice (FoFA) reforms which will come into effect from 1 July.

“Under the provisions, a conflict arises when a corporate super specialist undertakes a superannuation fund selection tender and then provides ongoing services that are paid for by the super fund,” Mr Latto said. “While it is essential to make sure that the specialist is not inappropriately influenced in the tender process when they are also providing the ongoing service, as things stand at the moment, they will have to find a new way to be remunerated – and that is proving very difficult.”

The issue is unique to corporate super specialists and has come about from the combined effect of FoFA and MySuper.
Mr Latto said if no regulatory solution can be found, corporate super specialists may have no alternative but to abandon corporate super fund clients or exit the industry.

“This would have devastating consequences for small to medium businesses which now enjoy a range of pro-active services at the employer level; at the policy committee / representative body level; at the individual super fund member level and at the collective member level,” Mr Latto said. 

“This would leave a large gap in the market with no obvious alternative.”

Mr Latto said corporate super specialists have a long history of providing services to employers.

“The role we have played has helped employers and policy committees ensure their members receive competitive benefits and features, at a competitive price and that members have access to general advice and information to help them improve their decisions about their retirement savings and life insurance choices,” he said.

“If no regulatory solution to the remuneration issue is found quickly, these services may disappear altogether on 1 July 2013.  Discouraging competition and pro-active services is hardly in the public interest.”

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In their submission, CSSA President Douglas Latto says the new selection process would introduce three layers of bureaucracy and therefore three layers of costs.

“For a fund to make it through to a Modern Award, an application to APRA to become a MySuper Fund would first have to be made,” he said. “It would then fall to the Default Selection Panel (DSP) to select which MySuper Funds make it through to each Modern Award. Finally, the Bench of Fair Work Australia (FWA) would vet the selections from the DSP. The amount of time and cost involved in this process is considerable.”

Mr Latto said the CSSA also objects to the new process on the grounds that it will distort the market.

“If a fund does not appear in enough Modern Awards it will be unlikely to survive because it cannot be chosen as a default super fund,” he said. “Major funds may be forced to close.  We believe such interference in the market is a step too far for any government.”

The CSSA also questioned how the DSP can choose default super funds when there is no investment history.  “Many funds will be choosing new investment strategies for their MySuper so comparisons will be difficult if not impossible,” Mr Latto said.  “The temptation will be to select funds purely on fee cost and not on value.”

He also said a review period of four or even eight years may have a negative impact on members.  “Funds that are on the list will wish to remain on the list and will be tempted to make inappropriately short term investment decisions,” Mr Latto said. “This could negatively impact investors in superannuation which is, by its nature, a long term investment.”

Mr Latto said the CSSA also has serious concerns about the removal of grandfathering from Modern Awards.

“If a fund, chosen by an employer as a default fund in the past, is not selected as a MySuper Fund going forward, employees, who have had a long relationship with that fund, will be forced to move out of it – whether they like it or not,” he said. “These are funds which have been tailored to meet the specific needs of the employees in their own individual workplaces.”

Mr Latto said the risks of forcing hundreds of thousands of members to move to alternate MySuper funds include:
• Auto acceptance into group life insurance options may disappear, leaving members underinsured. This is particularly problematic for members with pre-existing conditions who are ‘uninsurable’ elsewhere
• Those with life insurance in their existing super fund may end up with reduced cover on transfer to a MySuper fund
• The cost of transferring member funds into MySuper funds will run into the multi-millions, a cost which must surely be ultimately borne by the members
• The proactive financial literacy programs that corporate super fund advice specialists currently provide to corporate super fund members may no longer be available

“Forcing large numbers of employers to undertake this exercise and move away from current carefully selected solutions, that have been tailored for their workplace, does not make sense,” Mr Latto said.

The best solution, according to the CSSA, is for any MySuper fund to be a default super fund.

“If an award limits the choice employers have for their default fund, it reduces their ability to provide the best outcome for their employees,” Mr Latto said. “This is clearly anticompetitive and not in anyone’s best interest, other than the fund nominated in the award. If a product is superior, market forces will attract advisers and investors to it.”

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The CSSA is responding to a statement from the Minister for Financial Services and Superannuation, Bill Shorten, on the Interim Report of the Productivity Commission Inquiry into Default Superannuation Funds (the Productivity Commission), which indicated the Government supports establishing a FWA expert panel responsible for selecting default super funds for inclusion in industrial awards.

“Fair Work Australia has been subject to a significant level of criticism in their handling of recent enquiries,” said CSSA President, Douglas Latto. “Their impartiality has been brought into question and they have taken a long time to reach decisions. We don’t believe they have the necessary resources, expert knowledge and high level of superannuation experience required to take on such a critical role; a role which will significantly impact the retirement savings of most Australians.”

Mr Latto said the CSSA shares concerns raised by the Shadow Minister for Financial Services and Superannuation, Senator Mathias Cormann, who said Minister Shorten’s expressed support for an FWA expert panel pre-empts the Productivity Commission’s findings and final recommendations and inappropriately favours industry funds.

“We have been encouraged by the Productivity Commission’s approach to date, which has clearly been to investigate ways in which to make the default super selection process more open, contestable and transparent,” Mr Latto said. “By indicating support for one of the options outlined in the interim report over another, we believe the Government is undermining the impartiality of the work being done by the Productivity Commission.”

Mr Latto said the CSSA believes that employers should be able to select any MySuper fund as a default fund on behalf of employees. 

“The roles of employees under a particular award can be very diverse,” he said. “Employers understand that better than most.  As such, we believe it is very important to allow them to tailor their superannuation offering to suit the needs of their own workforce.”

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The Productivity Commission put forward four options as alternatives to reform the process for the selection and ongoing assessment of superannuation funds for listing as default funds in modern awards.

CSSA President, Douglas Latto said the Law Council of Australia, the Financial Services Council (FSC) and the Transport Industry Superannuation (TIS) Fund have all recently indicated support for the CSSA’s preferred option – Option 1.

Option 1 involves each employer choosing a fund from all of those that offer a MySuper or other approved default product. If the MySuper legislation passes into law and all default superannuation funds must be MySuper funds, then there will be no need to nominate default funds in awards as any MySuper fund would in fact be a default fund.

 “While Option 1 has always been our preferred option, we understood it had been ruled out because the Productivity Commission formed a view that it was too confusing for employers,” Mr Latto said. “However, arguments put forward by the FSC, the Law Council’s Superannuation Committee, and the TIS Fund confirm our view that it makes the best sense.”

In its Supplementary Submission to the Productivity Commission, the FSC preferred Option 1 on the grounds that, “it eliminates the need for any Fair Work Australia (FWA) or other process for listing or delisting funds as every MySuper product would be an eligible default fund at the workplace level.”

The FSC went on to say in its submission that, “Option 1 creates the most competitive market which is in the best interests of consumers/members according to OECD principles.”

The TIS Fund also supports the allowance of all MySuper Funds as Default Super options, saying in its submission to the Productivity Commission that: “… there is no net benefit to designing criteria over and above this, or requiring extra supervision by Fair Work Australia, when MySuper Fund options meet specific criteria already and provide a simple solution.”

The Law Council’s Superannuation Committee went one step further and was recently reported as saying that Options 3 and 4 could in fact lead to worker legal action against the Commonwealth and in a submission to the Productivity Commission suggested Option 1.

Mr Latto dismissed an argument put forward by the Industry Super Network (ISN) that there are too many superannuation funds available to consumers.

“The Productivity Review identified 220 funds,” he said. “Letting employers choose a superannuation fund for their employees helps ensure that it can be specifically tailored to meet the needs of their workplace.”

Mr Latto also said that in holding the returns on industry funds up as shining examples, the ISN is implying that past performance is a good indication of future returns.

“This defies current financial investment logic,” Mr Latto said. “The global financial investment community constantly reminds us that in fact past performance is no guarantee of future returns.”

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“The Government has announced that MySuper legislation will apply from 1 July 2013 but to date Treasury has not provided any detail relating to grandfathering that will allow those of us who deal with ordinary super to make changes to the way we do business,” said CSSA President, Douglas Latto.

Treasury has made announcements relating to grandfathering and how it applies to non-platform related superannuation and investments, but has so far not released any details relating to platform superannuation and investments.

“The only announcement Treasury has made is that it intends to make an announcement,” Mr Latto said. “For those of us who work with corporate super funds, this is simply not good enough. We need to know now what the ground rules are so that we can make the changes we need to make in order to get on with business.”

The CSSA is calling for clarity on which forms of remuneration will be grandfathered in the MySuper regime and which will not.

“The questions we need answered are whether or not those of us who deal with corporate super funds will be able to be reimbursed for the work we do with companies and their employees,” Mr Latto said. “Are we going to continue to receive insurance commissions? Should we be converting clients to fees? Are fees going to be any more acceptable than commissions? We really don’t know and as long as we don’t know, we can’t move forward.”

Mr Latto said at an industry level lack of clarity from the Government around the MySuper legislation is stalling the development of MySuper products.

“It’s a problem that affects not just those of us who work with corporate super funds, it’s an industry-wide problem,” he said.  “We are all stuck in this hiatus waiting for the Government to make announcements and all the while, the 1 July 2013 deadline hurtles towards us.”

Mr Latto said the CSSA is calling on the Government to furnish the detail the industry needs in order to operate in the MySuper environment without further delay or move the implementation date until 2014.

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In the CSSA’s response this week to the Interim Report of the Productivity Commission Inquiry into Default Superannuation Funds released late last month, CSSA Treasurer Gareth Hall congratulated the Productivity Commission (the commission) for recognising the need for reform in the default superannuation environment.

“It is excellent that the commission realises that the process for the selection and ongoing assessment of superannuation funds for listing as default funds in modern awards needs to be reformed,” he said.

“The Productivity Commission’s desire is to make the process open, contestable and transparent; as this is not currently the case.”

Mr Hall said that in particular the recommendation that, under any circumstance, employers would be able to choose a fund not listed in an award, is quite a breakthrough.

“We feel it is very important to allow employers to be able to tailor their superannuation offering to suit their employees, as the roles of employees that are employed under a particular award can be very diverse,” he said.

However, Mr Hall said the CSSA is concerned about the onus put onto employers to prove that their employees are no worse off.

“We believe that this requirement of proof needs to be carefully quantified so that an employer is aware that they have met the criteria required at the time a fund is selected,” he said, “as if this is not the case this would provide a significant disincentive for an employer to make a selection outside the funds nominated in an award.”

The commission put forward four options as alternatives to reform the selection process, however the CSSA’s preferred option, Option 1, has been ruled out because the commission believes it may be too confusing for employers.

Option 1 involves each employer choosing a fund from all of those that offer a MySuper or other approved default product.

“If MySuper legislation is passed into law and all default superannuation funds must be MySuper funds, then it is very clear to us that there will be no need to nominate default funds in awards as any MySuper fund would, by design, be suitable as a default fund,” Mr Hall said.

“If Option 1 is ruled out, then the CSSA would suggest that the only other viable option is Option 4.”

The CSSA does not support Option 2, which represents a minimal change, where the industrial parties assess all potential funds and nominate a subset of five to 10 funds to FWA for listing in awards.

Option 3 represents a more significant change to the current industrial process, with decisions being made by a Fair Work Australia (FWA) panel — comprising full-time members and part-time experts — and the selection process being opened up to allow all funds to present their case to FWA to be listed in modern awards.

Option 4 is similar to Option 3, but decisions would be made by a new expert body independent of FWA, with FWA playing a minimal role in administering the decision.

“We do not consider Option 3 as viable, as we do not believe FWA has the specific knowledge and the necessary experience of superannuation to be in the position to make decisions as to which funds should be allowed as default funds in modern awards,” Mr Hall said.

“We understand that FWA has been subject to some significant level of criticism in their handling of recent enquiries. Their impartiality has been brought to question and they have taken a long time to come to a conclusion, which would lead us to question if they have the necessary resources to take on this role.

“It therefore seems logical that a new expert body independent of FWA would be best positioned to make decisions on superannuation in Modern Awards.”

2 August 2012 

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According to CSSA President, Douglas Latto, in most cases, employers view superannuation as an important part of their employees’ benefits and they appreciate the ability to be able to add value for their employees by tailoring a superannuation solution to suit their needs.

Mr Latto said, “Many employers see their default superannuation offering as being a differentiating factor for their company, a tool for them to attract and retain staff – to become an employer of choice.”

The CSSA believes that the current Fair Work Act provisions are not providing employers with sufficient choice and flexibility. In many cases, if a superannuation fund is not nominated in an award, it is practically impossible for the employer to choose to use that fund as a default fund
unless they put an enterprise agreement in place, a costly and complicated process that is not appropriate for most small to medium employers.

Even if practicable for an employer, enterprise agreements can have the negative side effect of removing an employee’s ability to select their own arrangements under ‘choice of fund’ legislation.

“What we’re seeing with many of the employers we deal with is a decision to take advantage of grandfathering arrangements and retain their existing default fund. Very few have actively changed their default funds to those nominated in the relevant award,” said Mr Latto.

“The feeling among employers is that the current process of default fund selection is opaque. It is restricted to a small number of, predominantly industry, super funds.

“This is leading to a stifling of competition and, therefore, cost savings are not necessarily flowing through to fund members. In some instances, the fees charged by listed default funds are not as competitive as other funds and, in an environment where fees are generally falling, some fees have actually increased.

“An environment where employers find it too difficult to research alternative solutions for their employees, and opt to simply stay where they are, will eventually lead to a stagnancy in the market, and, ultimately, member benefits not evolving to keep pace with changing retirement demographics.”

The CSSA submission to the enquiry also questioned the validity of the MySuper legislation. “While we do not agree with the concept of MySuper, if the legislation is passed into law, and all default superannuation funds must be MySuper funds, then it is very clear to us that there will be no need to nominate default funds in awards as any MySuper fund would, by design, be suitable as a default fund. If this is not the case, we certainly do not see the point of the MySuper legislation at all.”

Mr Latto went on to say that, “the CSSA is continuing to work with all stakeholders to achieve a solution that will better benefit employers and their employees”.

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According to CSSA President, Mr Douglas Latto, there is a fundamental flaw in the assumptions made by Treasury regarding what happens to a member’s benefits when they leave a corporate superannuation fund.

“When an employee leaves their employer, and is no longer eligible to be a member of that employer’s corporate fund, and no instruction has been received from the member, current practice is that benefits are transferred to a personal fund, with, in most cases, the insurance cover being transferred as well.

“This is commonly known as ‘flipping’. With the introduction of MySuper in July 2013, this practice will disappear.”

The Treasury has suggested that all these funds are transferred to a MySuper fund by 1 July 2017 if the member has not made an investment choice. The CSSA has termed this as ‘back-flipping’.

The concern is that Explanatory Memorandum 6.40 suggests that most insurance arrangements attached to investment benefits cease at the point a member leaves a fund – the opposite to what actually happens. It assumes that an automatic transfer to a MySuper fund will not result in lost benefits.

Said Mr Latto “We have conducted our own research and found that 74% of members with balances over $1,000 have insurance cover within their fund. This increases to 81% for balances over $10,000. This cover could be for Death, Total &Permanent Disablement or Income Protection, or all of these.

“For many members, this may be the only cover they have and, if lost, it could prove to be too difficult or onerous to obtain replacement cover outside of automatic arrangements under super.

“With the underinsurance of the Australian market being a major concern, the introduction of a process which will result in the loss of this cover is disturbing.”

The Treasury proposal is that members be given an “opt out” option to elect not to be transferred to a MySuper fund and have a subsequent loss of benefits. But, as we know, without advice, many people will not fully understand the consequences and simply do nothing – especially at a time when they are likely to have other things on their mind, such as starting a new job.

So what’s the answer? “The CSSA submission is proposing that, rather than a member be required to “opt out”, the option should be to Opt-in to the MySuper offer” concluded Mr Latto.

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