Andrew Bragg

Proposals from industry superannuation funds to the Murray Inquiry to further protect themselves from competition are desperate, unworkable and protectionist, the Financial Services Council said yesterday.

Andrew Bragg, FSC Director of Policy said: “The superannuation market is sorely lacking in competition.”

”Despite the introduction of the new MySuper default system, on 1 January, many of the lowest cost products are not in the market due to the anti-competitive and discredited Fair Work Commission.

Mr Bragg also said: “Australians are missing out on the benefits of competition.”

“Higher fees are the only guarantee of the currently anti-competitive superannuation system.”

“We have seen evidence that competition for MySuper products is restricted in the workplace and for individuals.

“It is untenable for union officials and employer organisations to use their positions as directors of industry superannuation funds to lock anyone into a low performing or high fee superannuation fund.”

“Every working Australian should be permitted to select their own superannuation fund,” he said.

As one of Australia’s largest industries, superannuation should have nothing to fear from competition.

Convoluted proposals to hold back dividends to investors are a smokescreen to avoid scrutiny of an anti-competitive super system.

“Parliament does not need to wait for David Murray to open the superannuation system to competition and to improve corporate governance.”

“Both are essential reforms which will increase confidence in our otherwise world-leading retirement system.”

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Douglas Latto

The mandatory transfer of personal superannuation accounts to MySuper will result in thousands of people losing insurance entitlements attached to their superannuation, according to the Corporate Super Specialist Alliance (CSSA).

“Not only will people lose the insurance cover attached to their previous super funds, they will also have no legal recourse to pursue for their loss,” says CSSA president, Douglas Latto. “This is because MySuper legislation contains immunity for the trustees. Consumers cannot sue the trustee because the trustee is protected by legislation passed by the previous government.”

The transfer to MySuper accounts has begun. It is occurring because the MySuper legislation requires all super members that have not made investment choice, or are 100% in the default investment option, to be transitioned to a MySuper fund by 1 July 2017.

“Those who are pushing for the transfers to occur as soon as possible are viewing the issue too simplistically and are not mindful of members who are at risk,” Mr Latto says. “Fees are not the only issue to consider when implementing these changes.  A lot of people have insurances and we know of a number of providers who are not only going to switch members to MySuper accounts, but who are also going to reduce or cancel their insurance as well.”

Mr Latto says the mandatory transfer to MySuper funds can result in significantly different insurance cover, with the member often oblivious.

“We have already heard some terrible stories. One person’s insurance was reduced from $1,673,000 to $60,000, others have had their cover cancelled completely. With most of the transition still to take place, the damage has only just begun,” he says. “The last thing we want to see is destitute families who have belatedly discovered that they have lost the insurance they expected to rely upon following the death or disability of a family breadwinner.”

Mr Latto says these issues are very significant to members, and the CSSA is urging the industry and government to look at the situation as a whole, instead of dealing with it as a side issue.

“Some superannuation funds are now offering low-cost ‘vanilla-based’ products that prescribe low levels of insurance cover without the option to have higher amounts,” he says. “So those who are being transitioned to these products are the ones who are going to lose out significantly.”

The solution, according to Mr Latto, is to make transition to MySuper ‘opt-in’, not ‘opt-out’ for all members with insurance cover.

“At the moment, it is quite clear that the best interests of many super fund members are not being met and unless we make MySuper ‘opt-in’, we will have a serious problem when claims arise.”

Mr Latto will be presenting on this topic at the Association of Financial Advisers (AFA) National Adviser Conference.  Visit www.afa.asn.au for more information.

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Andrew Bragg

The first report on MySuper performance and fees released by APRA yesterday is a game changer for the way superannuation is reported, the Financial Services Council said.

Andrew Bragg, FSC Director of Policy said: “For the first time, Australians have APRA data which directly compares the fees and performance of MySuper products.”

“As of yesterday, APRA is showing true ‘apple with apple’ comparisons.”

“APRA data shows FSC members’ funds have outperformed industry funds since MySuper started in January 2014.”

FSC members’ funds averaged net returns of 3.4  per cent compared to industry funds at 3.18 per cent since the commencement of MySuper.

“This is evidence that MySuper is delivering both transparent, comparable information and lower fees,” Mr Bragg said.

“This is good news for 70% of working Australians who do not choose a superannuation fund.”

Mr Bragg said:  “Fees can be further reduced if the industry fund-dominated default superannuation market is opened up to competition.”

“MySuper has been a game changer for the default superannuation market.”

“Industry funds are now more expensive and offer lower returns than FSC member funds, but maintain a monopoly on default contributions through the Fair Work Commission process.

“While the FWC process continues, millions of Australians will be missing out on the benefit of lower fees and higher return MySuper products offered by FSC members ,” he said.

“Superannuation is a long term investment. This is why fees and performance are important.”

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Wade Matterson

With a growing trend both globally and in Australia around low volatility, managed volatility, and portfolio risk management strategies, it is imperative that advisors and research consultants explore each strategy to uncover how different risks are being addressed. Identifying those techniques that are robust and able to address both diversifiable and systematic risks is likely to provide better overall results for investors and fund members.

Traditionally, portfolio construction and diversification across asset classes has been the major focus of risk management for the asset management industry. However, as the global financial crisis (GFC) highlighted, diversification alone cannot provide adequate protection in highly stressed markets. During the GFC, balanced and conservative portfolios experienced significant drawdowns, with some falling by more than 25%. This acutely highlighted the Risk Tolerance Paradox faced by investors approaching and entering retirement: Risk levels expected by investors over the long term are rarely the same as the risk levels they experience over shorter periods.

Historically, the industry’s preferred approach to overcoming portfolio volatility and large portfolio losses has been to stay invested, ride out the storm, average down, keep investing, and eventually growth will return and damage to the portfolio will be repaired. While this still holds true for the young, who have substantial time left before retirement, it may not be practical or realistic for those near retirement or already retired. As demonstrated during the depths of the GFC, many fund members acted against these principles and realised losses at the worst possible time.

The other traditional answer for those near or in retirement has been to de-risk the portfolio by reducing exposures to growth assets — an approach which has been reflected in the increased adoption of life cycle strategies. However, as retirees live longer and interest rates remain at historically low levels, life cycle or annuity solutions may lock in low levels of income or create a higher likelihood of exhausting savings early in retirement. Given current global market conditions and increases in average life expectancies, the answer will most probably include an element of continued exposure to growth, albeit with some explicit ‘managed risk’ or ‘managed volatility’ approach.

Wade Matterson of Milliman Australia stated: ‘With large demographic shifts well underway in the developed world, including Australia, investment strategies focused upon retirement are starting to resonate with local industry and retail funds. The growing issues of balancing longevity risk with the risk of permanent capital loss have continued to grow in importance for most of our clients.

‘Following several years of preoccupation with FOFA and MySuper, we have begun to see a strong increase in demand for retirement solutions that address key issues around risk management and retirement.

‘Our work with Plato Investment Management, who recently launched a Managed Risk Income Fund and Maritime Super, highlights the momentum that is building in the industry and the increased appetite to create solutions which address some of these issues.’

In a new Risk Tolerance Paradox paper published by Milliman, we explore the main reason for this paradox, and introduce a risk management strategy that seeks to solve the problem.

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John Brogden

The selection process by the Fair Work Commission (FWC) for default superannuation funds under Modern Awards will cost superannuation fund members a staggering $400 million if it is allowed to proceed.

Laws put in place by the previous Federal Government require the FWC to assess all MySuper products that apply to receive default contributions and then replace every single fund in every Modern Award.  As early as 1 January 2015, each Modern Award must have from two to 15 default MySuper products.

New research by Rafe Consulting for the Financial Services Council shows the superannuation arrangements of at least 2.25 million working Australians and 100,000 employers will be thrown into turmoil if the Fair Work Commission is allowed to complete its review of default superannuation terms in awards.

It is the first research to analyse the systemic risks that superannuation members and employers face if the FWC process is not reformed.

Rafe estimates this will cost consumers and employers a massive $400 million due to duplication of fees, insurance premiums and employer search costs.

He says within two years fund members would be $150 out of pocket due to the cost of duplication of fees and premiums. Additional costs which will have no benefits for consumers. Costs which undermine years of reform aimed at stripping unnecessary expense from superannuation.

John Brogden, CEO of the FSC said: “The default superannuation system needs to be reformed as a matter of urgency.”

“The consequences of not making reform are far-reaching,” he said.

“These unnecessary costs to employers and employees may be incurred as early as 1 January 2015 unless the Government acts to reform the process before the FWC review is completed.”

The Financial System Inquiry interim report released last week made a point of commenting on this issue. It observed that “the selection of default funds in awards largely reflects precedent and is not subject to a competitive process.”

In the broader context, the Murray Review focused on driving costs lower to increase the adequacy of Australia’s retirement savings.

Chant West data released this week demonstrates that FSC members have outperformed industry funds over the last three and  five years. Opening up the default market to competition will enable more Australians to enjoy the benefits of their outperformance, forcing industry funds to lift their game.

“Superannuation funds that offer competitive products and provide good service to their members have nothing to fear from competition.

Mr Brogden also said: “The closed shop of default superannuation is a risk not just for individuals who will have lower savings in retirement as a result of less competition, but for the Government which will ultimately bare the cost of lower fund balances in retirement through paying more in Age Pensions.”

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John Brogden

The financial advice industry is open to any Parliamentary inquiry provided it focuses on the future, not just the past, the Financial Services Council said yesterday.

John Brogden, CEO of the FSC said: “The industry is an open book. We will work with any public inquiry.”

He was speaking in response to an announcement made by the Leader of the Opposition − The Hon  Bill Shorten MP, Shadow Treasurer − The Hon Chris Bowen MP and Shadow Minister for Financial Services and Superannuation – The Hon Bernie Rippoll MP yesterday which called for a Senate inquiry into the financial advice sector.

“However, the Parliament needs to ensure they review whether  the Opposition’s FoFA laws will actually deliver more affordable and accessible quality advice – as promised when they announced the FoFA legislation in April 2010,” Mr Brogden said.

“Everybody agrees more Australians should get financial advice.”

“Whilst FoFA has delivered reforms over the past five years that give the best consumer protections in the world, it will fail if millions more working Australians do not seek financial advice.”

“We believe the Government’s proposed changes to FoFA will make advice more affordable and accessible while maintaining quality and consumer protection.”

Mr Brogden also said: “The financial advice industry has been through several inquiries since the GFC which have resulted in significant legislative changes,” Mr Brogden said. (* see Appendix)

“We are still in the process of implementing the MySuper, FoFA and TASA regimes which are the result of inquiries into all aspects of financial services practises from 2009 to date.”

Mr Brogden also said the Parliament needs to remember that consumers will end up bearing the costs of any new regulation.

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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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John Brogden

The Full Federal Court last week upheld a challenge by the Financial Services Council and determined that the Fair Work Commission Expert Panel for the selection of MySuper default funds in Modern Awards is invalid.

The Federal Court declared that:

1. The decision by the President of the FWC to appoint himself to Expert Panel is not valid; and,
2. The Expert Panel is not correctly constituted.

John Brogden, CEO of the Financial Services Council said: “The Federal Court found the FWC Expert Panel lacked the number of superannuation experts required by law.”

FWC President, Iain Ross was also found to have acted outside his legislative powers by appointing himself to the Expert Panel.

“We have argued from the beginning that the Expert Panel was conflicted and then incorrectly reconstituted,” Mr Brogden said.

“The Federal Court has today upheld our position.”

“We want an open, competitive process which allows every APRA-approved MySuper product to compete for default superannuation contributions.”

“A genuinely competitive market will lead to more transparency, lower fees and better services for employers and employees,” he said.

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ASIC reviewed a number of MySuper product dashboards from across the superannuation industry, to ensure they provide useful and accessible information to members. This review was based on the product dashboard requirements and measures set out in ASIC Information Sheet 170 MySuper product dashboard requirements for superannuation trustees (INFO 170).

‘Our review suggests that trustees have shown a good level of compliance with the product dashboard requirements for MySuper products,’ Commissioner Greg Tanzer said. ‘Some trustees have chosen to adopt the ASIC ‘mock up’ of the product dashboard. However, there are some areas for improvement to the accessibility and clarity of product dashboards.’

In particular, ASIC expects trustees will:

• show the product dashboard in a prominent position and readily accessible location on the trustee’s website. This requirement is not met if several pages have to be navigated through, or a site ‘searched’, to view the product dashboard, or the product dashboard is otherwise difficult to find. The product dashboard should be able to be seen readily by a user of the website that has no prior knowledge of the concept of the product dashboard.
• not include information within the parameters of the product dashboard that is not required by the product dashboard mandatory provisions. This is distinct from the additional information being outside and proximate to the product dashboard. The inclusion of optional information, such as asset allocation information, within the product dashboard has the potential to compromise the ability of users to compare across multiple (non-uniform) product dashboards. It may also serve to confuse users of the product dashboard.
• address all of the mandatory elements. Some trustees have omitted the past returns and return target-past return comparison from the product dashboard where there is no predecessor product. In this situation, our preferred approach is for the trustee to include all elements with an accompanying explanation to the effect that no past return information is available because the MySuper product has not been in existence for a full financial year and there was no predecessor product.
• address each of the mandatory elements separately. For example, past return percentages should not be shown in the return target-past returns comparison graph.

Trustees may include additional information outside the product dashboard to assist users. Additional information may include, for example, the use of graphs, asset allocation charts, investment risk measures and a glossary of terms. In reviewing MySuper product dashboards, we observed that the additional information provided outside the parameters of the product dashboard, but in close proximity to it, was in most instances helpful to a user in understanding the mandatory elements of the product dashboard. The overall impression formed from the mandatory elements and the optional disclosure around the product dashboard should not be confusing, otherwise the trustee may be engaging in misleading or deceptive conduct.

Trustees are reminded that it is an offence for a trustee to fail to publish a product dashboard at all, or to publish a product dashboard that is out of date, omits required information or otherwise is misleading or deceptive.

Consistent with ASIC’s facilitative compliance approach for super reforms until 1 July 2014, ASIC is adopting a measured approach where inadvertent breaches arise or systems changes are underway, provided industry participants are making reasonable efforts to comply.

The product dashboard regime for Choice products is still subject to Government consultation and was scheduled to commence on 1 July 2014. On 5 May 2014, the government released an announcement which included that the Choice product dashboard provisions will be deferred to 1 July 2015. Our review of product dashboards did not cover Choice products.

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Douglas Latto

The Corporate Super Specialist Alliance (CSSA) disputes that making any MySuper fund a default fund will result in unnecessary costs and expensive red tape.

“We actually think the opposite is true,” says CSSA President Douglas Latto. “If any MySuper fund can be a default fund then most employers will not be forced onto the market in search of a new provider; they will elect to stay with their current fund. This means there would be no employer search costs and no red tape.”

Mr Latto says that at the moment some funds are under multiple Awards and each Award has a different default fund requirement. “This means employers may currently be paying to a number of different funds because the Award forces them to have different defaults for different groups of employees,” he says. “If any MySuper fund could be a default fund, employers could consolidate into the preferred fund amongst the funds they are contributing to. This would reduce time and red tape for the employer because they would then only have to choose one fund for their whole company.”

The CSSA also believes that it is not appropriate for the Fair Work Commission to be responsible for selecting default super funds for inclusion in industrial awards.

“With the greatest respect, we do not think the Fair Work Commission has the expertise or experience to do this kind of work. We are giving responsibility for millions of dollars of consumer retirement savings to people who have no expertise in choosing funds,” he says. “CSSA advisers take years to hone their skills, to make their selections and to understand how products work.”

Mr Latto also said that under the new MySuper rules only registered organisations can submit on modern awards and this presents a conflict of interest.

“Registered organisations are bodies like unions and employer groups,” he says. “When these organisations make their submissions they are highly likely to support their own funds. If any MySuper fund could be a default fund, this conflict of interest would cease to exist.”

Allowing any MySuper fund to be a default fund would also see the return of a fair market and a level playing field, he says.

“We utterly reject the concept of a ‘quality filter’ which narrows the universe of default funds down to a mere handful,” he says. “If the marketplace is reduced to just a few funds, people are forced to go into them. This is not only uncompetitive but also completely removes innovation from the marketplace because there is simply be no need to innovate.”

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