Part 1 Overview Recommendations

7/31/2019 Part 1 Overview Recommendations

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SUPERSYSTEMREVIEW

FINALREPORT

PARTONE

Overviewand

Recommendations

www.SuperSystemReview.gov.au


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Pageii

CommonwealthofAustralia2010

ISBN9780642746214

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Pageiii

www.SuperSystemReview.gov.au

30June2010

TheHonChrisBowenMP

MinisterforFinancialServices,SuperannuationandCorporateLaw

ParliamentHouse

CANBERRA ACT 2600

DearMinister

ReviewoftheGovernance,Efficiency,StructureandOperationofAustraliasSuperannuation

System

WearepleasedtopresentthefinalreportoftheSuperSystemReview.

Wehavedevelopedtenrecommendationpackagesaimedatbenefitingmembers.

MySupersitsattheheartofourrecommendations. Itisdesignedtofocusfundsonthecorepurpose

forwhichtheyexist:optimisingretirementincomesformembers.

SuperStreamisarecognitionthatbringingthebackofficeofsuperintothe21stcenturyiscriticalto

theoverallfunctioningofthesupersystem.

WeareconfidentthatallofourrecommendationswillenhanceAustraliasworldclassretirement

savingssystemandwecommendthemtoyou.

Yourssincerely

JeremyCooper

Chair

KevinCasey GregEvans SandyGrant

DavidGruen MegHeffron IanMartin

BrianWilson


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SuperSystemReview:FinalReportPartOne:OverviewandRecommendations

Pagev

TERMSOFREFERENCE

ThethenMinisterforSuperannuationandCorporateLaw,SenatortheHonNickSherry,announced

theSuper

System

Review

(Review)

on

29

May

2009.

1

The

Review

was

initiated

with

the

support

of

thesuperannuationindustry.2 Thetermsofreferenceareasfollows:

Reviewintothegovernance,efficiency,structureandoperationofAustraliassuperannuation

system.

Scope

1. TheReviewwillcomprehensivelyexamineandanalysethegovernance,efficiency,structureandoperationofAustraliassuperannuationsystem,includingbothcompulsoryandvoluntaryaspects,

addressing,butnotlimitedto,thefollowingissues:

1.1Governance:

examining

the

legal

and

regulatory

framework

of

the

superannuation

system,

includingissuesoftrusteeknowledge,skillsandtraining;andthoroughlyassesstherisksinvolvedin

theuseofdebtandleverageandthedevelopmentofinvestmentoptionsthatleadtoaweakeningof

thediversificationprincipleinthesuperannuationsystem;

1.2Efficiency:ensuringthemostefficientoperationofthesuperannuationsystemforallmembers,

whetheractiveorpassivemembersandwhethermakingcompulsoryorvoluntarycontributions,

includingremovingunnecessarycomplexitiesfromthesystemandensuring,inlightofitscompulsory

nature,thatitoperatesinthemostcosteffectivemannerandinthebestinterestsofmembers;

1.3Structure:promotingeffectivecompetitioninthesuperannuationsystemthatleadstodownward

pressureon

system

costs,

examining

current

add

on

features

of

the

superannuation

system;

and,

examiningotherstructurallegacyfeaturesofthesystem;and

1.4Operation:maximisingreturnstomembers,includingthroughminimisingcosts,coveringboth

passivedefaultingmembers,whoshouldreceivemaximumreturnsandvalueformoneythrough

soundlyregulateddefaultproducts,andactiveselectingmembers,whoshouldnotbenegatively

impactedbyconflictsofinterestthatmayinhibitadvicebeinginthebestinterestsofmembers.

2. TheReviewtobeconductedaroundtheconceptsofthebestinterestsofthememberandthemaximisingofretirementincomesforAustralians.

3. TheReviewtobeconductedwithreferencetoimprovingtheregulationofthesuperannuationsystem,whilstalsoreducingbusinesscostswithinthesystem.

4. TheReviewwillbeasystemicexamination,includingallsuperannuationfundsectors.5. Inconductingitswork,andindeterminingitsrecommendations,theReviewwillhaveregardtothe

CommuniquofPrinciples(seeseparateattachmenttothisrelease).

6. TheReviewwillcomparativelyexamineinternationaljurisdictionsandwillconsultwithexpertsasneededfromotherjurisdictions.


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SuperSystemReview:FinalReport PartOne:Overviewandrecommendations

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7. TheReviewisexcludedfromconsideringtheissuesbeforetheAustraliasFutureTaxSystemreviewconcerningsysteminputssuchasthelevelofsuperannuationcontributions,taxationincluding

taxationconcessionsandotherincentives.

8. TheReviewisexcludedfromconsideringthedevelopmentofasuperannuationclearinghouseortheproject

addressing

the

consolidation

of

lost

accounts,

as

these

are

the

subject

of

separate

and

already

commencedprocesses.

CompositionandConsultation

9. TheReviewtobeledbyanexpertpanelmadeupofafulltimeChairandfive3parttimemembers,supportedbyasecretariatdrawingontheskillsofthekeypolicyandregulatoryagenciesofthe

Commonwealth,aswellasmarketexpertise.TheReviewmayalsodrawonexternalexpertisewhere

necessary.

10. TheReviewwillconsultthesuperannuationindustry,otherstakeholdersandthebroaderpublic.Timing

11. TheReviewwillmakerecommendationstotheGovernmentby30June2010onpossibleoptionsforreform,includingappropriatetransitionalarrangements.TheReviewmayreportonparticularissues

priortothefinalisationofthefinalreport.


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Pagevii

CONTENTS

TERMSOFREFERENCE V

CHAPTER1: REVIEWHIGHLIGHTS 1

CHAPTER2: THEPANELS10SUPERPOLICYPRINCIPLES 4

CHAPTER3: THECASEFORREFORM 5

CHAPTER4: THESUPERFUNDMEMBER 8

CHAPTER5: INTRODUCTIONTOTHERECOMMENDATIONPACKAGES 10

CHAPTER6: HOWTHERECOMMENDATIONSBENEFITMEMBERS 18

CHAPTER7: IMPLEMENTATION 22

CHAPTER8: OUTSTANDINGISSUES 23

CHAPTER9: ACKNOWLEDGEMENTS 23

CHAPTER10: LISTOFRECOMMENDATIONS 24

APPENDICES

APPENDIXA:

THESUPERSYSTEMREVIEWPANEL

64APPENDIXB: OVERVIEWOFTHESUPERANNUATIONSYSTEM 69APPENDIXC: TREASURYASSUMPTIONSFORMODELLING 72APPENDIXD: DELOITTEREPORT 76APPENDIXE: SECRETARIAT 107APPENDIXF: ABBREVIATIONSANDACRONYMS 108APPENDIXG: GLOSSARY 111APPENDIXH: BIBLIOGRAPHYANDREFERENCEMATERIAL 118APPENDIXI: SUBMISSIONS 142APPENDIXJ:

PUBLISHEDSPEECHES

155

APPENDIXK: OTHERSUPERANNUATIONRELATEDREVIEWS 156


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1 REVIEWHIGHLIGHTS1.1 EngagementAustralianshavecontributionsmadetotheirsuperfundswhethertheylikeitornot. Members

shouldnothavetobeinterested,financiallyliterate,orinvestmentexpertstogetthemostoutof

theirsuper. Ifmemberswanttoengageandmakechoices,thenthesystemoughttoencourage

andfacilitatethemdoingso. Ifmembersarenotinterested,thenthesystemshouldstillworkto

provideoptimaloutcomesforthem. Thesupersystemshouldworkforitsmembers,notvice

versa. ThisisthebasisofthePanelsnewchoicearchitecture.

1.2 MySuperMySuper

is

asimple,

well

designed

product

suitable

for

the

majority

of

members.

The

MySuper

conceptisaimedatloweringoverallcostswhilemaintainingacompetitivemarketbased,private

sectorinfrastructureforsuper. Theconceptdrawsonandenhancesanexistingandwellknown

product(thedefaultinvestmentoption). MySupertakesthisproduct,simplifiesit,addsscale,

transparencyandcomparability,allaimedatachievingbettermemberoutcomes.

1.3 SuperStreamSuperStreamisapackageofmeasuresdesignedtobringthebackofficeofsuperannuationinto

the21stcentury. Itskeycomponentsaretheincreaseduseoftechnology,uniformdatastandards,

use

of

the

tax

file

number

as

a

key

identifier

and

the

straight

through

processing

of

superannuationtransactions.

1.4 RegulatingforefficiencyAPRAwouldhaveanincreasedmandatetooverseeandpromotetheoverallefficiencyand

transparencyofthesuperannuationsystem. Tothisend,APRAwouldbegivenastandardsmaking

powerinsuperannuationasatoolfordrivingtransparencyandcomparabilityofmember

outcomes.

1.5 SMSFsTheSMSFsectorislargelysuccessfulandwellfunctioning. Significantchangesarenotrequired,

butmeasuresrelatingtoserviceproviders,auditorsandtheregulatoryframeworkare

recommended.

1.6 ScalemattersTherearesubstantialbenefitsformembersarisingoutofincreasedscaleinthesuperannuation

industry. MySuperproviderswouldbeexposedtoscrutinyandpressureonthisissueandwould

berequiredtoconsidereachyearwhethertheyhadsufficientscaletooptimiseoutcomesfor

members.


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1.7 GovernanceNearlyalltheissueslookedatintheReviewlinkbacktotrusteegovernanceinsomewayorother.

Improvinggovernancepracticesandstructuresiskeytoimprovingmemberoutcomes. ACodeof

Trustee

Governance

is

proposed.

1.8 HelpingmemberscompareInordertomakemeaningfulchoices(ortounderstandtheirpersonalsituation)membersneedto

beabletomakelikewithlikecomparisonsbetweencompetingsuperannuationproducts.

Standardproductdashboardsandstandardisedinvestmentperformancereportingwouldliftthe

fogthathascloudedthisareasofar.

1.9 InsuranceinsuperCommissionsshouldbebannedonallinsuranceproductsinsuper,includinggroupriskand

personalinsurance. Trusteeswillcontinuetobeabletoofferlife,TPDandincomeprotection

insuranceinMySuperandchoiceinvestmentoptions.

1.10 SystemictransparencyEachfundwouldberequiredtoprovidefreeofchargeonitswebsite,detailedfinancialand

operationalinformationaboutthefund(includingitsportfolioholdings)andaboutthefunds

managementtogreatlyincreaseaccountabilityandavailabilityofinformationtothosewhoare

interested.

1.11 WholeoflifefocusThesupersystemexiststoenhanceretirementincomesforworkingAustralians,notsimplyto

accumulateassets. MySupershouldbeawholeoflifeproductandincludeasingletypeof

retirementincomestreamproductchosenbythetrusteeandnotjustcaterformembersinthe

preretirementphase. Trusteeswouldhaveadutytoaddresslongevity,inflationandinvestment

risksforretirementphasemembersindevelopingtheirstrategies.

1.12 DataImprovingthequalityandavailabilityofdataandresearchonthesuperannuationindustry

facilitatesdecisionmaking,ensuresparticipantsintheindustryareheldtoaccountbymembers,

regulatorsandpeersandgivesconfidenceintheintegrityofthesystem. Theimportanceofthis

issuejustifiesregulatoryinterventionsoAPRAwouldhaveanincreasedroleinthisarea.


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1.13 DollarsavingsforthesystemTreasuryestimatesshorttermannualsystemsavingsofabout$1.55Bandlongtermannual

systemsavingsofaround$2.7BasaresultofMySuperandSuperStream.

1.14 DollarsavingsformembersTreasuryestimatesthattheMySuperandSuperStreamproposalswould,inthelongrun,seeacut

ofaround40percentinfeesfortheaveragemember. Thiswouldlifttheirfinalsuperannuation

balancebyaround$40,000or7percentafter37yearsintheworkforce.

Aboutthisfinalreport

Thisfinal

report

supersedes

all

of

the

Panels

preliminary

reports.

The

final

report

of

the

Super

SystemReviewcomprisesthefollowing:

PartOne:OverviewoftheReview,includingaconsolidatedlistofallthePanelsrecommendationsandasummaryofhowtheyimpactmembers; and

PartTwo:ThePanels10recommendationpackages,eachinitsownchapter.


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2 THEPANELS10SUPERPOLICYPRINCIPLESThePanelrecognisesthewidergovernmentpolicyconcernsthataffectthesuperannuationsystem:

overallfiscalsustainability,broaderretirementpolicyandtaxationpolicyamongthem. However,in

shapingitsrecommendations,thePanelhasformulated10principlesaboutsuperannuation,which

haveunderpinned

its

decision

making

process.

ThePanelbelievesthattheseprincipleshavebroaderapplicationthanjustthisReview. Theyshould

betheguidingprinciplesbywhichpolicyisdevelopedinrelationtosuperannuationgenerally,to

ensureconsistencyofapproachtosuperannuationpolicybysuccessiveAustraliangovernments.

1. Superannuationmustalwaysbeforthebenefitofmembers. Thesuperannuationsystemdoesnotexisttosupportintermediaries. Trusteesmustberelentlessinseekingbenefitsfor

members.

2. Thesuperannuationsystemneedstobewellregulatedtoaddressprudentialandotherrisksso

that

members

can

have

the

confidence

to

invest

their

retirement

savings

for

their

long

term

financialbenefit.

3. Transparencyanddisclosureareessentialfortheeffectiveoperationofthesystem,butarenotsubstitutesforwelldesignedproductsthatworkinmembersinterests. Disclosureisa

necessary,butnotasufficient,conditionforensuringthatmemberinterestsprevail.

4. Individualchoicesformembersshouldbeavailableandrespected,butmembersmustrecogniseandaccepttheincreasedresponsibilitythatcomeswithmakingthosechoices.

5. Thesuperannuationsystemmustbesupportedbyhighqualityresearchanddata,aswellasbyintermediaries

with

high

professional

standards.

6. Financialliteracyisanimportantlongtermgoal,butacompulsorysuperannuationsystemcannotdependonallitsparticipantshavingtheskillsnecessarytocomprehendcomplex

financialinformationorbeinginvestmentexperts.

7. Feesandcostsmatter;theydetractfrommembersretirementsavingsandneedtobemanagedasdiligentlyasthegenerationofinvestmentreturns. Technologicalimprovements,

andinnovationgenerally,shouldbeencouragedtohelplowercostsandbenefitmembers.

8. Superannuationisalargeandcomplexsystemwithanincreasinglyimportantsocialandmacroeconomic

dimension.

It

must

be

regulated

and

administered

coherently

and

rule

changes,includingtotaxationrules,shouldbemadesparinglyandinawaythatengenders

memberconfidence.

9. Thesystemmusthavesufficientflexibilitytoaccommodateitsinherentgrowthpathandshouldstriveforcontinualimprovement,ratherthanabruptchanges. Wherepossible,

governmentandtrusteedecisionsaboutsuperannuationshouldbetakenwithalongterm

perspective.

10. Governmentsshouldnotseektodirectsuperfundtrusteestoinvestinparticularassetsorassetclasses,nortopreventinvestmentsincertaintypesofassetsorassetclassesunlessthere

areprudential

or

regulatory

reasons

for

doing

so.

This

is

regardless

of

how

much

it

might

seeminthenationalinteresttodoso.


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3 THECASEFORREFORM3.1 Thesuperannuationsystemin2035Australianshaveoveratrilliondollars4insuperannuationsavings.5 Thecompulsorynatureofsuper

contributionsmeans

that

by

2035,

Australians

are

projected

to

have

increased

their

collective

super

savingsto$6.1T.6

ThisReviewprovidesavaluableopportunitytotakestockofthecurrentsysteminlightofhowit

mightdevelopandtomakerecommendationsdesignedtoenhanceitssimplicity,efficiencyand

equity.

Justasin1993,whenthecurrentarchitectureofthesystemwasestablished,itishardtoenvisage

exactlythecoursethosechangeswilltake. In1993,totalsuperannuationassetsamountedto

$183B,7andtheindustrywasdominatedbycorporatefundsandbylarge,partlyfundedpublicsector

schemes. TheSMSFsector,asweknowittoday,didnotexist.

Foranoverviewofthesuperannuationsystemtoday,seeappendixB.

Forecastingthesizeandstructureofthesuperannuationsystemoverthecoming25yearsisnotan

easytask,giventhesystemsdynamismandcomplexity. However,Treasuryprojectionsshowaquite

dramaticdecreaseinthenumberoffundssothatthelargeAPRAfundsectorisdominatedbyfewer,

largersuperfunds.

Table1: TheAustraliansuperannuationindustryin2035(includingSMSFs)

1996 June

2009

2035

(nominal)8

2035

(current)

Overallindustryscale $245b $1.1t $6.1t $3.2t

Ratioofaccumulationtopostretirementassets 4:1 3:1 3:1

Biggestfund $41.5b $350b $187b

NumberoflargeAPRAfunds(excludingERFs) 4734 447 74 74

AveragelargeAPRAfundsize $40m $1.5b $53b $28b

Averageaccumulationmemberbalance $15,000 $70,000 $335,000 $180,000

Totalsuperassets proportionofGDP 47% 90% 130% 130%

3.2 ThekeychallengesTheprojectedfiguresintable1arebasedonTreasurymodellingandaresubjecttoanumberof

assumptions(explainedinappendixC). Theydo,however,throwintosharpreliefthesortsofissues

thatthePanelbelievesthatgovernmentandcommunityneedtobethinkingaboutandaddressing

now,topositionthesupersystemtorespondthechallengesofthefuture.


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3.2.1 IssuesforthefutureFundswillbemuchlarger: Theaveragefundwillbemuchlargerinreal(2010dollar)terms. This,in

turn,willhaveimplicationsforfundgovernance,forinvestmentandprudentialregulation. The

largestfundswillbeverylargebycurrentstandards,thougheventheywillremainrelativelymodest

byglobalstandards.

Assetbasedfeeswillgrow: Assetbasedfeeswillgrowwiththesizeoftheassetpoolandwill

requirecontinuedvigilancetoensurethattotaldollarfeelevelsremainappropriate,ratherthan

merelyfocusingonpercentagesnotincreasingortrendingslightlydownwards.

Memberaccountbalanceswillbelarger: Memberaccountbalanceswillbesubstantiallylargerin

realterms,thanatanytimeinthehistoryofsuperannuation. Thiswillputpressureonmember

transferandremediationprocessesacrossthesystemandwillincreaseconcernsaroundidentity

theftandfraudandtrusteeaccountabilitytomembers. Itmightalsoencouragegreatermember

engagementassuperannuationbalancesmakeamorematerialcontributiontotheretirement

incomesofmoreAustralians.

Economicallysignificant: Thesuperannuationsystemwillcontinuetobeanimportantfactorinthe

Australianeconomyandfinancialmarkets. Theefficiencyofthesectorwillhavemacroeconomic

effects.

Competingintheglobalmarketplace: Localfundswillincreasinglyfindthemselvescompetingwith

largeglobalfunds,notjustinmarketsforlistedsecurities,butalsoforspecificassets,suchas

infrastructure,privateequityanddirectproperty.

3.2.2 IssuesthatneedtobeaddressednowThe

future

growth

of

the

industry

sets

the

current

issues

in

their

broader

context

and

highlights

the

needforreform.

Memberinterestsarenotalwaysparamount: Superannuationiscompulsoryandfullyoutsourced

totheprivatesector. Systemdesignandregulatorysettingshaveperhapsnottakenthisinto

accountsufficiently. Memberinterestsarenotalwaysparamount.

Immaturesystemforitssize: Overall,itisasystemthathasnotyetreachedalevelofmaturity

commensuratewithitsmonetaryscale.

Efficiencyisoutsidetheregulatorynet: Theregulatorymodelhasfocusedmainlyonprudential

safetywhich,

while

important,

has

left

the

efficiency

of

the

system

for

members

in

the

hands

of

marketparticipants.

Toomuchcomplexity: Membersperceivesuperannuationastoocomplexandopaqueandthereis

anoveralllackoftransparencyandcomparabilityofsuperannuationproducts.

Disclosuretomembershasfailedtoachieveitsobjectives: Whatevertheactuallevelof

engagementandliteracyamongmembers,aregulatorymodellargelybuiltarounddetailed

disclosureandmemberchoicehasnotworkedforasubstantialportionofthememberpopulation.

Ambiguityabouttrusteerolewhenmembersmakeactivechoices: Wheremembersdomake

choicesabout

their

superannuation

in

alarge

APRA

fund,

there

is

alack

of

clarity

about

how

much

responsibilitytheyaretakingandhowmuchthetrusteeislookingafterthem.


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Pastperformancedatagiventoomuchprominencesometimesatmemberexpense: Muchofthe

explicitandimplicitmarketingthatoccursinsuperannuationisbasedonpastinvestmentreturn

performance,oftenpretaxandunauditedandalmostalwayswithoutreferencetovolatility.

Antiquateddivisionofindustryalongretailandindustrylinespersists: Thesectoral

classifications

such

as

industry

and

retail

are

redundant

and

in

some

cases

obscure

clear

identificationoftheissues.

Inadequateaccountingandfinancialreportingstandards: Theaccountingandfinancialreporting

standardsapplyingtosuperareinadequatebecausetheyaredirectedtoentityreporting;a

perspectiveinwhichonlyafractionofparticipantsareinterested.

Backofficedominatedbymanualtransactions: Thebackofficeofsuperisinurgentneedofan

upgradeandannuallycostsmembershundredsofmillionsofdollarsmorethanitshould.

Lackofscale: Manyfundslackthescalenecessarytoprovideoptimaloutcomestotheirmembers

and,

in

some

cases,

trustee

self

interest

has

hindered

rationalisations

that

are

clearly

in

members

interests.

Feestoohigh: Feesinsuperannuationhavenotreducedinlinewithwhatcouldhavebeenexpected

giveneconomiesofscalethatareclearlypresentoravailable.

Toomuchtinkering: Thefrequencyofchangestorulesaboutsupercanunderminemember

confidenceinthesystem.

3.3 Whyhasntcompetitiondeliveredoptimaloutcomesalready?In

classical

economic

theory,

markets

efficiently

allocate

resources,

shape

products

and

determine

prices. Insuperannuation,competitioninthemarketforsuperattheconsumerlevel(iebetween

fundscompetingforthebusinessofanewmember)hassofarbeenrelativelyweak.

Thisisbecausesuperannuationisdifferent. Inadditiontothefactthatsuperiscompulsory,normal

consumerdemandledcompetitionismademoredifficultbecause:

Failuretoexercisechoice: Oftenamemberdoesntchoosethefundtowhichtheybelong. New

employeestypicallysimplybecomeamemberoftheiremployersdefaultfund;

Lackofpriceawareness: Compulsorycontributionsdontcomedirectlyoutofmembers'pockets,

nordo

the

fees

and

other

costs

charged

by

the

fund

(at

least

not

until

they

retire).

This

makes

peoplemuchlesspriceawareandmuchlesslikelytomakeadecisionbasedonpriceorcost;

Lackofinterest: Membersareoftennotengagedwiththeirsuperuntilclosertoretirementandso

willnotbesufficientlyinterestedtorespondtocompetitivebehaviouronthepartoffundsuntilthat

time(ifatall);

Agencyandstructuralissues: Therearelimitedopportunitiesformembervigilance,ontheone

hand,orincentivesforagencyvigilance,ontheother,toreduceprices;

Complexity: Superisinherentlycomplexandmanyconsumersdonotfeelconfidentmaking

decisionsabout

it;


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Lackofcomparability: Evenifmembersareengageduptoapoint,thereisalackofcontestabilityat

consumerlevelbecauseofproductcomplexityandlackofinformationandtransparencyaboutfees

andperformance; and

Frictions: Lastly,evenifsomeoneisinterestedinswitchingfunds,oftenthepaperworkandother

frictions

in

changing

funds

become

too

big

a

disincentive

and

they

give

up.

Ithastobesaidthattheoriginalsuperannuationarchitecturewassomewhatoptimisticinthatit

reliedonnotionsofmarketforces,disclosureandcompetition(alongwithtrustconcepts)toresolve

consumerissuessurroundingcomplexproducts,structuresandconflicts.

ThePanelthereforeacceptsthatthemodelofmemberdrivencompetitionthroughchoiceoffund

(intheformofSGActchoiceandconsequentportability)hasstruggledtodeliveracompetitive

marketthatreducescostsformembers.

ThePanelalsobelievesthatthefailureofcompetitiontodeliverdesirableoutcomesformembers

encapsulates

the

broader

issue

in

the

industry

as

it

currently

operates:

it

is

remote

from

the

member. ThePanelrecognisedearlyonthat,forrealbenefitstoflowtomembersasaconsequence

ofthisReview,thesuperannuationsystemmustoperatefromthememberperspective.

4 THESUPERFUNDMEMBER4.1 ThetheoryofrationalandinformedinvestorsvsreallifeexperienceA

key

tenet

of

the

1997

Wallis

Report

was

that

super

fund

members

should

be

treated

as

rational

andinformedinvestors,withdisclosureandmarketconductcontrolsbeingthemainregulatory

instrumentswithwhichtooverseetheindustry.9

Morespecifically,thesesettingsassumethatmembershavethetoolsattheirdisposal,andthe

necessaryregulatoryprotectionsinthemarketplace,toenablethemtomakeoptimaldecisions

abouttheirinvestmentstrategies,aboutwhentoenterandexitthemarket,andaboutwhattodo

withtheirsuperonreachingretirement. Inacompulsorysystem,italsoassumesthatmembershave

therequisitedegreeofinterest.

But,formanymembers,thisisnotthecase.

The2006AdultLiteracyandLifeSkillsSurveyofAustralianspublishedbytheAustralianBureauof

Statistics(ABS)inJanuary2008,foundthat46percentof1574yearolds,orsomesevenmillion

people,wouldstruggletounderstanddocumentationsuchasjobapplications,mapsandpayroll

forms. FiftythreepercentofsurveyedAustraliansreachedjustthesecondoffivelevelsina

practicalnumeracytest,while70percent(about10.6Mpeople)managedonlytoprogresstolevel2

inaseriesofproblemsolvingexercises. Level3isregardedbythesurveydevelopersasthe

minimumrequiredforindividualstomeetthecomplexdemandsofeverydaylifeandworkinthe

emergingknowledgebasedeconomy.10

Whilethesefinancialliteracystatisticsarestark,thefactremainsthatacompulsorysystembasedon

informedinvestors

making

rational

choices

fails

to

confront

this

reality.


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4.2 EngagementwithsuperThefinancialliteracyissueshighlightoneoftheongoingtensionsanddebatesforthisReview:whatit

meanstobeanengagedsupermemberandhowengagementshouldbepursued,facilitatedor

encouraged. ThePanelskeyconcernhasbeenthesuggestionthatacertainlevelofengagement

andfinancialliteracyisnecessaryforthesystemtoworkproperly.

SincetheintroductionoftheChoiceofSuperlegislation,switchingratesbetweenfundshave

actuallydeclinedfromaround5percentin2005to2percentbytheendof2009.11 ARoyMorgan

Researchreport,basedonover50,000interviewsconductedannually,indicatesthatapproximately

80percentofsuperfundswitchescomeasaresultofmemberschangingemployersoremployers

changingdefaultfundproviders.12

Ofthosewhodefaultintoasuperfundchosenbytheiremployer,oraward,roughly80percentare

inthedefaultinvestmentoption.13 Ofthat80percent,anecdotalevidencesuggeststhat

approximately20percentofdefaultinvestmentoptionmembersdochoosetobeinthedefault

investmentoption. Thissuggeststhatapproximately60percentofmembersdonotmakeactive

choices.

However,thePanelisconsciousnottooverstatethelevelofmemberdisengagement. ThePanel

recognisesthattherearesegmentsofthecommunityverymuchengagedwiththeirsuperandwho

spendtimethinkingandmakingactivedecisionsaboutsuperannuation.

Onethingisclear:thelevelofengagementofanyindividualmemberwilldependonarangeof

factors,forexamplethemembersage,accountbalance,andbroaderfinancialandlife

circumstances. ThekeypointfromthePanelsperspectiveisthatacompulsorysystemneedstobe

abletocaterforthesedifferentdegreesofengagement:thesignificantproportionofmemberswho

arenotengagedwiththeirsuper,orinapositiontomakethesortsofdecisionsrequiredofthem;

andtheinformed,financiallyliterate,orwelladvisedmembers.

4.3 PhilosophicalframeworkofMySuperandthechoicearchitecturemodelTheserealisationsaboutfinancialliteracyandengagementhaveledthePaneltoproposethenew

choicearchitectureframeworkfortheAustraliansuperannuationsystemthatisdetailedinthis

report. Thisframeworkisanadaptationofcontemporarythinkinginthefieldofbehavioural

economics. Thisfieldiscurrentlybeingappliedoverseastoavarietyofcomplexpublicpolicy

challengesinvolvingconsumers forexample,inthefieldsofhealthcare,childnutrition,roadsafety

andsustainability,aswellasretirementsavings.14

Thekey

tenet

of

this

approach

is

the

concept

of

libertarian

paternalism

the

idea

that

the

outcomesexperiencedbyinertordisengagedconsumersshouldhaveinbuiltsettingsthatmost

closelysuitthoseconsumersobjectiveneeds,asassessedbytheexpertprovidersoftheproductor

serviceinquestion.15

Importantly,thisdoesnotamounttoacentrallydeterminedboilerplateoptionforeverybody,asit

mustatalltimeshaveregardtothecollectivecharacteristicsoftheparticularconsumersaffected,

anyofwhomcanatanytimeoptoutiftheywanttotakemorecontrolforthemselves. Norisita

completelylaissezfairesystemofunimpededchoiceswhereproviderscanbeindifferenttothe

selectiondecisionsmade(ornotmade)byindividuals. Thisisbecausethedefaultsettingmust

alwaysbeonethatreflectsapositivejudgmentaboutthemostappropriateoutcomeforthe

consumer(member)intheeyesoftheproductprovider(beingthetrusteeinthecaseofa

superannuationfund).


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5 INTRODUCTIONTOTHERECOMMENDATIONPACKAGESThePanelhasframeditsrecommendationsin10packages,eachbeingachapterinPartTwoofthis

report,makingupacomprehensiveblueprintforreform. Earlierversionsofsomeofthesepackages

havebeenreleasedaspreliminaryreportsduringthecourseoftheReview(seeappendixAforafull

listingof

these

preliminary

reports).

Whereverpossible,thePanelhaspitcheditsrecommendations,anditsanalysis,atwhatitregardsas

thekeyconceptualissuesandnotmattersoflegislativeoroperationaldetail. Giventhetimeand

resourcesavailabletoit,thePanelnecessarilyhadtorefrainfromengaginginamoregranulated

reviewofthecomplicatedlegislativeandregulatoryenvironmentthathasbuiltuparoundthe

superannuationsystem.

5.1 Chapter1:MySuperandthechoicearchitectureThe

Panel

has

re

cast

the

architecture

of

the

superannuation

industry

to

amember

oriented,

rather

thananindustryoriented,perspective. Itbelievesthatthesystemshouldfacilitate,butnotbebased

on,choice. Thatis,thedegreeofengagementamemberwantstoexerciseinrelationtotheir

superannuationshoulddictatetheregulatorysettingsandthenatureoftheproductsavailable.

Figure1: AchoicearchitecturemodelforAustraliassuperannuationsystem

MySuper Choice SMSF

Thesuperannuationsystemoughttofacilitate,butnotimpose,choice...

ERFs/Lost MySuper Choice SMSF

Thesuperannuationsystemoughttofacilitate,butnotimpose,choice...

ERFs/Lost

Broadlyspeaking,thearchitecturerecognisesfourtypesofmembers.

Therearesomememberswhosimplywantsomeoneelsetotakecareofitallforthem. MySuperis

particularly

designed

to

cater

to

these

members.

Therearesomememberswhowanttoexercisechoiceovertheinvestmentstrategiesappliedtotheirsuperannuationbalances,butwanttohavetheiraccountsadministeredforthem. These

memberscanelecttobeinthechoicesegment,thoughtheymightdecidethataMySuper

productmeetstheirneedsandelecttohavetheirmoneyinvestedthere(orinacombinationof

MySuperandchoiceproducts).

Therearesome,andthenumberhasincreasedsharplyinrecentyears,whochoosetobefullyresponsiblefortheinvestmentandadministrationoftheirsuperannuationarrangements. These

memberscanchoosetooperateanSMSF.


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Page11

Thesystemalsohastocaterformemberswhohavelosttheirsuperannuationaccount. Theobjectivehereistoreconnectmembersandtheiraccountsquicklyandefficientlyandto

introducemeasuresthatmakethislesslikelytooccurinfuture.

Figure2: Increasedchoice,increasedmemberresponsibility

...butwithincreasedchoicecomesindividualresponsibility.

increasedchoice

MySuper Choice SMSFERFs/Lost

...butwithincreasedchoicecomesindividualresponsibility.

increasedchoice

MySuper Choice SMSFMySuper Choice SMSFERFs/Lost

5.1.1 MySuperTheMySupercomponentofthechoicearchitecturemodelaimstoprovideasimple,costeffective

productwithasingle,diversifiedportfolioofinvestmentsforthevastmajorityofAustralianworkers

(roughly80percentofmembers)whoareinthedefaultoptionintheircurrentfund.

MySuperisdesignedwithtwolargegroupsofmembersinmind:thosewhotakenorealinterestin

theirsuper(atleastnotinitially)andthosewhochoosetobeinalarge,lowcostandwellmanaged

productwhere

the

investment

strategy

is

designed

and

implemented

by

the

trustee.

MySuperwouldhaveanumberoffeaturesdesignedsolelywiththememberinmind:specifictrustee

dutiesdesignedtodeliverlowercostoutcomesformembers;increasedtransparencyleadingto

bettercomparability,especiallyofcostsandlongtermnetperformance;provisionofintrafund

advice;simplercommunications;andanembeddedretirementproduct. Ithasbeendesignedtosit

withintheexistingsuperannuationstructuresandisbasedonexistingwidelyofferedandwell

understooddefaultinvestmentoptions.

5.1.2 ChoiceThe

choice

sector

is

also

an

important

component

of

Australias

superannuation

system.

The

Panel

recognisesthatacompetitivechoicesectorworkswellformemberswhowanttotailortheir

superannuation.

But,evenwithinchoice,therearegraduateddegreesofmemberresponsibilityandengagement.

WhilethePanelbelievesthatthetrusteeshouldbeprotectedwhenamemberchoosesaparticular

investmentoptionthatcausesthatmembertosufferloss,thetrusteealsohasaresponsibilityto

applyagreaterlevelofscrutinytothesortsofproductsthatareofferedtosuperfundmembersin

themastertrusts,platformsorwrapenvironment. Itshouldnotbepossiblefortrusteesmerelyto

presideoveramenuofinvestmentoptionsprincipallyselectedbydealergroupsorotherexternal

parties.


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Page12

Currently,theAustralianfinancialservicesregulatoryregimedoesnotassessthesuitabilityof

productsmadeavailabletoretailinvestors,includingmembersofcertaintypesofsuperfunds.

Instead,disclosureissaidtoenableinvestorstodecideforthemselveswhatproductisappropriate

andneitherAPRAnorASICpassesjudgmentonthemeritsorsuitabilityoftheinvestment.

This

regulatory

policy

affects

super

because

members

are

able

to

access

a

wide

range

of

non

super

financialproductsthroughmastertrusts,platformsandwraps(oftenmanyhundredsofproducts).

Thishasresultedinsomememberssometimeschoosingriskyandilliquidinvestmentsthatare

arguablyunsuitableasretirementproducts.

ThePanelhasrecommendarefineddutyonthepartofachoicetrusteetocarryoutappropriatedue

diligenceandmonitoringofinvestmentoptionstheyoffer. Thedetailsofthisnewdutywouldbe

fleshedoutinstandardstobedevelopedbyAPRAinconsultationwiththeindustry.

5.2 Chapter2:TrusteegovernanceThePanelbelievesthatthecombinedeffectofacompulsorysystem(outsourcedbygovernmentto

theprivatesector)andlegislatedpreservationofbenefitsdemandahigherlevelofgovernancein

respectofsuperfundmembersthanthelevelrequiredforshareholdersinmajorlistedcompanies.

Investorsinlistedcompanieshavechosentoinvestandarefreetoselltheirholdingsatanytime.

ThePanelhasrecommendedseveralinitiativestoimprovetrusteegovernance.

ThePanelseesvalueincreatingadistinctnewofficeunderstatute,thatoftrusteedirector. The

duties,powersandstandardsrequiredofthisofficewouldberecordedclearlyintheSISActand

nowhereelse. Thesestatutorydutieswouldenhance,expandandclarifythedutiessetoutin

section

52(2)

of

the

SIS

Act

as

well

as

appropriately

adapt

the

chapter

2D

directors

duties

from

the

CorporationsAct. Theidentificationandmanagementofconflictsofinterestsandofdutiesarea

particularpriority. Thoughconflictsarecoveredunderthegenerallawpertainingtotrustees,itis

clearfromtheReviewsanalysisthatthereisaneedforgreaterclarityofwhatisrequiredof

superannuationfundtrusteesandtrusteedirectorsinthisregard.

Changesarealsorequiredinrelationtothestructureoftrusteeboards,includingtheirsizeandthe

tenureoftrusteedirectors. Contemporarybestpracticeincorporategovernanceforlisted

companiesincludesthepresenceofindependentdirectorsontheboard. ThePanelbelievesthata

minimumnumberofnonassociatedtrusteedirectors(suchthattheycangenuinelyinfluencethe

decisionsofthoseboards)shouldberequiredonallsuperannuationtrusteeboards.

Tosupporttherecommendedlegislativechanges,thePanelproposestheestablishmentofaCodeof

TrusteeGovernancewhichwouldreflecttheuniquecontextofasuperannuationfund. ThisCode

wouldnotbebindinglawand,assuch,wouldbemoreflexiblethanlegislationandcouldkeeppace

moreeasilywithchangesintheindustry. ThisCodewouldbedevelopedbyindustry.

Aspartofimprovingaccountabilitytomembers,thePanelhasrecommendedthatatrusteeshould

provideamemberwithreasonsforitsdecisionsinrelationtoamembersformalcomplaint.


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Page13

5.3 Chapter3:InvestmentgovernanceTheinvestmentoffundassetsisoneofthekeypartsoftheroleplayedbyatrusteeofa

superannuationfund. Thegovernanceoftheinvestmentfunctioniskeyinensuringthatthesteps

involvedintheinvestmentprocessareefficientandthatriskismanagedproperlyatalllevels.

ThePanelrecognisesthattheinvestmentofamodernsuperannuationfundisacomplexactivity

requiringawiderangeoftechnicalexpertiseandskills. Forthisreason,mostAPRAregulatedfunds

employarangeofserviceproviders,includingfundmanagers,assetconsultantsandcustodians,to

assistthem. Thisinturnplacespressureonthetrusteetoensurethattheprocessofappointment

andtheprocessofmonitoringtheseagentsaredesignedtopromotetheinterestsofmembers.

ThePanelhasidentifiedanumberofareasinwhichameasureoftighteningintheregulatorysystem

seemsappropriate.

Performancebasedfeeswere,untilrecently,typicallyonlychargedbyhedgefundsorinthecontext

ofmandates

relating

to

alternative

assets.

Quite

quickly,

they

have

become

much

more

widespread.

ThePanelsviewisthatperformancebasedfeesshouldbetheexception,ratherthantherule,for

superannuationfundinvestmentsandhasrecommendedthataperformancebasedfeestandardbe

adoptedforMySuperproducts.

Membersaccumulatetheirretirementsavingsandretireonaftertaxreturns,notpretaxones. Yet,

thereisawidevariationintheextenttowhichmosttrusteesandinvestmentmanagershaveregard

totheoptimisationoftaxoutcomesformembers. Thebenefitsofdividendimputationcreditsand

capitalgainstaxdiscountsareonlyrealisedwheretheunderlyinginvestmentsareheldatthetimeof

thedividenddistribution,orforaspecifiedperiod.

Investmentchurn

or

portfolio

trading

that

ignores

tax

consequences

can

result

in

the

premature

turnoverofassetswherethepotentialaftertaxbenefitstomembersarelost.

Researchonthequantumoftheleakagehasfoundthatportfolioturnoverresultingfrominvestment

decisionsmadewithoutregardtotaxcanaffectaftertaxreturnssignificantly. ThePanelbelieves

thattheSISActshouldbeamendedsothattrusteeshaveanobligationtohaveregardtothetax

consequencesoftheirinvestmentstrategies.

Similarly,thePanelalsoconsidersthattheSISActshouldbeamendedsothattrusteeshavean

obligationtohaveregardtotheexpectedcostsofparticularinvestmentstrategiesandthe

availabilityofindependentandtimelyassetvaluations.

5.4 Chapter4:OutcomestransparencyTransparencyandcomparabilityarecriticaltotheefficiencyandoperationofamarketbasedsavings

system,evenwhereparticipationiscompulsory. ThePanelbelievesthatthereispresentlyalackof

transparency,comparabilityand,ultimately,accountabilityintheAustraliansuperannuationsystem

thatcanonlybeeffectivelyimprovedthroughtargetedandproportionateregulation.


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Page14

ThePanelconsidersthat,tomakeprogressquicklytowardaccuratecomparability,APRAshouldhave

anewpowertomakeoutcomesreportingstandardsastothewaylargeAPRAfundsreportand

advertisetheinvestmentperformanceandcostsoftheirinvestmentoptions. LargeAPRAfunds

wouldberequired(amongotherthings)to:

report

past

performance

in

a

standard

format

that

also

discloses

the

volatility

associated

with

the

return; and

classifytheirinvestmentoptionsaccordingtoanewriskandreturntargetingapproach.Infinancialmarkets,thereisgreatbenefitinwhatcouldbetermedsystemictransparency:thatis,

disclosuretothesystematlarge,includingregulators,academics,analysts,advisersandinformed

investors. SystemictransparencyiswhatislargelymissingintheAustraliansupersystem. Thereis

toolittlehighqualityinformationavailabletoexpertswhowouldbeabletousesuchinformationfor

theultimatebenefitofmembersasawhole. SystemicfundinformationaboutlargeAPRAfunds

shouldsitalongsidespecificmemberfocusedandeventdrivendisclosureobligations.

ThePanelconsidersthatthereneedstobealowcost,butdramatic,changeinthisarea. Thisis

wherelargeAPRAfundsmustseethemselvesasdifferentfromotherbusinesses. Trusteesmustget

usedtobeingmoretransparentabouttheirfunds. ThePanelthereforebelievesthereshouldbenew

standardsforwebbasedsystemicdisclosuresforlargeAPRAfundsinarangeofareas,including

detailsoftheirportfolioholdingseverysixmonths.

Membersalsoneedacertainminimumamountofinformationwhenconsideringsuperannuation

investmentoptions,includingMySuper. ThePanelbelievesthiscanbeprovidedthroughthe

developmentofaplainEnglishproductdashboardthatwouldprovidememberswitha

standardisedformatinwhichtocompare:

theinvestmentoptionsriskandreturntargets; whethertheinvestmentoptionwasilliquid;and feesandcosts,includingaprojectedTotalAnnualExpenseRatio(TAER).5.5 Chapter5:InsuranceinsuperannuationInsurancecanbeanimportantaspectofsuperannuationasitprovidesbenefitstomembers(and

theirdependants)whenmembersarenolongerabletoworkduetodeathortotalandpermanent

disablement(TPD)beforenormalretirementage.

However,insurancecoverembeddedinsupercomesatthecostofforegoneretirementsavingsand

earnings. Inthiscontext,trusteeshaveanimportantroleinsettingappropriateinsuranceofferings

fortheirmembers. Defaultinsurancemustbetailoredformemberswhodonotconsidertheir

insuranceneeds,andwhorelyonthetrusteesjudgmentforadequateinsurance. Formemberswho

doconsidertheirinsuranceneeds,theyshouldbeabletooptoutofcoverentirelyortohaveaccess

toadditionalcover.

DeathandTPDinsurance,inparticular,meettheneedsofmemberssothattheyhavesufficient

benefitsintheeventthattheyneedtoaccesstheirretirementsavingsearly. Incomeprotection

insurancecancomplementthesetypesofinsurancebyprovidingbenefitswhendisabilityisbelieved


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Page15

tobetemporary,notpermanent. InthePanelsview,noothertypeofinsuranceisconsistentwith

theobjectivesofsuperannuationandnorshoulditbepaidforfrommembersupersavings.

Insuranceisacomplexproductformemberandtrusteealikeanditisacrucialcomponentof

superannuation. Accordingly,alltrusteesshoulddevelopaconsideredinsurancestrategyand

monitor

its

implementation.

The

risks

associated

with

fund

self

insurance

of

life

and

TPD

benefits

arehighandsoselfinsuranceshouldonlybepermittedinlimitedcircumstances.

Informationaboutinsurancemustbemorewidelyavailableandtrusteesmustmakeiteasierfor

memberstocompareinsuranceoptions,recognisingthefinancialimpactonmembers. ThePanel

thinksthatmuchofthiscanbeeasilyaccomplishedonthefundswebsite.

Insuperannuation,insuranceisgenerallyautomaticallyprovidedtomembersand,consequently,

memberswillcontinuetohavecoveragewithouttheneedtohaveadvisersrenumeratedbytrailing

commissions.InthePanelsview,commissionsaddunnecessarilytotheinsurancepremiumsthat

memberspay.

5.6 Chapter6:SystemintegrityTrusteesoflargeAPRAfundsneeddirectaccesstoariskweightedpoolofcapital,whetheran

operationalriskreservewithinthefundorcapitalheldseparatelybythetrustee. Changesproposed

inordertoimproveaccesstocapitalaccordingtotheassessedriskofthefundshouldbephasedin

overtimesoastoliftprudentialstandardswhileminimisinganyintergenerationalequityissuesand

disruptiontofunds.

Trusteesneedtogiveexplicitconsiderationtoliquidityriskmanagementatbothwholeoffundand

investment

option

level.

Administratorsandcommercialclearinghousesaresystemicallysignificanttothesuperannuation

systemandshouldbesubjecttoAPRAregulationandlicensing,includingarequirementtohold

capitalintheirownright.

Thefundingstandardsfordefinedbenefitfundsshouldbestrengthenedtofocusonthelevelof

vestedbenefitsratherthanminimumrequisitebenefits. ThePanelbelievesthatdefinedbenefit

fundsneedtobeconsideredcarefullyandspecificallywhenthereisanychangetolegislationascosts

forthesefundscanbeinadvertentlyincreasedwhenlegislationdoesnotsufficientlytaketheminto

account.

Giventhesuperannuationsystemssolepurpose,externalities,whetheranationalinterestin

developinginfrastructure,orpromotingsoundenvironmental,socialandgovernanceoutcomes,

alwaysneedtobereflectedintheriskandreturnvaluationofapotentialinvestment,butnotas

endsinthemselves.

5.7 Chapter7:RetirementAustraliassuperannuationsystemexiststodeliverprivateincometoenhancethelivingstandardsof

retiredAustralians. Successivegovernmentshavecommittedtothethreepillarframeworkasthe

underpinningofAustraliasretirementincomespolicy,blendingnearuniversalemployee


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Page16

participationinthesuperannuationsystemwithanadequatesocialsecuritysafetynetandincentives

fordiscretionarysavingsbyindividualsbeyondtheemployermandatedlevels.

Todate,theretirementincomeproductmarkethasbeenunderdeveloped,largelyreflectingthe

relativelysmallbalancesthatmanyretiringworkersholdasaconsequenceoftheimmaturityofthe

SG

system

(being

less

than

20

years

old).

Currently,

the

market

is

dominated

by

account

based

productsinwhichtherisksassociatedwithinvestmentmarkets,longevityandinflationaredirectly

bornebythemember. However,balanceswillincreasesubstantiallyintheperiodaheadandthis,

combinedwithdemographicageing,shouldhelpspurproductdevelopment. Treasuryestimatesthat

postretirementassetswillmorethantripleinrealtermsby2035toreach$850B.

MySupershouldbeawholeoflifeproductandincludeasingletypeofretirementincomestream

product,chosenbythetrustee.

Becauseretirementneedsvaryconsiderably,thereisnoonesizefitsallretirementincomeproduct

thatthegovernmentshouldmandate. Itisimportantthattrusteesconsiderlongevityissuesmore

explicitlywhen

developing

investment

strategies.

It

is

also

important

that

the

regulatory

system

supportsproductinnovation.

Goodfinancialadvicecanbeveryhelpfulasmembersplanforretirementandastheymanageassets

intheretirementphase. ThereisastrongcaseforrequiringMySuperproductstoprovideproactive

intrafundadviceperiodicallytothisgroupofmembers.

5.8 Chapter8:SelfmanagedsupersolutionsThePanelrecognisesthatwithintheSMSFsector,members(whoalsoactasthetrustees)should

have

ultimate

responsibility

for

their

retirement

savings.

Unless

there

is

a

countervailing

public

policyreason,trusteesofSMSFsshouldbefree,asmuchaspossible,fromgovernmentintervention.

Ineffect,theworkofthePanelhasledittoconcludethattheSMSFsectorislargelyasuccessfuland

wellfunctioningpartofthesystem,asreflectedinthePanelsstatisticalsummaryissuedin

December2009. Infact,thePanelsuspectsthatthemostsignificantaspectofitsworkintheSMSF

sectoriswhatithasnotrecommended(forexample,minimumfundsizeorspecifictrustee

educationalrequirements). TheSMSFrecommendationsarenotdramaticandlargelyrelateto

compliance,audit,advisercompetencyandlikemeasures. Thereweresomerecommendations

aboutassetsthatthePanelthoughtoughtnottobeinSMSFs(forexample,collectables)butthese

werenotmaterialinquantum.

SometrusteesarecapableoflookingafteralloftheaffairsoftheirSMSF. Mostultimatelydelegate

someorallofthetasksofrunninganSMSFtoserviceproviders. Insomerespects,serviceproviders

intheSMSFsectorhaveauniquerole. Theyare,inasense,thefirstlineofdefenceforthe

communityinasectorthatischaracterisedbyadoityourselfphilosophy. Recognisingthis,the

PanelbelievesthathighercompetencyandadvicestandardsareneededforSMSFserviceproviders.

ThePanelalsobelievesthatthesectorwouldbemoreefficientiftrusteeshadaccesstobetter

resourcesandsimplifiedlegislation.

ThePanelalsorecognisesthatotherpartsoftheSMSFregulatoryframeworkneedtobeimproved.

TheATOneedsagreaterrangeofflexiblepenaltiesifitistoachieveappropriateandproportionate

regulatoryoutcomes.

Likewise,

given

the

pivotal

role

approved

auditors

play

in

underpinning

the

SMSFregulatoryframework,theircompetenceandindependenceshouldberaisedtoalevelwhere


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Page17

theyprovidethelevelofassurancethatacompliancebasedregulatoryframeworkdemands. The

SMSFregistrationprocessneedstobeimprovedtocombatfraudsandillegalearlyaccessschemes.

5.9 Chapter9:SuperStreamSuperStreamisthenamethePanelhaschosentodescribethepackageofmeasuresdesignedto

enhancethecurrentbackofficeofsuperannuation. Itincludesnewstandardstoimprovethe

qualityofdataprovidedbyemployers,toallowtheuseoftaxfilenumbers(TFNs)asaprimary

identifierandtorequiretheuseoftechnologytoimproveprocessingefficiency. SuperStreamalso

includesimprovementstothewayfundtofundrolloversareprocessedandthewaycontributions

aremade.

Excessivecostscausedbymanualprocessingofbothmoneytransfersanddatainsupercanbe

significantlyreducedbyrequiringelectronictransmissionoflinkedfinancialandmemberdataatall

levels,usingstandardisedformats. UseoftheTFNastheprimaryidentifieriscriticaltothisprocess.

TherewillbeanenhancedrolefortheATOinfacilitatingamoreefficientbackofficefor

superannuation. Further,thePanelproposesthatthepresentarrayofcontrolsoversuperannuation

contributionsshouldbesimplifiedandstreamlined,withtheATOhavingsoleregulatory

responsibility.

Improveddataqualityandsearchprocessesshouldleadtoareductioninthenumberofinactiveor

lostmemberaccountsinthesystem.

5.10 Chapter10:RegulatorysettingsChanges

are

required

to

the

regulatory

system

in

order

to

achieve

the

efficiencies

that

the

Panel

seeksfortheindustry.

ThePanelbelievesthatAPRAmusthaveastandardsmakingpowerinrelationtosuperannuationto

allowittotakeonthesignificanttasksofoverseeingandpromotingindustryefficiency(aswellasits

existingprudentialrole). ThePanelseesthiscomplementedbyafreshapproachtograduated

regulatoryenforcementandsanctions.

ThePanelisoftheviewthatefficiencycanalsobeachievedbyenhancedcooperationand

coordinationbetweentheregulatorswithrespecttotheirsuperannuationfunctions. Thiscouldtake

severalforms,includingsecondmentarrangementsbetweenASICandAPRAoranoperational

mergeroftheirsuperannuationcapabilitieswithorwithoutacolocationinmajoroffices. TheATO

shouldberesourcedsothatitcancarryoutitsnewrolewithrespecttoSuperStreamaswellasits

currentrolesintheindustry.

InthePanelsview,furtherefficienciescanbeachievedbyfacilitatingrationalisationoflegacy

productsinsuperannuationand,tothatend,suggeststhattheequivalencetestforsuccessorfund

transfersbechangedtoatestofnooveralldisadvantagewiththeintentionofallowingmore

transferstoproceed. ThereisalsobenefitingivingtheFederalCourtthejurisdictiontodetermine

superannuationproductrationalisationwherethesuccessorfundtransfertestcannotbemet. CGT

reliefintheseinstancesshouldbeexpandedandmadepermanent.


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InefficiencyisalsoabyproductofacomplexlegislativeframeworkandthePanelbelievesthata

restructureoftheSISActcouldbehelpfultotheindustry. ThePanelsuggestthattheSISActbe

organisedsothat,amongotherthings,theprovisionsapplyingtoeachsectorofthenewchoice

architecturearesetoutseparately.

As

a

way

to

determine

if

the

Panels

recommendations

have

been

effective

in

advancing

efficiency

in

theindustry,thePanelbelievesthattheProductivityCommissionshouldreviewtheimpactand

implementationofMySuperandSuperStreamandthefunctioningoftheretirementproductmarket

fiveyearsaftertheGovernmentsresponsetothisreport.

Withaviewtoadvancingmembersinterests,thePanelbelievesthatmemberprotectionshould

ceaseinthenewchoicearchitecturesothatsubsidisationofprotectedmembersbyunprotected

membersdoesnotcontinuetooccur. ThePanelalsoendorsesanextensionoftheGeneralEmployee

EntitlementandRedundancyScheme(GEERS)tocoveruptothreemonthsofunpaidSGAct

contributionsandachangeofnamefortheSuperannuationComplaintsTribunal(SCT)tobecome

theSuperannuationAppealsTribunaltobetterreflectitsrole.

6 HOWTHERECOMMENDATIONSBENEFITMEMBERSThePanelstermsofreferencewerequiteexplicitthatitsworkwastobeconductedaroundthe

conceptsofthebestinterestsofthememberandthemaximisingofretirementincomesfor

Australians.

ThePanelhasthereforeframeditsrecommendationsinawaythatreinforcestheprinciplethat

superannuationmustbeforthebenefitofmembersandimposesnewrequirementsontrusteesto

ensurethat

they

make

decisions

and

conduct

their

operations

so

that

members

benefit.

ThePanelhasalsodevelopednumerousproposalstomakesupereasier,simplerandmoreefficient

formembers.

6.1 Optimisingcostsandfeesformembers6.1.1 MySuperfeesincurrentmarketconditionsTheaimofMySuperisloweringoverallcostsformemberswhilesupportingandencouraginga

competitivemarket

based,

private

sector

infrastructure

for

superannuation.

The

Panels

objective

is

tomakesuperbettervalueformoneyandMySuperisdesignedwiththisinmind.

WhilethePanelhasnotrecommendedacaponfees,thePanelhasrecommendedchangesin

legislationandregulationtomakefeesmoretransparentandtoassistmemberstocomparefees

acrosstheindustry. Thesemeasures,alongwithsharperdutiesontrustees,shouldseebetter

managementofoverallcosts.

AspartoftheReview,thePanelcommissionedareportfromDeloitteActuariesandConsultants

seekingDeloittesviewofreasonableandachievabletotalcostsforanaveragememberwitha

$25,000accountbalance,assumingtheadoptionoftheMySupermodel. Deloittesmethodology

involvedusing

current

market

information

to

estimate

the

likely

costs

and

fee

ranges

for

the

various


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Page19

componentsoftheMySuperproduct,withouttakingaccountoftheimpactofSuperStreamand

otherPanelrecommendations.

DeloittesviewofwhatthecurrentmarketcouldprovideinthewayoffeesforMySuperisshownin

thefollowingtable:

Table2: EstimatedtotalannualpercentagecostsforMySuperproductsofvaryingsizes

(investmentcosts,plusoperatingcostsandintrafundadvice)

MySuperfundsize/investmentstrategy $2b $5b $10b $20b

Passivebalanced 0.60% 0.46% 0.38% 0.32%

Passiveconservative 0.58% 0.45% 0.37% 0.32%

Activebalanced 0.94% 0.83% 0.70% 0.60%

Activeconservative 0.80% 0.70% 0.59% 0.49%

Activebalanced(withalternatives) 1.04% 0.89% 0.77% 0.66%

Activeconservative

(with

alternatives)

0.89%

0.76%

0.64%

0.54%

AcopyofthefullDeloittereportisatappendixD.

Foravarietyofreasons,feescurrentlypaidbysuperfundmemberscoverawiderangeacrossthe

differentfundtypesandsectors. However,nearlyalldefaultfundmembersaretodaypayingmore

thanthe0.66percenttotalfeesprojectedbyDeloitteforthehighestcostinvestmentoptionina

$20BMySuperproduct,withsomememberspayingmorethantwicethisamount. Thisestimated

savingwouldrepresentasignificantboosttoretirementsavings. Treasuryestimatesanaveragefee

fordefaultfundmembersof97bpsperannum,basedontheRiceWarnerSuperannuationFee

Report2008.

Beingacurrentmarketestimate,Deloittesnumbersdonottakeaccountofanysavingsfromthe

SuperStreamproposaltomodernisethebackofficeofthesuperindustry(seechapter9). ThePanel

askedDeloittetokeeptheaccountbalanceusedintheexampleslow,reflectingtherelativelylow

averageaccountbalancesinthesystem. Anaccountbalanceof$250,000wouldseeoperatingcosts,

includingforintrafundadvice,ofbetween0.05percentfora$2Bfundand0.03percentfora$20B

fund,towhichpercentagebasedinvestmentmanagementfeeswouldhavetobeadded.

6.1.2 Wouldlowerfeesharminvestmentreturns?ConcernhasbeenexpressedthatMySuperwouldbeseenascheapandnastywithitsmembers

disadvantagedbecausetheywouldbeforcedintopoorlyperforminglowcostinvestmentstrategies.

Thisisnotso. Thecostestimatesshownintable2includeanelementofperformancefeesand

rangeacrosspassiveandactiveinvestmentstrategies,includingexposuretoalternativeassetclasses.

MySupertrusteeswouldberequiredtoconsiderandimplement,asappropriate,whattheyconsider

tobetheoptimalinvestmentstrategytomaximisenetreturnsfortheirmembers.

ThereisnojustificationfortheassertionthatMySuperwouldpreventtrusteesandfundmanagers

frompursuingcertaintypesofinvestmentstrategiesthattheymightotherwiseconsider. The

MySuperconceptispredicatedontrusteesbeingrequiredtodesignandimplementaninvestment

strategy

that

is

for

the

benefit

of

members,

which

means

trustees

have

to

weigh

the

expected

returnsofanystrategyagainstconsiderationsofliquidity,riskandcost. ThePanelisconfidentthat


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trusteeswouldbeabletoidentifystrategiesthatoffercompetitivenet(thatis,aftertaxes,feesand

costs)returnstomemberswithintheregulatoryframeworkgoverningMySuper.

ItisclearfromDeloitteswork,andothermaterialanalysedbytheReview,thattherearesubstantial

benefitsfromscaleinthesuperindustry. InMySuper,trusteeswouldhavetoconsiderannually

whether

their

MySuper

product

would

have

enough

scale

to

provide

optimal

benefits

to

members.

6.1.3 FutureimpactofMySuperandSuperStreamonfeesThePanelhassoughttoquantify(assetoutintable3)thepotentialimpactoftwomajorreforms

MySuperandSuperStreamonfeesthatmembersmightpayinthefuture.

Table3: ProjectedannualsavingsfromMySuperandSuperStream*

Sourceofsavings Shortrun Longrun

MySuper $0.55b $1.7b

SuperStream $1.0b

$1.0b

Totalannualsavings $1.55b $2.70b

* TheSuperStreamreformsareexpectedtoinvolveinitialupfrontcostsfortheindustryandthefullbenefitsmightnotbe

realisedimmediately. Theseshortruncostshavenotbeenquantified. However,theyareexpectedtoberelativelylowin

thelongerterm.

Thesefeesavingswouldprovidesignificantbenefitstoordinaryworkers. Treasuryestimatesthatan

averagewageearnerpayingaverageMySuperfeescouldbenefitfromarounda40percentfeecut,

liftingtheirfinalsuperannuationbalancebyaround$40,000or7percent.

Giventheuncertaintiesinvolved,theseestimatesshouldbeseenasbroadlyindicativeonly. Details

ofthe

Treasury

assumptions

underpinning

these

projections

are

set

out

in

appendix

C.

6.2 BetterretirementbenefitsThebettermanagementofcostsandfeesgoesdirectlytoimprovingthebottomlineformembers,

thatis,greaterretirementbenefits. Theinformationinsection6.1illustratewhatpositiveresultscan

beachievedwiththeMySuperandSuperStreamproposals.

WhileincreasedretirementbenefitsaretheoverallaimofthePanelsrecommendations,specific

recommendationsthatsignificantlycontributetothisresultare:

(a) movementofagreatershareofthevaluederivedfrominvestmentsofsuperassetsfromagentstomembersascompetition,scaleandefficiencygainsarerealised,increasing

membersnetwealth;

(b) prohibitingadvisercommissionsoninsuranceprovidedthroughsuperannuation,thatcanbeupto2030percentofmemberpremiums;

16

(c) removingtrailingcommissionsonadviceandlimitingperformancebasedinvestmentmanagementfees;

(d) requiringtrusteestomanageinvestmentsforaftertaxreturnsandtoaligninvestmentmanagementarrangementswithmemberinterests;


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(e) givingMySupertrusteesadutytoconsiderlongevityriskandinflationriskinrelationmembersinretirementphase;

(f) removingbarriersinthetaxlegislationandSISActtofundconsolidationsothatscalecanbemoreeasilyachieved; and

(g) requiringtrusteestohavenotonlyaninvestmentstrategy,butalsoaninsurancestrategysothatcostsinbothareasareactivelyconsideredandmanagedbythetrustee.

6.3 EnhancedsecurityofthesystemImposingacapital(orreserving)requirementontrusteeswillhelpensuretheirviability,whichisof

courseofutmostimportancetomembers.

Licensingofadministratorsandclearinghouses(andcapitalrequirementsforthem)meansthat

memberrecordsaremoresecureand,generally,reducestheriskofoperationalfailurein

administratorsand

clearinghouses.

Bringing

these

entities

into

the

regulatory

net

gives

comfort

to

membersthattheregulatoryoversightextendstoallcriticaloperationsofthesystem.

Definedbenefitmemberswillbemoresecureinknowingthatthefocusoffundingwillbeontheir

vestedbenefitsnotminimumrequisitebenefits.

Further,trusteeswillberequiredtomanageliquidityrisksbetterbothinthefundasawholeandin

individualinvestmentoptionswhichreducestheriskformembersthattherewillbenocashavailable

topaytheirbenefitswhentheycomedue.

Thestrengtheningofgovernancestandardsfortrusteeboardsandtrusteedirectorswillhelpensure

thatpersons

involved

with

the

fund

at

the

highest

level

are

of

high

quality

and

capability.

Maintainingconfidenceinthesystemisimportantandsecuringthesystemsstabilityisfundamental.

6.4 BetterinformationIncreasingthetransparencyofthesystemandprovidingmoremeaningfulinformationwouldbeof

obviousbenefittomembers. ThePanelbelievesthattheprovisionofbetterinformationto

membersandtheiradviserswouldmakesuperannuationlessopaqueandincreasethelikelihood

thatmembersunderstandwhatishappeningwiththeirsuperannuation.

Thenewforwardlookinginvestmentoptiondisclosuredashboardwouldenablemembersto

examinelikelyfutureperformance,ratherthanbasinginvestmentchoiceonpastinvestment

performance. ThePanelbelievesthatthiswayofpreparinganddisclosinginvestmentoptiondata

willaidmembersinfiguringoutsomeofthetechnicalinformationthatisassociatedwiththeirsuper.

MySupertrusteeswillberequiredtoprovidetheirmemberswithintrafundadviceproactivelyat

variousstagesthroughouttheirworkinglivesandastheyapproachretirementandduringtheir

retirement. ThePanelseesintrafundadviceasbeingofgreatvaluetomembersasitcomesfrom

thetrustee,theentitythatismostfamiliarwiththefundsoperation.


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6.5 GreaterefficiencyAsaconsequenceoftheSuperStreamproposals,superwillbeeasiertolocateandhardertolose.

Currently,thereareapproximately12Mmemberswithsuperannuation,17yetthereareover

33

million

accounts.

18

Equally

frustrating

for

members

(and

trustees

and

administrators)

is

the

laboriousprocessofreunitingmemberswiththeirlostsuper. Therewasmorethan$13.6Binlost

superasat30June2009.19

ThePanelsrecommendationstoenablegreateruseofTFNstohelpinidentifyingmemberaccounts,

torequireelectronictransmissionoflinkedfinancialandmemberdata(usingstandardisedformats)

andtofacilitateautoconsolidationofmultipleaccountswillgofarinmakingthesystemmore

efficientformembers.

MemberswillalsobenefitfromthePanelsemphasisontheavailabilityofelectronicinformation

bothfromtheirfundandfromgovernment. Theestablishmentofthegovernmentssuperwebsite

meansthat

there

will

be

acentral,

authoritative

repository

for

information

about

superannuation.

A

websitebasedapproachwillbemoreefficient(andlesscostly)asinformationcanbeupdatedeasily

andquicklyandmemberscanaccesstheinformationatanytime.

7 IMPLEMENTATIONWhilepitchingitsrecommendationsatahighconceptuallevel,thePanelhasendeavoured

throughouttheReviewtobesatisfiedthatitsideasandrecommendationsarepracticable. Inpart,

thishasbeeninanefforttominimiseanyunintendedconsequencesofitsproposals.

ThePanelappreciatestheworkinvolvedintakinghighlevelrecommendationsandimplementing

theminpractice. TothatextentthePanelhas,wherepossible,givenasmuchdirectionasitcanto

enabletheTreasury,withitsresponsibilityforimplementingrecommendationsthatareacceptedby

Government,tounderstandthePanelsthinking. Inthesamevein,thePanelurgesTreasurytohave

regardtothe10superpolicyprinciplestoclarifyareasofambiguity.

Inevitably,therewillbemattersofdetailthatwillnotbeaddressedinaprojectofthisnatureand

thesewillhavetoberesolvedinthesubsequentconsultationprocess.

ThePanelsrecommendationsareexpectedtobenefitmemberssubstantiallyinthelongterm

throughcost

savings

and

improved

efficiencies.

Counter

balancing

these

savings,

the

Panel

acknowledgesthatsomeofitsrecommendationswouldincreasesomefundcostsintheshortterm,

particularlytheimplementationofcertainaspectsoftheMySuperandSuperStreamreforms.

Whenmakingrecommendations,thePanelhasbeenconsciousoftheGovernmentsbestpractice

regulationprinciples. Asaresult,thePanelslargelyprinciplebasedreformsaimtomaximisethe

overallbenefittomembers,whileminimisingthecostbornebytheindustry.

ThePanelhasnotpresumedtorecommendaspecifictimetableorsequenceofimplementation,

althoughitwouldclearlybepreferableforimplementationplanningtocommenceimmediatelyon

someofthekeyproposalsincludingMySuperandthevariousSuperStreamproposals. Manyofthe

otherkey

recommendations

depend

on

further

detailed

consultation

with

the

industry,

and

any

reformsrequiringlegislativechangesneedtobeverycarefullyplannedandaccommodatedwithin


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thegovernmentsbroaderlegislativeprogram. ThePanelis,however,confidentthatallthereforms

proposedareeminentlycapableofbeingimplemented,andwillresultinsignificantnetgainsto

members.

8 OUTSTANDINGISSUESAspartoftheReviewprocess,thePanelreleasedthreecomprehensiveissuespapers,detailing

myriadissuesaboutgovernance,operations,efficiencyandstructureacrossthesuperannuation

industrytoday(seeappendixAforalistoftheissuespapers).

ThePanelspriorityhasbeentoaddressthoseissuesthatitbelievedwouldbringaboutthegreatest

benefittomembersandthesuperannuationindustry. However,thePanelrecognisesthatthereare

stillanumberofsecondorder,butstillimportant,changesthatcouldresultinbenefitsformembers.

Inthisregard,thePanelbelievesthatpolicymakersandregulatorsshouldcontinuetoprogressthese

issuesand

commends

to

them

the

issues

papers

and

the

submissions

that

responded

to

these

papersasanimportantongoingresource.

9 ACKNOWLEDGEMENTSThePanelwishestothankthelargenumberoforganisations,particularlyAPRA,theATO,ASICand

everyonewhoparticipatedinroundtables,focusgroupsandmeetingswiththePanel,orassisted

withresearch. ThePanelwasgratefultoreceivethemanythoughtful,consideredanduseful

submissionsandthanksthemanyorganisationswhomadesubmissionsinallthreephasesofthe

Review.The

Panel

was

also

particularly

grateful

that

so

many

individual

members

made

submissions

abouttheirownexperiencesandissues.

ThePanelalsoacknowledgesthesupportMinisterBowenandtheGovernmenthavegiventothe

Reviewprocess,whilealwaysrespectingtheindependenceofthePanel. ThePanelalso

acknowledgestheinitiativeofAssistantTreasurer,SenatortheHonNickSherry,ininstigatingthe

Review.

ThePanelisalsogratefulfortheadministrativesupportithasreceivedfrommanyareasofthe

DepartmentoftheTreasury. TherewerealsomanyothersupportersoftheReviewwhoassistedin

variouswaysduringtheprocess(byprovidingmeetingvenues,ideasandfeedback,goodquality

coffee,discussion

forums

and

support)

and

we

thank

them

as

well.

ThereweremanyfriendsoftheReview(toomanytonameindividually)andthePanelthankseachof

themfortheirsupportandencouragement.

Lastly,thePanelwishestoacknowledgetheoutstandingsupportprovidedbyallmembersofthe

Reviewsecretariat(listedinappendixE)drawnfromboththeprivateandpublicsectors.


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10 LISTOFRECOMMENDATIONS10.1 Chapter1:MySuperandchoicearchitecture

Recommendation1.1

ThechoicearchitecturemodelshouldbeadoptedasthestructureforAustralias

superannuationindustry.

Recommendation1.2

TheSGActshouldbeamendedsoonlyaMySuperproductiseligibletobeadefaultfund

nominatedbyanemployer.

Recommendation1.3

Therelevantlegislationshouldbeamendedso:

(a) onlyMySuperproductsareeligibletobenominated; and(b) allMySuperproductsareabletobenominated,fordefaultfundpurposesinawardsapprovedbyFairWorkAustralia.

Recommendation1.4

In2012,theProductivityCommissionshouldconductareviewoftheprocessesbywhichdefault

fundsarenominatedinawardstoassesswhethertheprocessesaresufficientlyopenand

competitive.

Recommendation1.5

Anyfundthatisasuccessorfund(asdefinedintheSISAct)toafundcurrentlynominatedasa

defaultfund

under

an

award

should,

where

the

successor

fund

is

aMySuper

product,

be

acceptedautomaticallyasadefaultfundundertheaward,sothatthereisnoimpedimentto

consolidationforthosefundsthatwishtodoso.


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Recommendation1.6

TheSISActshouldbeamendedtoapplystatutorydutiestoMySupertrusteesto:

(a) formulateandgiveeffecttoasingle,diversifiedinvestmentstrategyatanoverallcostaimed

at

optimising

fund

members

financial

best

interests,

as

reflected

in

the

net

investmentreturnoverthelongerterm; and

(b) activelyexamineandconcludewhether,onanannualbasis,itsMySuperproducthassufficientscaleonitsown(withrespecttobothassetsandnumberofmembers)to

continueprovidingoptimalbenefitstomembers.

Recommendation1.7

TheSISActshouldbeamendedtorequiretrusteesofMySuperproductstosatisfyobjective

criteriarelating

to:

(a) APRAlicensing;

(b) acceptanceofcontributions;

(c) single,diversifiedinvestmentstrategy;

(d) absenceofcostscrosssubsidisation;

(e) buyandsellspreads;

(f) switchingfees;

(g) feediscounts;

(h) performancebasedinvestmentmanagementfees;

(i) esuperdisclosures;

(j) retirementincomestreamproduct;

(k) entryandexitfees;

(l) benchmarking;

(m) intrafundadvice;

(n) insurance;

(o) absenceofcommissionsandlikepayments; and

(p) memberengagement.


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Recommendation1.8

Neitheradvicetomembers(otherthanintrafundadvice),noradvicetoemployersshouldbe

bundledwithMySuperproducts.

Recommendation1.9

AdvicetomembersofaMySuperproduct(otherthanintrafundadvice)shouldonlybeprovided

onrequestandtrusteesshouldonlybeabletodeductthecostsofadviceaboutsuperannuation

fromamembersaccountwiththememberswrittenagreement.

Recommendation1.10

Thecostofadviceorservicesprovidedtoemployersshouldnotbeborneinanyway,directlyor

indirectly,by

MySuper

members.

Recommendation1.11

TrusteesofMySuperproductsshouldnot:

(a) payorfundanyproductbasedupfrontortrailingcommissionorothersimilarpayment;

or

(b) makeorfundanypaymentthatrelatestovolume,

inrespectofsuperannuationadviceorotherproductsorservicesprovidedtomembers.

Recommendation1.12

MembersofMySuperproductsshouldonlybeprovidedwithadviceaboutsuperannuation

(otherthanintrafundadvice)underarrangementsthatrequirethemembertorenewtheadvice

serviceeachyearonarenewalnoticefromtheadviser.

Recommendation1.13

ASICshould,inconsultationwithindustry,deviseastandardformwhichrequiresclear

identificationoftheadviceservicetobeprovidedwhereafundmemberrenewsanongoing

adviceservice.

Recommendation1.14

TrusteesofMySuperproductsshouldnotpaypremiumsforinsuredmemberbenefitsthat

includeorfundanupfrontortrailingcommissionorlikepayment.


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Recommendation1.15

Legislationshouldapplyspecificandthoroughconductandenquirydutiesonpersons(including

trustees)providingswitchingadvicetoaMySupermemberbuiltonthecurrentrequirementsof

section947DoftheCorporationsAct.

Recommendation1.16.

MembersshouldonlybeabletobemovedinvoluntarilyoutofaMySuperproductiftheyare:

(a) transferredtoanERF;

(b) flippedfromaMySuperproductinamastertrusttoanotherMySuperproductinanother

divisionofthattrust;or

(c)

transferredunder

legislative

requirements

such

as

auto

consolidation

of

accounts

or

temporaryresidentarrangements.

Recommendation1.17

ThepresentationofretirementforecastsshouldbemandatoryforMySuperproducts,and

shouldbedevelopedinconsultationwithindustryinaccordancewiththeapproachidentifiedby

thePanel.

Recommendation1.18

ThesuperannuationindustryshouldhaveatleasttwoyearstotransitiontoMySuperandthe

newchoicearchitecture.

Recommendation1.19

BothAPRAandASICshouldoverseethetransitionreferredtoinRecommendation1.18.

Recommendation1.20

Trusteesofchoicesectorproductsshouldalsonotbeabletochargeentryfeesandshouldonly

chargeexitfeesonacostrecoverybasis.

Recommendation1.21

Neitheradvicetomembers(otherthanintrafundadvice),noradvicetoemployersshouldbe

bundledwithchoiceproductsorwithanyotherproductinthechoicearchitecturemodel,

includingproductsofferedtoSMSFs.


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Recommendation1.22

Advicetomembersofachoiceproductorofanyotherproductinthechoicearchitecturemodel

(otherthanintrafundadvice)shouldonlybeprovidedonrequestandtrusteesshouldonlybe

abletodeductthecostsofadviceaboutsuperannuationfromamembersaccountwiththe

memberswritten

agreement.

Recommendation1.23

Thecostsofadvicetoemployersshouldnotbeborneinanyway,directlyorindirectly,by

membersofchoiceproductsorbymembersofanyotherproductsinthechoicearchitecture

model.

Recommendation1.24

Trusteesofchoiceproductsorofanyotherproductinthechoicearchitecturemodelshouldnot:

(a) payorfundanyproductbasedupfrontortrailingcommissionorothersimilarpayment;

or

(b) makeorfundanypaymentthatrelatestovolume,

inrespectofsuperannuationadviceorotherproductsorservicesprovidedtomembers.

Recommendation1.25

Membersofchoiceproductsorofanyotherproductinthechoicearchitecturemodelshould

onlybeprovidedwithadviceaboutsuperannuation(otherthanintrafundadvice)under

arrangementsthatrequirethemembertorenewtheadviceserviceeachyearonarenewal

noticefromtheadviser.

Recommendation1.26

Trusteesofchoiceproductsorofanyotherproductinthechoicearchitecturemodelshouldnot

paypremiums

for

insured

member

benefits

that

include

or

fund

an

up

front

or

trailing

commissionorlikepayment.

Recommendation1.27

Choicetrusteesmustofferarangeofoptionssufficienttoallowmemberstoobtainadiversified

assetmixiftheychoose,butmemberscanchoosetobeundiversifiedandthetrusteewould

havenoobligationtoassesstheappropriatenessoftheinvestmentstrategychosenbythe

member. Trusteeswouldbesubjecttonewexpressdutiesinselectingandmonitoringoptions.


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Recommendation1.28

Achoicetrusteethatdischargesitsdutiesinselectingandmonitoringinvestmentoptionsshould

notbeexposedtocivilliabilityintheeventthatamembersuffersdamagebyreasonof

illiquidityorothercircumstancesaffectingtheinvestmentoption,includingdiminutioninvalue

orfailure.

10.2 Chapter2:TrusteeGovernanceRecommendation2.1

TheSISActshouldbeamendedtocreateadistinctnewofficeoftrusteedirectorwithall

statutoryduties(includingthosewhichwouldotherwisebeintheCorporationsAct)tobefully

setoutintheSISAct,alongwithrefocuseddutiesfortrustees. Thedutiesfortrusteedirectors

shouldinclude:

(a) Toactsolelyforthebenefitofmembers,includingandinparticular:

i. toavoidputtingthemselvesinapositionwheretheirinterestsconflictwith

membersinterests;

ii. togiveprioritytothedutytomemberswhenthatdutyconflictswiththetrustee

directorsdutytothetrusteecompany,itsshareholdersoranyotherperson;

iii. toavoidputtingthemselvesinapositionwheretheirdutytoanyotherperson(such

asanothersuperfundoraserviceprovider)conflictswiththeirdutytomembers;

iv. toavoidputtingthemselvesinapositionwheretheirdutytoanyotherperson

(otherthanmembers)conflictswiththeirdutytothetrusteecompany;

v. nottoobtainanyunauthorisedbenefitfromthepositionoftrusteeortrustee

director;and

vi. nottoenterintoanycontract,ordoanythingelse,thatwouldpreventthetrustee

from,orhinderthetrusteein,properlyperformingorexercisingthetrustees

functionsandpowers.

(b)

Toact

honestly.

(c) Toexerciseindependentjudgment.

(d) Toexercisethedegreeofcare,skillanddiligenceasanordinaryprudentpersonof

businesswouldexerciseindealingwiththepropertyofanotherforwhomtheperson

feltmorallyboundtoprovide.

(e) Tohavespecificregardto(amongothermatters)thelikelylongtermconsequencesofany

decision,includingtheimpactofthedecisiononthecommunityandtheenvironment

andontheentitysreputationforhighstandardsofconduct.

Thedutiesfortrusteesshouldinclude:


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(f) Tokeepthemoneyandotherassetsoftheentityseparatefromanymoneyandassets,

respectively:

i. thatareheldbythetrusteepersonally;or

ii.

thatare

money

or

assets,

as

the

case

may

be,

of

astandard

employer

sponsor

or

an

associateofastandardemployersponsor,oftheentity.

(g) Toformulateandgiveeffecttoaninvestmentstrategyinrespectofthefundasawhole

andeachinvestmentchoiceoption,thathasregardtothewholeofthecircumstancesof

theentityincluding,butnotlimitedto,thefollowing:

i. theriskinvolvedinmaking,holdingandrealising,andthelikelyreturnfrom,the

entitysinvestmentshavingregardtoitsobjectivesanditsexpectedcashflow

requirements;

ii.

thecomposition

of

the

entitys

investments

as

awhole,

including

the

extent

to

whichtheinvestmentsarediverseorinvolvetheentityinbeingexposedtorisks

frominadequatediversification;

iii. theliquidityoftheentitysinvestmentshavingregardtoitsexpectedcashflow

requirements;

iv. theabilityoftheentitytodischargeitsexistingandprospectiveliabilities;

v. theexpectedcostsofthestrategy,includingthoseatdifferentlevelsofany

interposedlegalstructuresandunderavarietyofmarketconditions; and

vi. thetaxationconsequencesofthestrategy,inlightofthecircumstancesofthefund.

(h) Toformulateandgiveeffecttoaninsurancestrategywhichincludes,butisnotlimitedto,

thetypesofinsurancetobeofferedandthedefaultminimumandpermissiblemaximum

levelsofcovertobeofferedaswellasthecostandvalueformoneytomembers.

(i) Ifthereareanyreservesoftheentity,toformulateandtogiveeffecttoastrategyfor

theirprudentialmanagement,consistentwiththeentitysinvestmentstrategyandits

capacitytodischargeitsliabilities(whetheractualorcontingent)asandwhentheyfall

due.

(j) Toallowabeneficiaryaccesstoanyprescribedinformationoranyprescribeddocuments.

(k) Toactfairlybetweenallbeneficiariesofthefundandtoactimpartiallybetween

beneficiariesofthesameclass.


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Recommendation2.2

Trusteedirectorsshouldnotberequiredtohavespecificpreappointmentskillsortraining.

However,APRAshouldconsiderfurtherstrengtheningitsadministrationofthefitnesstest

undertheSISActincludingrequiringpotentialtrusteedirectorstobefullybriefedbefore

acceptingthe

position

(or

deciding

to

seek

nomination,

where

applicable)

as

to

their

responsibilitiesandpotentialliabilities. TheCodeofTrusteeGovernanceshouldaddressthe

ongoingtrainingrequirementsthattrusteesandtrusteedirectorsmustmeetonanannual

basis.

Recommendation2.3

Theboardofthetrusteemustdemonstrateonanannualbasisthatithasthecollectiveskillset

togoverntheAPRAregulatedfundorfundsforwhichitisresponsibleandthisshouldbeoneof

thesubjectscoveredintheindependentannualreviewoftheboard.

Recommendation2.4

TheSISActshouldbeamendedsothatitisnolongermandatoryfortrusteeboardstomaintain

equalrepresentationinselectingitstrusteedirectors. ThePanelexpectsthattrusteeswould

reviewandamendcorporateconstitutionstoensureconsistencywiththisrecommendation.

Recommendation2.5

TheSIS

Act

should

be

amended

so

that

policy

committees

are

no

longer

mandatory

where

the

trusteeboarddoesnothaveequalrepresentation.

Recommendation2.6

TheSISActshouldbeamendedsothatifatrusteeboarddoesnothaveequalrepresentation,

thetrusteemusthaveamajorityofnonassociatedtrusteedirectors(asdescribedin

chapter2).

Recommendation2.7

Forthoseboardsthathaveequalrepresentationbecausetheircompanyconstitutionsorother

bindingarrangementssorequire,theSISActshouldbeamendedsothatnolessthanonethird

ofthetotalnumberofmemberrepresentativetrusteedirectorsmustbenonassociatedandno

lessthanonethirdofemployerrepresentativetrusteedirectorsmustbenonassociated.


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Recommendation2.8

TheCorporationsActshouldbeamendedsothatanyprovisionofatrusteecompany

constitutionthatprohibitsanytrusteedirectorfromvotingonanytrusteecompanybusiness

(otherthanintheeventofconflictofdutyorinterest)isineffective.

Recommendation2.9

SISActsection101shouldbeamendedtorequireatrusteetoprovideamemberwithr

Documents

Part 1 Overview Recommendations