14 Feb Productivity Commission final report into superannuation
The Government released the Productivity Commission’s final report “Superannuation: Assessing Efficiency and Competitiveness” on 10 January 2019.
The report contains 31 recommendations aimed at improving member outcomes and system stability, as well as reducing barriers to the efficiency and competitiveness of the superannuation system.
Key recommendations from the draft report were retained such as limiting default superannuation accounts to one per member and providing a ‘best in show’ shortlist of up to 10 superannuation products to members who are new to the workforce. The final report also contains new recommendations such as requiring all fees within superannuation to be calculated on a cost recovery basis and the removal of trail commissions from all superannuation products.
The Treasurer Josh Frydenberg issued a media release stating the Government will not provide a full response to the Productivity Commission report until after the release of the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry due on 1 February 2019.
KEY RECOMMENDATIONS
Key recommendations from the final report that impact financial advice include:
- Default once: only default members without an account (recommendation 1)
To reduce the number of unintended multiple accounts, default superannuation accounts should only be created for members who are new to the workforce or do not already have a superannuation account (and who do not nominate a fund of their own).
To facilitate this, the Australian Government and the ATO should establish a centralised online service that builds on the existing functionality of myGov and Single Touch Payroll. The service should:
- allow members to register online their choice to open, close or consolidate accounts when they submit their Tax File Number on starting a new job
- facilitate the carryover of existing member accounts when members change jobs
- A ‘best in show’ shortlist (recommendations 2 and 3)
To assist in selecting a superannuation account, a single ‘best in show’ shortlist of up to 10 superannuation products should be presented to all members who are new to the workforce (or do not have a superannuation account), from which they can choose a product. Clear and comparable information on the key features of each shortlisted product should also be presented.
Terms in enterprise and workplace agreements that restrict member choice should be invalidated. Any member who does not have an existing account and who fails to make a choice of fund within 60 days should be defaulted to one of the products on the shortlist, selected via sequential allocation.
An independent expert panel should run a competitive process to develop the ‘best in show’ shortlist. This panel should select from products submitted by funds that meet a clear set of criteria and that are judged as likely to deliver the best outcomes for members over the long term, with high weight placed on investment strategy and performance.
- Elevated MySuper and choice outcomes test (recommendation 4)
All APRA regulated superannuation funds should be required to undertake an annual outcomes test for their MySuper and choice offerings. The outcomes test should include:
- a requirement for funds to obtain independent verification at least every three years
• clear benchmarking requirements for all MySuper and choice investment options including a requirement for all investment options to be compared with a listed investment benchmark portfolio tailored to their asset allocation.
Options that fall short of this benchmark portfolio by more than 0.5 percentage points a year, on average, over a rolling eight-year period should be subjected to a 12-month period of remediation or, if remediation is not possible, withdrawn from the market, with members transferred by funds to a better performing option.
- Cleaning up the stock of unintended multiple accounts (recommendation 5)
Superannuation accounts with balances under $6000 and 13 months or more of inactivity should be auto-consolidated. Trustees should be required to transfer these accounts to the ATO for auto-consolidation with a member’s matched active account.
- Opt-in insurance for young and inactive members (recommendation 15)
Insurance through superannuation should be provided on an opt-in basis for members under 25 years of age. Trustees should cease all insurance cover on accounts where no contributions have been made for the past 13 months (unless the member provides express permission that the cover is to be retained).
- A member-friendly dashboard for all products (recommendation 6)
Superannuation funds should be required to publish simple, single-page product dashboards for all superannuation investment options by the end of 2019 (already required in the case of MySuper products).
Dashboards for MySuper and choice superannuation products should be published on ASIC’s MoneySmart website, with the information clearly and readily accessible from the area of myGov that allows for consolidation of accounts.
- A clearer definition of ‘advice’ and disclosure of approved product lists (recommendation 8)
The Corporations Act 2001 (Cth) should be amended to ensure that the term ‘advice’ can only be used in association with ‘personal advice’ — that is, advice that takes into consideration personal circumstances.
The Government should also immediately require Australian Financial Service Licensees to disclose to ASIC, in relation to superannuation products:
• the number of products on their approved product list (APL)
• the proportion of in-house products on their APL
• the proportion of products recommended that are in-house
• the proportion of products recommended that are off-APL.
- Reassess the need for a retirement income covenant (recommendation 10)
The Government should reassess the benefits, costs and detailed design of the Retirement Income Covenant, which would require many superannuation funds to offer a Comprehensive Income Product for Retirement (CIPR) as a default retirement product.
The Covenant should only be introduced if design imperfections (including equity impacts) can be sufficiently remediated.
- Stronger safeguards on SMSF advice (recommendation 12)
To improve the standard of advice provided to SMSFs:
- require specialist training for persons providing advice to set up an SMSF
• require persons providing advice to set up an SMSF to give prospective SMSF trustees a document outlining ASIC’s ‘red flags’ prior to establishment
• extend the proposed product design and distribution obligations to SMSF establishment.
- Limit all fees to cost recovery and ban trailing commissions (recommendation 14)
All fees charged by APRA-regulated superannuation funds should be levied on a cost-recovery basis. Using fees to cross-subsidise between members should be prohibited.
Trailing financial adviser commissions in superannuation should be banned to take effect as soon as practicable.
For more information, see the Productivity Commission’s final report including a full list of recommendations.
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