Stephen Huppert, Head of Product Innovation at Trustee Partners, reflects on government reforms and rhetoric surrounding Australia’s c.$2.3 trillion retirement savings sector.
There is a lot being written about innovation and disruption in superannuation with the emergence of new superannuation funds focused on millennials and other FinTech startups impacting the industry. However, it has been argued that the biggest disruption to superannuation and its associated industries may not come from innovative technology companies, but instead from government intervention and legislative change.
In late July 2017, Financial Services Minister Kelly O'Dwyer announced a comprehensive package of reforms designed to improve governance, transparency and accountability in Australia's c.$2.3 trillion retirement savings sector.
In announcing the reforms and in subsequent media interviews, Minister O’Dwyer continually referred to everyday Australians not having a lot of control over their superannuation providers and that the Government needs “to give every day Australians more control over their superannuation providers”. The first measure listed is “make superannuation providers more accountable to consumers through the introduction of annual member meetings”.
Whilst annual general meetings (AGMs) will give members the opportunity to interact in a more direct manner with the management teams of the superannuation provider, it is not expected to directly improve member outcomes in retirement. It is worth noting that the government has finally acted on a recommendation proposed in the 2002 report of the Superannuation Working Group on Options for Improving the Safety of Superannuation and this proposal should satisfy Nick Xenophon as he tried to have AGMs introduced following the Financial Services Inquiry.
The other measures in this latest reform package include:
- Expanding the scale test to an ‘outcomes test’
- Accountability and improved expense transparency
- Powers to approve change in ownership
- Processes for opting-out of insurance
The superannuation industry is no stranger to legislative change. It is 25 years since the introduction of compulsory employer contributions by the Keating Labor Government - 25 years of reviews, inquiries, legislative reforms, and taxation changes. That trend has continued and one could be excused from thinking that they had walked into an episode of “Yes, Minister”.
Politics has always been a feature of superannuation and the industry is divided down party lines. In a 1985 parliamentary debate, John Howard called industry superannuation a “Chicago-style protection racket”. The introduction of choice of fund in 2005 was just as much about trying to counter the growth of industry funds as it was about consumer choice.
The dramatic rhetoric is not just coming from the conservative side. “We have created a massive river of superannuation heading down to the sea of retirement. What we don't want is a lot of rent seekers on the riverbanks trying to divert some of that retirement income unnecessarily for their own gain.” Bill Shorten, The Australian, 3 September 2011
The Financial System Inquiry chair David Murray observed in October 2015 that “retail and industry superannuation fund bodies have been more interested in sniping at each other than devising better retirement solutions”.
The current focus of this is the Productivity Commission review of the competitiveness and efficiency of the Australian superannuation system that is part of the Government’s response to the 2014 Murray Financial System Inquiry. The most recent example being the fox and hen house add that is currently running on TV.
The Government asked the Productivity Commission to develop a framework for assessing the competitiveness and efficiency of the superannuation system, and to examine alternative models for a formal competitive process for allocating default fund members to default superannuation products. The final report is expected to be handed to the Australian Government by June 2018.
The one area that both sides seem to agree on is the need to improve the decumulation phase of the system. The Government has agreed to support the development of more efficient retirement income products and to facilitate trustees offering these products to members. The Treasury has just completed consultation on Comprehensive Income Products for Retirement (CIPRs), or MyRetirement products. There does not seem to be much consensus as to how this should be implemented.
In 1993 the FitzGerald report on national saving said, “It goes almost without saying that further change to superannuation is not desirable in itself - continual change in recent years has engendered complexity and uncertainty and diminished confidence.”
This is still a constant refrain but changes are needed. The retirement income system will always be a work in progress as society, technology, and the economy are always evolving. There is still much work to be done to, amongst other things, better prepare members for a longer and more complex retirement. The big question is: can the various stakeholders work together to achieve this?
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