Given that the Cooper Review of superannuation produced a set of recommendations that were broadly uncontroversial, it isn’t surprising that the federal government has broadly endorsed them.
The Cooper Review was generally well-received because it didn’t call for a radical re-making of a system that, after all, functions very well. Its focus was on the archaic and inefficient back office aspects of super administration and it also contained some relatively restrained measures to improve transparency, reduce costs and recognise the lack of engagement of many members within the system.
Bill Shorten’s response to the review endorsed 139 of the review’s 177 recommendations and was very supportive of the broad thrust of the review. Encouragingly, the bigger areas of dissent from the recommendations relate to mandating the composition of trustee boards and restricting the investments of self-managed funds.
Had the review recommendations been adopted, the requirement for equal representation of employers and employees would have been abandoned and boards would have been populated with non-associated directors, creating something analogous to a public company board and distancing members of funds from the governance of their own savings.
A meaningful element in the success of the current system has been the representation and engagement of members at the trustee level and the common cause the boards or policy committees create for employers and members.
Similarly, the decision not to support further restrictions on investments in “in-house” assets and collectables by self-managed funds is designed to avoid limiting investment choices for the funds. There are already some standards in place, or in train, to protect against abuses of those investment choices.
The most important element of the Cooper Review recommendations related to SuperStream, or the overhaul of the administrative processes in the system.
While there are some in the industry who think Cooper’s estimate of savings of up to $1.7 billion a year of savings in the long term perhaps over-state the benefits and understate the cost of achieving the reforms, the current system is inefficient, unduly costly and complex, involves too much manual processing and lacks standardised processes and formats. There is a huge opportunity to drag the sector into the 21st Century.
The other core group of recommendations relate to the creation of a new default product to displace the existing range of default options in which the vast majority of funds are held. Shorten is proposing that funds will be allowed to offer the new no-frills low-cost product from July 2013 but won’t initially make it compulsory. After an “appropriate” transition period the MySuper product will be the only one eligible to accept contributions from employees who don’t choose a fund.
The emphasis within MySuper is on low costs, few fees, transparency and easy comparability between the versions of the product offered by different funds. There would be only a single diversified investment option.
Some in the retail sector of the industry would argue that MySuper isn’t necessary, given that there are already simple and low cost options in the market. Others argue that MySuper dumbs down the sector, creating an incentive for trustees to pursue low-risk, low-cost low-returning passive strategies because of the comparability and a new specific duty to deliver value for money.
It is also conceivable that if the bulk of the funds now sitting in trustee-designed default options flows into MySuper, the more engaged members who actively choose different options (and it is often unrecognised that for many members the election of their fund’s default option is itself an active choice and vote of faith in their trustees) would be penalised and face higher costs.
Shorten has taken some of the sting out of that argument by not supporting the review’s recommendation that there should be no cross-subsidisation between MySuper and other products. Trustees will be required to make a “fair and reasonable” allocation of costs between MySuper and other products.
The government is separately acting to ban commissions and unbundle the cost of advice from investment products and will adopt the review’s recommendations that it should regulate buy and sell spreads, switching fees and performance-based investment management fees for MySuper products.
While the review, and the government’s response to it, might appear to have produced a series of proposals for incremental rather than wholesale change, even minor gains in efficiency and member costs could, given the sheer size of the system, produce very substantial gains – for members and the broader economy – in the longer term.
This article first appeared on Business Spectator.
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