Super’s next shake up? Productivity Commission gets tough

Investment performance

FINDING 2.1

The Commission’s funds survey suggests that superannuation funds on average outperformed a market index benchmark in most individual asset classes over the 10 years to 2017. Not for profit funds outperformed retail funds on average within most major asset classes over this period.

However, these survey results are positively biased due to missing data for funds that have exited the system (survivor bias) and that did not provide the requested data (selection bias).
While international comparisons add further data issues, compared with large pension funds in other developed countries, Australian superannuation funds appear to have achieved comparable returns on individual asset classes.

FINDING 2.2

APRA regulated funds have delivered investment returns to members over the past 21 years (net of all fees and taxes) of 5.9 per cent a year, on average. The majority of members and assets in the system are in products that have performed reasonably well. But there is significant variation in performance within and across segments of the system that is not fully explained by differences in asset allocation.

Not for profit funds, as a group, have systematically outperformed retail funds. This outperformance cannot be fully explained by asset allocation, tax or expenses. Much of it is likely due to differences in asset selection (within asset classes) between the segments.

FINDING 2.3

There is wide variation in performance at the fund level. About 5 million member accounts and $270 billion in assets are in 29 funds that underperformed conservative benchmarks tailored to each fund’s own asset allocation over the 13 years to 2017. About 77 per cent of member accounts and 72 per cent of assets in underperforming funds were in retail funds, even though retail funds represented just 9 of the underperforming funds. Of the other underperforming funds, 14 are industry funds, 3 are corporate funds and 3 are public sector funds.

While asset allocation is the largest determinant of returns at the fund level, most of the variation across funds cannot be explained by asset allocation, tax or expenses. Rather, it is most likely primarily due to differences in asset selection (within asset classes) between funds.

FINDING 2.4

There is wide variation in performance in the default segment. About 1.6 million member accounts and $57 billion in assets are in MySuper products that underperformed conservative benchmarks tailored to each product’s own asset allocation over the 11 years to 2018. This suggests that many members are currently being defaulted into underperforming products and could be doing better.

If all members in bottom quartile MySuper products received the median return from a top quartile MySuper product, they would collectively be $1.2 billion a year better off. Being in the median bottom quartile product means that, on retirement, a typical worker (starting work today) is projected to have a balance 45 per cent lower (or $502 000 less to retire with).

FINDING 2.5

There is wide variation in performance in the choice segment that is not fully explained by differences in asset allocation. Almost $25 billion in assets are in investment options that underperformed conservative benchmarks over the 13 years to 2017. Many choice members could be doing a lot better.

FINDING 2.6

The SMSF segment has delivered broadly comparable investment performance to the APRA regulated segment, but many smaller SMSFs (those with balances under $500 000) have delivered materially lower returns on average than larger SMSFs.

Fees and costs

FINDING 3.1

Superannuation fees in Australia are higher than those observed in other OECD countries. This may be partly because Australian funds face higher expenses. While international comparisons are not straightforward, there is evidence (by asset class) that Australian investment management costs are generally high by international standards, including for significant asset classes (such as equities and international fixed income).

FINDING 3.2

In aggregate, total fees in APRA regulated funds (for administration and investment management services) have been trending down as a proportion of assets over the past decade, from 1.3 per cent in 2008 to 1.1 per cent in 2017.

FINDING 3.3

Fees have fallen for retail funds, albeit remaining higher (for choice products) than the (largely unchanged) fees for industry funds.

Among APRA regulated funds, the MySuper and SuperStream reforms have likely acted to reduce fees (including some possible competitive spillover to choice products), although this is difficult to attribute directly given the impact of other fee drivers.

FINDING 3.4

While financial advice can benefit members, excessive advice fees in choice products and all trailing commissions erode member balances. Ten retail funds collected about $1.4 billion of advice fee revenue in 2017, charging their members about $341 per account in that year alone. Separately, members of 11 retail funds identified in data from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry are estimated to have paid in excess of $400 million in (grandfathered) trailing adviser commissions in 2017.

In contrast, advice fees are closely regulated in MySuper products (with funds only permitted to recoup the cost of intrafund advice from fee revenue), thereby protecting members from undue balance erosion. The disparate regulation of fees and costs in the choice and MySuper segments is in part contributing to poor member outcomes in the choice segment.

FINDING 3.5

There is a ‘tail’ of choice products with high fees (exceeding 1.5 per cent of balances), offered by retail funds. This tail accounted for about 17 per cent of assets and 15 per cent of member accounts in APRA regulated funds in 2017. Retail legacy products account for almost half of all products in the high fee tail.

The share of member accounts in the high fee tail has been declining over time, particularly since 2013 and the introduction of MySuper, but today still accounts for an estimated 4 million member accounts holding $275 billion in assets. Further declines are likely to hinge on the effectiveness of regulator efforts to shift members out of retail legacy products.

FINDING 3.6

Despite regulator awareness, there remain significant gaps and inconsistencies in how funds report data on fees and costs. Funds that misreport or underreport fees and costs appear, at times, to have gone unpunished. This harms members by making fee comparability and decision making difficult at best, and thus renders fee based competition largely elusive.

FINDING 3.7

Higher fees are clearly associated with lower net returns over the long term. The material amount of member assets in high fee funds, coupled with persistence in fee levels through time, suggests there is significant potential to lift retirement balances overall by members moving, or being allocated, to a lower fee and better performing fund.

Fees have a significant impact on retirement balances. For example, an increase of just 0.5 per cent a year in fees would reduce the retirement balance of a typical worker (starting work today) by a projected 12 per cent (or $100 000).

FINDING 3.8

Reported costs for SMSFs (relative to assets) have increased over recent years and, for those with over $1 million in assets, are broadly comparable with APRA regulated funds. By contrast, costs for SMSFs under $500 000 in size are particularly high, on average, and significantly more so than for APRA regulated funds.

About 42 per cent of all SMSFs (some 200 000 in 2016, with an estimated 380 000 members) have been under $500 000 in size for at least two years, and appear to persist with high average cost ratios and low average returns. Nevertheless, the proportion of new SMSFs with very low balances (under $100 000) has fallen from 35 per cent of new establishments in 2010 to 23 per cent in 2016.

Members’ needs

FINDING 4.1

Qualitative judgments by members of superannuation funds suggest that a small share are dissatisfied with the overall performance of their fund. Members who have a poor understanding of the system and less capacity for accurately gauging the performance of their funds tend to report being much less satisfied. Many more members indicate that the performance of funds, including their service quality, has improved over time than those who feel that performance has flagged.

A sizable minority of members selecting a retirement product express equivocal or negative views about the degree to which funds meet their specific product needs.

FINDING 4.2

Many members find it hard to make comparisons between the large numbers of superannuation products available. The proliferation of tens of thousands of investment options in the choice segment complicates decision making and increases member fees, without boosting net returns.

A low fee product that, over a person’s working life, exposes them to a mix of defensive and growth assets is likely to meet the needs of most Australians during the accumulation phase. A better designed and modernised default allocation mechanism could act as a trusted benchmark for better member decision making across the entire system.

FINDING 4.3

Well designed life cycle products can produce benefits greater than or equivalent to single strategy balanced products, while better addressing sequencing risk for members. There are also good prospects for further personalisation of life cycle products that will better match them to diverse member needs, which would require funds to collect and use more information on their members.
Some current MySuper life cycle products shift members into lower risk assets too early in their working lives, which will not be in the interests of most members.

FINDING 4.4

In the retirement phase, risk pooled lifetime income products may meet some members’ preferences for a predictable income stream and for managing longevity risk. However, the proposed Retirement Income Covenant may nudge many others into products ill suited to their long term needs, may not achieve its desired goal of increasing retirement consumption, and fails to take sufficient account of the diversity in household preferences, incomes and other assets.

The requirement that all funds must offer a ‘flagship’ risk pooled product would oblige any fund without a capacity to create such a product to purchase it from a third party — where there are few choices currently on the market. The requirement for a standardised risk pooled product may conflict with trustees’ obligations to act in members’ best interests, and many funds do not want to offer them. Their complexity, limited scope for reversibility and major deficiencies in the credibility, independence and affordability of financial advice for retirement products leaves significant scope for member detriment arising from the requirement to supply risk pooled products.

FINDING 4.5

Superannuation funds make insufficient use of their own (or imputed) data to develop and price products (including insurance). This is particularly problematic for designing products for the retirement and transition to retirement stages, because this is when different strategies can have the biggest payoffs for members.

Member engagement

FINDING 5.1

Across a range of indicators, member engagement remains low on average, though it is not realistic or desirable for members to be engaged all the time. Engagement tends to be higher among those approaching retirement, those with higher balances and owners of SMSFs. Engagement is lowest for the young and those with relatively low balances.

While many Australians have good broad knowledge of the superannuation system, many lack the detailed understanding necessary for effective decision making. Low financial literacy is observed among a sizable minority (about 30 per cent) of members.

FINDING 5.2

Demand side pressure in the superannuation system is weak.

• Most members in the accumulation phase let the default segment make decisions for them, at least when they enter the workforce.
• A significant minority of members (an estimated 1 million) are barred from exercising choice even if they wanted to.
• Fund and investment switching rates are modest, suggesting that active members (or their intermediaries) have not exerted material competitive pressure on funds.

Proposed legislative changes to prohibit restrictive clauses in workplace agreements on members’ choice of fund are much needed.

FINDING 5.3

While there is no shortage of information available to members, it is often overwhelming and complex. Dashboards should be a prime mechanism to allow for product comparison and need to be salient, simple and accessible to be effective — but most are not, and regulators have left this unresolved.

FINDING 5.4

The quality of financial advice provided to some members — including those with SMSFs — is questionable, and often conflicted.

The need for information and affordable, credible and impartial financial advice for retirees will increase as retirement balances grow with a maturing system, and given the rising diversity and complexity of retirement products.

Erosion of member balances

FINDING 6.1

Several proposed policy changes will promote Superannuation Guarantee payment compliance.

• Single Touch Payroll being extended to small employers (with less than 20 employees) from 1 July 2019.
• Funds being required to report contributions to the ATO at least monthly.
• The ATO having stronger powers to penalise non compliant employers and recover unpaid contributions.

FINDING 6.2

The superannuation system, primarily due to its policy settings, does not minimise the unnecessary and undesirable erosion of member balances. This erosion is substantial in size and regressive in impact.

• Structural flaws have led to the absurdity of unintended multiple accounts in a system anchored to the job or the employer, not the member. These unintended multiple accounts (one in three of all accounts) are directly costing members nearly $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees. For an individual member holding just one unintended multiple account throughout their working life, the projected reduction in their balance at retirement is 6 per cent (or $51 000).
• Superannuation Guarantee non compliance is hard to estimate, but may be costing members about $2.8 billion a year.

Recent policy initiatives have improved the situation, but current policy settings are inevitably making slow progress by treating the symptoms and not the structural cause.

Market structure, contestability and behaviour

FINDING 7.1

The market structure of the superannuation system (as distinct from its policy and regulatory settings) is conducive to rivalry. At the retail level, there are many funds and products. At the wholesale level, there is concentration in some service provider markets for outsourcing (like administration). However, a growing ability for larger funds in particular to insource all, or parts, of their service requirements adds to competitive pressure.

While concentration is low in the investment management market, evidence suggests that managers have some market power. As a consequence, smaller funds, in particular, pay higher fees than would be the case if competition was more robust.

FINDING 7.2

Fund level regulation creates a significant cost of entry and some structural features of the system are likely to create challenges for new entrants (including gaining scale by attracting members). However, these are not prohibitive or even high barriers to entry. Nor does the strategic use of integrated business models to gain members stifle contestability in the choice segment.

In the default segment, regulatory settings limit access to the market (including difficulty being listed in a modern award), competition for the market is absent, and competition in the market is muted.

FINDING 7.3

There is a high propensity for funds in the system (particularly retail funds) to report using associated (or related) service providers — a form of vertical integration. Use of related parties is associated with higher costs, and weaknesses in contract review processes suggest some funds are outsourcing to related parties ahead of more efficient (but unrelated) service providers — constraining contestability and likely at the expense of member outcomes.

FINDING 7.4

Evidence of economies of scale is compelling — larger fund size is strongly associated with lower average costs in the Australian superannuation system.

Significant economies of scale have been realised over the past 13 years, particularly on the administration side. Holding constant other cost drivers, ‘marginal’ (or incremental) gains in system savings (accruing from increases in scale in any year) totalled an estimated $4.5 billion between 2004 and 2017. Data limitations rule out estimation of realised ‘cumulative’ savings (scale benefits that persist beyond the year in which gains are first realised), but no doubt they have also been material.

Significant unrealised economies of scale remain. For example, annual cost savings of at least $1.8 billion could be realised if the 50 highest cost funds merged with the 10 lowest cost funds. And a 0.01 percentage point reduction in administration expense ratios for funds with more than $10 billion in assets could result in annual savings of about $130 million. The presence of these potential gains, particularly from further consolidation, reflects a lack of effective competition in the system.

Scale benefits also manifest through increasing returns to scale. Net returns are positively related to size for not for profit funds. (No corresponding correlation was found for retail funds.) Stronger net returns among larger not for profit funds might be due to higher exposure to unlisted asset classes, but data limitations rule out strong conclusions. Larger funds do appear, however, to make better investment decisions within asset classes.

There is little evidence that realised economies of scale have systematically been passed through to members in the form of lower fees. Scale benefits may have been passed through in the form of member services or increases in reserves, or offset by the costs of meeting new regulatory requirements. And not for profit funds, on average, might have passed through some scale economies by investing more heavily in (higher cost) unlisted assets and obtaining higher returns. Data limitations preclude firm conclusions about the form of pass through of economies of scale, and thus how members are actually benefitting and whether they are benefitting in a form they value.

Insurance

FINDING 8.1

The deduction of insurance premiums can have a material impact on member balances at retirement.

This balance erosion is more costly to members with low incomes. It also has a larger impact on members with intermittent attachment to the labour force, and those with multiple superannuation accounts with insurance (the latter comprise about 17 per cent of members).

Balance erosion for low income members due to insurance could reach a projected 14 per cent of retirement balances in many cases, and in extreme cases (for low income members with intermittent work patterns and with multiple income protection policies) could be well over a quarter of a member’s retirement balance.

FINDING 8.2

In terms of premiums paid, default insurance in superannuation offers good value for many, but not for all, members. For some members, insurance in superannuation is of little or no value — either because it is ill suited to their needs or because they are not able to claim against the policy. Income protection insurance and unintended multiple insurance policies are the main culprits for policies of low or no value to members.

Younger members and those with intermittent labour force attachment — groups which commonly have lower incomes — are more likely to have policies of low or no value to them.

FINDING 8.3

The fiscal impact of insurance in superannuation is complex and multifaceted. The effect on Age Pension outlays of the erosion of superannuation balances by insurance premiums is not trivial, and could materially offset any savings to government in social security outlays (that would otherwise have been paid to members that become insurance payout recipients).

Fund governance

FINDING 9.1

Board processes to recruit highly skilled and experienced directors, and to effectively evaluate board performance and capability, are an essential prerequisite for best practice governance. Although there have been improvements to trustee board processes to better ensure boards have the necessary skills and experience, there is still much room to do better. Many boards are not employing effective assessment processes.

Use of a skills matrix (informed by external evaluation of board performance, skills, experience and knowledge) to guide the appointment process should be considered best practice by superannuation trustee boards. A focus on skills would likely lead to more independent directors as boards recruit from a wider ‘gene pool’.

FINDING 9.2

Contract management processes, along with disclosure and reporting, need much improvement. While vertical integration is not a problem per se, conflicts of interest raised by the use of related parties need to be better managed by trustees and, where left poorly managed, redressed decisively by confident regulators.

A better definition of the term independent director is needed. Trustee directors are not independent if they are affiliated with parties related to a fund.

FINDING 9.3

Many funds mimic (at least to some degree) the investment strategy of rival funds for fear they will otherwise exhibit poor short term performance relative to their peers (‘peer risk’). This short termism is likely to be at the expense of long term returns to members.

FINDING 9.4

Robust and independently assessed performance attribution is needed for a trustee board to satisfy itself that it has acted in members’ best interests. But trustees have considerable room for improvement in the use of performance attribution. Indeed, some even appear to have ‘outsourced’ their best interests duty for members using platforms and wrap accounts to financial advisers and product providers.

FINDING 9.5

Benefits provided to employers by some funds unduly influence some employers’ choice of default fund.

FINDING 9.6

Considerable evidence of trustees acting in ways that are inconsistent with members’ best interests suggests that trustees and regulators adopt a broad and at times inappropriate interpretation of members’ best interests.

System governance

FINDING 10.1

The package of reforms contained in the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation) Bill 2017 would improve member outcomes if legislated.
In particular, the proposed MySuper outcomes test (a good first step) should better enable APRA to de authorise poorly performing products and better promote fund consolidation. But the test needs to be strengthened, extended to choice investment options and then fully and transparently enforced by APRA.

Introducing civil and criminal penalties for trustee directors, and giving APRA more power to deal with ownership changes of superannuation funds, are policy ‘must haves’ to better protect members.

FINDING 10.2

Conduct regulation arrangements for the superannuation system are confusing and opaque, with significant overlap between the roles of APRA and ASIC. These arrangements inevitably lead to poor accountability and contribute to the lack of strategic conduct regulation, especially public deterrence through enforcement action, with poor outcomes for members.

FINDING 10.3

The formation of the new Australian Financial Complaints Authority should be a positive reform for members, provided it is adequately resourced to deal with the level of complaints received.

FINDING 10.4

The relatively small number of SMSFs with some form of limited recourse borrowing arrangement (about 7 per cent of SMSFs representing 5 per cent of SMSF assets) means such borrowing does not currently pose a material systemic risk. However, active monitoring (along with public reporting and discussion by the Council of Financial Regulators) is warranted to ensure that SMSF borrowing does not have the potential to generate systemic risks in the future.

Concerns about SMSF borrowing arrangements being utilised by members that lack the requisite financial literacy to properly understand the risks associated with them (or for whom such arrangements are unsuitable for other reasons) are best dealt with through measures to improve the quality of SMSF related advice.

FINDING 10.5

The frequency and pace of policy change undoubtedly create real pressures for participants in the superannuation system. However, most of the recent major reforms (such as MySuper and SuperStream) have been overwhelmingly beneficial from a public interest perspective.

Overall assessment

FINDING 11.1

Fixing some of the worst problems in the current superannuation system would bring substantial benefits. If there were no unintended multiple accounts (and the duplicate insurance that goes with them), members would have been collectively better off by about $2.6 billion a year. If members in bottom quartile MySuper products had instead been in the median of the top quartile performing MySuper products they would collectively have gained an additional $1.2 billion a year.

Competing for default members

FINDING 12.1

While the default segment has on average provided better outcomes for members than the system as a whole, it fails to ensure members are placed in the very best funds and places a sizeable minority in funds delivering poor outcomes. For example, focusing on investment performance (an important aspect of member outcomes), products that performed above their benchmark generated a median return of 5.5 per cent a year in the 11 years to 2018, whereas the 17 underperformers generated a median return of 3.8 per cent a year (and represented about 1.6 million member accounts and $57 billion in assets).

Current arrangements also lead to unnecessary account proliferation, rely heavily on third party decision making and deny some members any ability to choose their own funds. Default arrangements need to be modernised and recrafted to harness the benefits of competition for default members. The interests of members (not funds) should be paramount.

FINDING 12.2

Current default arrangements do not promote member engagement. Survey evidence reveals that when members are provided with a simple and accessible list of superannuation funds, only a small minority would not choose their own fund. This evidence aligns with the lessons of behavioural economics.

1: Default once: only default members without an account

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 continue work towards establishing a centralised online service for members, employers and the Government 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 are submitting their Tax File Number on starting a new job
• facilitate the carryover of existing member accounts when members change jobs
• collect information about member choices (including on whether they are electing to open a MySuper account) for the Government.

There should be universal participation in this process by employees and employers. It should be fully in place by no later than the end of December 2021.

2: A ‘best in show’ shortlist

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. The shortlist should also be easily accessible to all members at any time, including when starting a new job.

Members should not be prevented from choosing any other fund (including an SMSF). 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.

The ATO should embed the shortlist and accompanying information into the centralised online service.

The first ‘best in show’ shortlist should be in place by no later than the end of June 2021.

3: Independent expert panel for ‘best in show’ selection

The Australian Government should establish an independent expert panel to 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 (established and published beforehand by the panel) 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. All APRA regulated superannuation funds should be free to participate in the ‘best in show’ selection process, regardless of ownership or sponsor (including government owned funds).

In setting the criteria and selecting products, the expert panel should be guided by three legislated guiding principles.

• Products should be chosen based on the fund’s likelihood of providing the best outcomes for members in the accumulation phase, taking account of risk.
• Products chosen should be particularly suitable for members who have typically defaulted but should also be highly suitable products for all members.
• The panel should always seek to ensure a competitive dynamic exists between funds, without compromising the integrity of the ‘best in show’ list.

The panel should have flexibility to select up to 10 products, with the exact number at the discretion of the panel based on the merit of each product and what is most tractable for members, while maintaining a strong competitive dynamic between funds for inclusion on the shortlist.

The panel should be comprised of independent experts who are appointed through a robust and independent selection process and held accountable to the Government through adequate reporting and oversight.

The process should be repeated, and the panel reconstituted, every four years. No more than half of expert panel members should carry over from one selection period to the next, and no individual member should remain on the panel for more than two terms.

4: Elevated MySuper and choice outcomes tests

The Australian Government should legislate to require all APRA regulated superannuation funds to undertake annual outcomes tests for their MySuper and choice offerings. These outcomes tests should include:

• a requirement for funds to obtain independent verification, to an audit level standard, of their outcomes test determination, at least every three years (starting with the first test)
• clear benchmarking requirements for all MySuper and choice investment options.

This benchmarking should include a requirement for all investment options to be compared with a listed investment benchmark portfolio tailored to their asset allocation (with exceptions only to be granted on an ‘if not, why not’ basis). APRA should issue clear and specific guidance on the construction of these benchmark portfolios (drawing on the methodology established by this inquiry). 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. Any remediation or transfer activity should be subject to close oversight by APRA.

The Government should provide APRA with the power to stop a fund from launching new investment options or accepting new members into existing options subject to remediation until that remediation is complete.

APRA should also be given the power to revoke the fund’s MySuper authorisation or direct the fund to withdraw the choice option where remediation is not successful in the required timeframe or a voluntary withdrawal of the product from the market does not occur. In these circumstances, APRA should oversee a process of transferring the affected members to another suitable fund, including on a temporary sub fund basis where necessary, provided that APRA has determined that the transfer is, on balance, likely to be in the best long term interests of the members of both funds. Should no fund be willing to accept the members, APRA should appoint an independent acting trustee with a remit to wind up the fund.

The outcomes tests should form part of the new APRA standard to require fund wide assessments of member outcomes.

Funds should be required to complete their first (annual) elevated outcomes tests by no later than the end of December 2020 for MySuper products, and no later than the end of June 2021 for choice investment options.

5: Cleaning up the stock of unintended multiple accounts

The Australian Government should seek the passage of legislation to require the auto consolidation of superannuation accounts with balances under $6000 and 13 months or more of inactivity. Trustees should be required to transfer these accounts to the ATO for auto consolidation with a member’s matched active account.

The Government should make explicit that this process should capture accounts held in Eligible Rollover Funds. These funds should be wound up within three years, with APRA oversight.

The Australian Government should increase the balance threshold for auto consolidation over time, unless there are compelling reasons not to. The Government should also review the policy framework for lost and unclaimed superannuation accounts with the aim of streamlining the framework and ensuring it works in harmony with the auto consolidation mechanism.

6: A member friendly dashboard for all products

The Australian Government should require funds to publish simple, single page product dashboards for all superannuation investment options.

ASIC should:

• prioritise the implementation of these dashboards for choice investment options to achieve full compliance by the end of 2019
• only grant an exemption for an option or set of options from the dashboard requirement on the basis of evidence under the principle of ‘if not, why not’
• revise the dashboards to simplify the content and provide more easily comprehensible metrics (drawing on robust consumer testing) by the end of 2019
• immediately publish all available MySuper and choice dashboards on its MoneySmart website, with the information clearly and readily accessible from the area of myGov that allows for consolidation of accounts.

The Australian Government should also require all superannuation funds to provide their members with the corresponding dashboards when a member requests to switch from a MySuper product to a choice option within the fund.

7: Delivering dashboards to members

The Australian Government should require the ATO to provide a link to the relevant (single page) product dashboard(s) on a member’s existing account(s) via its centralised online service. Links to each single page product dashboards for the ‘best in show’ products should also be presented on the centralised online service.

8: A clearer definition of ‘advice’ and disclosure of approved product lists

The Australian Government should immediately amend the Corporations Act 2001 (Cth) 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.

ASIC should publish this information annually.

ASIC should also conduct selected audits of the information received to facilitate assessment of the effectiveness of advisers in meeting clients’ best interests.

9: Evaluation of financial literacy programs

The Australian Government should comprehensively and systematically evaluate the programs it funds that aim to improve the financial literacy of Australians. Such a review would help to better target funding to those programs evaluated as effective and to defund those that are not. This could be done through a review of the National Financial Capability Strategy, which could also include State and Territory Governments evaluating such programs in their own jurisdictions.

10: Reassess the need for a retirement income covenant

The Australian Government should reassess the benefits, costs and detailed design of the Retirement Income Covenant — including the roles of information, guidance and financial advice — and only introduce the Covenant if design imperfections (including equity impacts) can be sufficiently remediated.

In conjunction with this reassessment, the Australian Government should also:

• consider cost effective options, including possibly extending the Financial Information Service to provide retirees with access to a one off, impartial information session to help them navigate complex retirement income decisions
• explore the business case for investing in digital technology that assists people’s financial decision making.

11: More useful information for Pre Retirees

The Australian Government should prompt all superannuation members when they reach 55 years of age to visit the:

• ‘Retirement and Superannuation’ section of ASIC’s MoneySmart website
• Department of Human Services’ Financial Information Service website.

12: Stronger safeguards on SMSF Advice

The Australian Government should:

• 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.

13: Roll out the Consumer Data Right for superannuation

The Australian Government should automatically accredit superannuation funds to be eligible to receive (following member consent) information held by banks under the Open Banking Initiative. The Government should also roll out the new Consumer Data Right to superannuation in parallel with implementation of the elevated outcomes tests (recommendation 4).

14: Limit all fees to cost recovery and ban trailing commissions

The Australian Government should require that all fees charged by APRA regulated superannuation funds are levied on a cost recovery basis. Using fees to cross subsidise between members should be prohibited. These rules should be implemented and enforced by regulators in such a way that avoids gaming by funds and does not pose new barriers to member switching.

The Australian Government should ban trailing financial adviser commissions in superannuation, to take effect as soon as practicable.

15: Opt in insurance for young and inactive members

The Australian Government should seek the passage of legislation to make insurance through superannuation opt in for members under 25 years of age, and to require trustees to 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).

In addition to these proposed legislative changes, exemptions to the under 25 opt in restriction should only be granted if the trustee can demonstrate to APRA that opt out disability or income protection insurance would be in the best interests of a specific cohort of younger members.

16: Insurance balance erosion trade offs

APRA should immediately require the trustees of all APRA regulated superannuation funds to articulate and quantify the balance erosion trade off determination they have made for their members in relation to group insurance, and make it available on their website annually.

As part of this, trustees should clearly articulate in their annual report why the level of default insurance premiums and cover chosen are in members’ best interests. Trustees should also be required to provide on their websites a simple calculator that members can use to estimate how insurance premiums affect their balances at retirement.

17: A binding and enforceable insurance code of conduct

The Australian Government should immediately establish a joint regulator taskforce to advance the Insurance in Superannuation Voluntary Code of Practice and maximise the benefits of the code in improving member outcomes. The taskforce should:

• monitor and report on adoption and implementation of the code by funds
• direct and monitor enhancements to strengthen the code, particularly implementation of standard definitions and moving to a short form annual insurance statement for members
• direct the industry to take further steps for the code to meet ASIC’s definition of an enforceable code of conduct, and to give ASIC an enforcement role under the code.

Both ASIC and APRA should be members of the taskforce, with ASIC taking the lead. The taskforce should annually report findings on industry progress on the code.

The code owners should be given two years to strengthen the code and make it binding and enforceable on signatories. At this point, adoption of the code should become a condition of holding a Registrable Superannuation Entity Licence for all superannuation funds that offer insurance.

18: Independent inquiry into insurance in super

The Australian Government should commission an independent public inquiry into insurance in superannuation. This inquiry should evaluate the effectiveness of initiatives to date, examine the costs and benefits of retaining current insurance arrangements on an opt out (as opposed to an opt in) basis, and consider if more prescriptive regulation is required.

It should also look at the intersection of insurance in super with other schemes (such as workers’ compensation) and consider how best to provide assistance to people in the event of illness and injury, including whether opt out insurance through superannuation is the most efficient and equitable way to do so.

This insurance inquiry should be initiated within four years from the completion of this inquiry report.

19: Regulation of trustee board directors

APRA should amend its prudential standards to be prescriptive in:

• requiring trustees of all superannuation funds to have and use a process to effectively assess their board’s performance relative to its objectives and the performance of individual directors, and to disclose this process annually
• requiring all trustee boards to maintain a skills matrix and annually publish a consolidated summary of it, along with the collective skills of the trustee directors
• requiring trusts to have and disclose a process to seek external third party evaluation of the performance of the board (including its committees and individual trustee directors) and capability (against the skills matrix) at least every three years. The evaluation should consider whether the matrix sufficiently captures the skills that the board needs (and will need in the future) to meet its objectives, and highlight any capability gaps. APRA should be provided with the outcomes of such evaluations as soon as they have been completed
• requiring all trustee board directors to have a professional understanding of the superannuation system and investment decision making, gained either through industry experience or formal training
• defining what constitutes an ‘independent director’, based on the definition currently in the Superannuation Laws Amendment (Strengthening Trustee Arrangements) Bill 2017.
  The Australian Government should ensure that there is no legislative impediment to APRA defining what constitutes an ‘independent director’, or to superannuation funds appointing independent directors to trustee boards (with or without explicit approval from APRA). It should also give APRA powers to interpret and enforce the definition of an independent director.

20: Disclosure of merger activity

The Australian Government should require trustee boards of all APRA regulated superannuation funds to disclose to APRA when they enter a memorandum of understanding with another fund in relation to a merger attempt. For mergers that ultimately do not proceed, the board should be required to disclose to APRA (at the time) the reasons why the merger did not proceed, and the members’ best interests assessment that informed the decision. APRA should also be empowered to prevent mergers that are not in members’ best interests.

The Australian Government should also legislate new powers and penalties to explicitly enable ASIC to pursue action against trustee directors for misconduct in relation to mergers.

21: Capital gains tax relief for mergers

The Australian Government should legislate to make permanent the temporary loss relief and asset rollover provisions that provide relief from capital gains tax liabilities to superannuation funds in the event of fund mergers and transfer events.

22: Definition of the best interests duty

The Australian Government should pursue a clearer articulation of what it means for a trustee to act in members’ best interests under the Superannuation Industry (Supervision) Act 1993 (Cth). The definition should reflect the twin principles that a trustee should act in a manner consistent with what an informed member might reasonably expect and that this must be manifest in member outcomes. In clarifying the definition, the Government should decide whether to pursue legislative change, greater regulatory guidance, and/or proactive testing of the law by regulators. It should be informed by the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

23: Australian Prudential Regulation Authority

APRA should focus more on matters relating to licensing and authorisation, ensuring high standards of system and fund performance. It should (in addition to recommendations 4, 16 and 19):

• supervise and enforce the obligations of the licences and authorisations it grants
• require all APRA regulated superannuation funds to conduct formal due diligence of their outsourcing arrangements, at least every three years, to ensure the arrangements provide value for money. Each fund should provide a copy of the assessment to APRA (including the fees paid and the comparator fees)
• require all APRA regulated superannuation funds to include a clause in material service contracts with outsourced providers that obliges the provider not to do or take any action that adversely affects members’ interests
• report annually to the Council of Financial Regulators on funds’ progress with implementing the elevated outcomes tests and on fund merger activity
• undertake a systematic assessment of the costs to funds of the thousands of legacy products in the superannuation system. If the evidence demonstrates that they represent a significant cost in accumulation, APRA should further refine trustees’ obligations for member transfers so these products can be rationalised
• embed product level reporting within its reporting framework as soon as practicable (no later than 18 months) to enhance visibility of actual member outcomes across all APRA regulated funds and to bring reporting for the choice segment into line with the MySuper segment. APRA should also expedite efforts to address inconsistencies in reporting practices.

The Australian Government should set an explicit ‘member outcomes’ mandate for APRA in its regulation of superannuation.

24: Australian Securities And Investments Commission

ASIC should focus more on the conduct of superannuation trustees and financial advisers, and on the appropriateness of products (including for particular target markets) and disclosure. It should (in addition to recommendations 6 and 8):

• proactively set and enforce standards for the meaningful disclosure of information to members on superannuation products and insurance policies (in addition to product dashboards). Information should be simple, comparable and easy for members to understand
• require all superannuation funds to publicly disclose to current and prospective members the proportion of costs paid to service providers that are associated with related party outsourcing arrangements
• proactively investigate (questionable) cases where mergers between superannuation funds stalled or did not proceed, and report to the Council of Financial Regulators on its enforcement against trustee directors who breach their duties by not pursuing a merger when it would be in their members’ best interests
• undertake recurring thematic reviews on financial advice in superannuation, including advice in relation to choice platform products and SMSFs.

25: Clarify regulator roles and powers

The Australian Government — with the benefit of this inquiry report and that of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry — should clarify the roles of APRA and ASIC in relation to superannuation. In doing so, it should consider the suitability of each regulator’s powers, the suitability and strength of penalty provisions for misconduct, and whether there are any undesirable constraints on either regulator engaging in strategic conduct regulation.

26: APRA capability review

The Australian Government should immediately initiate the independent capability review of APRA, which it had previously agreed to do. This review should also examine how efficiently and effectively APRA operates to achieve its strategic objectives in relation to superannuation, including:

• the capability of APRA to adequately supervise and regulate the superannuation system in line with its current responsibilities and those proposed in draft legislation (as well as future responsibilities arising from the implementation of recommendations in this inquiry), including a focus on capability in enforcement
• identification and analysis of immediate and forward looking priorities and risks
• the use of legal powers and enforcement tools, including the pursuit of test cases and effective coordination with ASIC and other regulators in this regard
• the skills, capability and culture of the organisation, including the number of staff dedicated to regulating superannuation and their capabilities
• internal governance and accountability mechanisms
• engagement and information sharing with other regulators, especially ASIC
• the use of data collection and analytics
• future resourcing needs.

The review should be completed and published during 2019.

27: Superannuation data working group

The Australian Government should establish a permanent superannuation data working group, comprised of APRA, ASIC, the ATO, the ABS, the Commonwealth Treasury and the new member advocacy body (with Treasury taking the lead). This group should:

• identify ways to improve the consistency and scope of data collection and release across the system, with a focus on member outcomes
• evaluate the costs and benefits of reporting changes, including strategies for implementation
• identify areas where legislative or regulatory change may be necessary to support better data collection
• report annually to the Council of Financial Regulators on its progress, and on the data analytics capabilities of each regulator.

28: An independent member advocacy body

The Australian Government should, as a priority, provide adequate ongoing funding to support an independent superannuation members’ advocacy and assistance body.

29: Ongoing review of the super system

The Australian Government should:

• require APRA and ASIC to jointly produce a State of Superannuation report every two years on the performance of the superannuation system, including outcomes relating to investment performance, fees, low balance inactive accounts, merger activity and the elevated MySuper and choice outcomes tests. This report should also detail progress by the industry and regulators to implement Government policy changes and address performance and member harm issues identified in this inquiry report
• commission an independent review, every five years, of the effectiveness of the MySuper and choice elevated outcomes tests at meeting their objectives, and whether they are being suitably applied by APRA to remove underperforming funds and options from the super system
• commission an independent public inquiry, every ten years, of the superannuation system, including a review of the criteria used to assess ‘best in show’ products.

30: Independent inquiry into the retirement incomes system

The Australian Government should commission an independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system, including the net impact of compulsory super on private and public savings, distributional impacts across the population and over time, interactions between superannuation and other sources of retirement income, the impact of superannuation on public finances, and the economic and distributional impacts of the non indexed $450 a month contributions threshold. This inquiry should be completed in advance of any increase in the Superannuation Guarantee rate.

31: A steering group to oversee implementation

The Australian Government should prioritise the implementation of this inquiry’s recommendations by establishing a Steering Group of Departmental and agency heads to oversee the implementation. This group should comprise the Secretary of the Department of the Prime Minister and Cabinet, Secretary to the Treasury, Chairs of APRA and ASIC, and the Commissioner of Taxation.