If the latest round of Royal Commission hearings sought to answer one thing, it was whether Australia’s superannuation system is fit for purpose.
It’s a question worth asking, given that, as we’ve previously discussed, super is a bedrock of the Australian economy, accounting for around 50% of total household wealth – and in many cases, probably your clients’ largest savings pool. The answer is complicated, as you might expect, but several issues emerged that it’s likely will impact how you’ll be addressing the topic with customers in the future.
As Counsel Assisting Michael Hodge noted in his closing remarks, the hearings covered oral evidence from trustees representing over $627 billion in member funds – or about 38% of total funds held in regulated super funds as at 30 June 2017.
Here are three key issues to consider when discussing the latest hearings with your clients:
Financial literacy and its impact on member behaviour
On Tuesday, Minister for Revenue and Financial Services Kelly O’Dwyer launched the 2018 National Financial Capability Strategy, aimed at improving the average Australian’s capabilities with respect to day-to-day money management, making informed financial decisions and planning for the future. Justifying the initiative, O’Dwyer noted that over a third of Australians “find dealing with money stressful and overwhelming.”
Read more: The way we talk about super needs to change
The announcement was well-timed in light of Hodge’s comments that super fund members are “disengaged and disadvantaged by a lack of financial literacy,” which in some cases may lead to trustees shirking their fiduciary responsibilities – or at least incentivising them to do so.
“In most industries,” he noted, “the forces of competition can be relied upon to minimise improper conduct and effective regulation can be expected to address breaches of the law when breaches occur.” But for superannuation, he said, member disengagement as a result of a general lack of financial literacy may be stifling effective competition in the market.
If anything, this highlights the extent to which financial advisers can improve this issue – if they can play a role in raising financial literacy, they’re not just helping clients but shoring up the effectiveness of the basis of Australia’s entire retirement system.
A regulatory shake-up?
Hodge made multiple recommendations regarding how the legislative framework around superannuation could be rejigged so as to improve member outcomes. He argued that there may be issues with said framework that raise “inherent problems,” making structural changes “desirable”.
We’ve covered some of these issues before – the prohibition of commissions paid from super products and grandfathering as well as the elimination of ongoing advice fees – but others included harsher penalties for trustee directors who fail to act in members’ best interests.
On top of this, given the concerns raised about the effectiveness of ASIC’s enforceable undertakings as a means of managing misconduct, it was also suggested that super regulation needs to be readjusted to address “conduct that in subtle but ongoing ways negatively affects the retirement outcomes of consumers.”
Hodge questioned whether APRA and ASIC, collectively, are currently structured appropriately so as to deal with this kind of ongoing conduct, asking if “the balance between them [should] be restructured or significantly altered.” This refers back to his earlier comments that ASIC’s regulatory powers regarding super fund governance and members’ best interests is fundamentally limited, and that it would need “additional powers” if it were to become a conduct regulator for the industry.
It isn’t known at this stage what a revamped ASIC would look like in terms of super trustee conduct regulation, but it’s also worth heeding further calls for expanded powers from the regulator, given how ASIC’s remit has already been altered after both FoFA and the Life Insurance Framework.
It also suggests clients will want to know more about the governance of their particular super fund than they might have before.
Emphasising (informed) choice
Hodge said that evidence suggests a pattern of issues with how super funds communicate to members. Specifically, he pointed to “information that was provided to members that had the potential to confuse or to mislead them,” including disclosure about service fees, tax surpluses, consequences of transitioning to MySuper, conflicted remuneration and so on.
He also said members should be better informed as to their financial advice services from super funds, arguing that members could still enter into an ongoing arrangement with an adviser if they “wished to pay for and commit to paying for ongoing advice.”
“Such a change might act to nudge a consumer to consider more carefully what financial advice she or he wishes to obtain and what she or he wishes to pay for it,” he added.
A likely more significant change would be mandating “consumer stapling,” where members are attached to a single superannuation account and are not given new accounts “each time they change jobs.” Hodge said this might “reduce the incentive for superannuation trustees to wish to maintain low balance members.”
All of this implies super funds will have their member communication duties more clearly and rigidly defined in the future, which may have flow-on effects on how super is handled in an advice context.
We won’t be seeing the final report from these hearings until early next year, but these preliminary findings and recommendations imply some looming structural changes to the super industry – and it always pays to be prepared.
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