Deloitte works with many of Australia’s superannuation funds, be they industry, corporate, public sector or retail funds. These funds have a common theme of being passionate about the positive impact they can have on the future financial prosperity of working Australians.
However, in doing this work we’ve noticed a common, frustrating theme. And it’s a theme that we believe, if rectified, could make a positive impact on savings and investments habits in Australia.
We have lost count of the number of times funds think of great ways to help members achieve their financial goals, but are prevented from doing so for fear of breaching the Sole Purpose Test.
The Sole Purpose Test
The Sole Purpose Test, as is legislated in section 62 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act), restricts the focus, offerings and actions of super funds in prescribing that:
Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely:
a) for one or more of the following purposes (the core purposes)…
where the purposes are essentially retirement, death or permanent incapacitation. That is, money that is preserved for purposes long beyond the present-day considerations of most Australians.
And that is exactly why our superannuation system was created and, in the early 1990s, a compulsory savings scheme known as the Superannuation Guarantee was created and has been supported by successive governments, both Coalition and Labor.
With the development and maturity of the superannuation system we have also seen the creation of a number of large super funds which have become financial institutions in their own right.
The biggest problem they face, is that they are structurally forced to ignore the near-term focus of their members who generally, at least until their early to mid-fifties, are more focussed on shorter term objectives than they are on superannuation. Behavioural scientists refer to this near-term focus as ‘hyperbolic discounting’ or ‘present day bias’. That is, we place far higher value and focus on things that are closer to attainment, than those that are far off.
So, while Australia, through our superannuation legislation, has developed a retirement savings programme and financial institutions that are admired worldwide, the system still has short-comings which need to be addressed.
Global studies by firms such as Mercer show our system is one of the best in the world. However even with global endorsement of the strength of our system, we believe Australians are not getting the value from their funds that they could. If the Sole Purpose Test was removed what extra services could funds offer their members on a cost-effective basis?
For example, if funds could offer non-superannuation savings, individuals could better integrate a holistic savings strategy. For those who wish to save more for either long-term or short-term purposes, it seems logical to us that their superannuation provider should be able to support them.
Research performed by Deloitte Digital and commissioned by Salesforce showed that wealth and superannuation enjoy the strongest level of trust of Australian financial institutions.
Chart one: Level of trust held in Australian financial instiutions
Source: Deloitte Digital
Industry funds have demonstrated a high degree of trust by their members in particular. They have the resources and the membership to offer a broader range of services than are currently being offered.
Opportunities from changing the Sole Purpose Test
So, our question is why, when Australians are required to participate in the superannuation system as a result of the compulsory Superannuation Guarantee, are the institutions providing them prohibited from also helping their members think about saving and investing for the other life outcomes the member is trying to achieve?
A consequence of the current legislation is that members are prohibited from using these institutions to help save for shorter-term needs. Equally, members who wish to save more for their retirement but have reached the cap on balances that members can accumulate, are prohibited from using these institutions for further retirement savings.
This is not suggesting a change to the way these non-superannuation assets are taxed. Nor is it advocating an unfettered ability to offer unlimited products and services to members. Prudential regulation would still be required.
However, allowing funds to offer non-superannuation savings and some general or health insurances would enhance the member experience, lead to greater competition in the market and, more importantly, allow funds to achieve a greater degree of member engagement than most currently experience.
This is not about creating additional products. Rather it is about providing additional channels and competition for consumers to access high-performing investment and insurance solutions.
Could there be an opportunity for funds to design mechanisms to support their members in considering, and seeking advice on, how best to achieve their desired outcomes over the short, medium and long-term? Could it help them better save for homes, school fees and other significant savings goals? Could it make it easier for them to explore diversified strategies for their medium- and long-term savings? Our experience in working with many funds and conducting thousands of hours of customer research with them suggests the answer to each of these questions is a resounding ‘yes’.
The Sole Purpose Test is, in our opinion, a relic of the old corporate superannuation system where there were significant tax incentives to place large amounts of savings into superannuation funds which could not have coped with the administrative burden of a financial offering that extended beyond super.
We live in a very different world today than that was being experienced by Australians 35 years ago when the need for the Price and Incomes Accord was agreed and a compulsory contributions scheme was realised. The idea that superannuation stands separate to other financial considerations is no longer valid. With the pressures of the financial obligations that most Australians take on in their working lives, we need a system that better integrates superannuation with the rest of our financial lives.
The legislative change
What would it take to make this happen? It might be as simple as inserting an additional clause to section 62 of the SIS Act, such as:
62.1(a)(vi) the provision of savings, insurance and investment facilities for each member of the fund
Naturally, there should be a review of any unintended legislative or regulatory implications for the licensing arrangements of trustees and advisers, and we do not underestimate the significance of this process. We are not suggesting that superannuation be downgraded, or people be allowed to avoid the responsibility of saving for retirement. We simply believe a more flexible and integrated system will better allow Australians to meet their short-term and long-term savings goals. The Sole Purpose Test does not allow this to easily happen.
The adoption of a model of this kind is not without precedent. Singapore’s Central Provident Fund provides a fine working example of where financial institutions are able to provide retirement savings, healthcare and investment solutions for pre- and post-retirement with great effect.
We believe this relatively simple change to our legislation could go a long way to enhancing the long-term quality of life in Australia, and ultimately the future prosperity of our economy and our working Australians.
Russell Mason is a partner, superannuation and David Johnson is a director at Deloitte.