By the time Australians head back to the polls for the next Federal Election, the superannuation guarantee (SG) will have increased to 10 per cent, with the prospect that it will move to 11 per cent a year later.
The reality of the Australian Labor Party’s failure to gain office on 18 May is that the superannuation industry’s hopes of the SG being lifted to 12 per cent immediately, rather than in 2026 have been dampened for at least another three years, and probably another six years.
The impact of the election
So, what does the re-election of the Liberal/National Party Coalition Government under Prime Minister Scott Morrison really mean for the superannuation industry?
First up, it means that industry superannuation funds will continue to need to defend the current default superannuation funds regime in the face of a Government which never stopped believing that the current arrangements based on industrial awards were inappropriate.
The industry funds will also need to continue to defend their governance models in the face of a Government armed with a Productivity Commission (PC) report which claimed that governance of superannuation funds overall “falls short of best practice”.
More immediately, superannuation funds and insurers should brace for the Government reintroducing the legislation which lapsed when the Parliament was prorogued in early April ahead of the Federal Election.
The most important element of that lapsed legislation is that which will impose opt-in arrangements for insurance inside superannuation for those aged under 25.
The Assistant Treasurer, Stuart Robert also announced shortly before the election the Government’s intention to establish a superannuation consumer advocate in line with one of the issues raised by the PC with respect to member advocacy being lacking in the superannuation industry.
Reflecting the fact that the Government is likely to continue to pursue changes to the default regime, was the Financial Services Council’s (FSC’s) immediate post-election call for “a fair and competitive default superannuation framework where individuals only default once”.
It is expected that continuing pressure from the FSC combined with the recommendations of the Productivity Commission inquiry into Superannuation Competitiveness and Efficiency will fuel the Government’s agenda over the next three years.
In particular, the Government is expected to justify its moves by pointing to the manner in which the PC pointed to shortcomings in the existing arrangements, suggesting “a lack of healthy competition for the market means poor-performing funds are not being weeded out”.
“Tying defaults to the employer rather than the member has led to the absurdity of members accumulating unintended multiple accounts (and paying multiple sets of fees and insurance premiums). And policy settings have enabled restrictive clauses in workplace agreements that prevent an estimated one million members from exercising choice should they want to,” it said.
“One of the main drivers of subpar outcomes is the way default funds are tied to employers and the workplace relations system, with employer choice constrained by lists of funds in modern awards and enterprise bargaining agreements.”
Award listing is concentrated
Source: Productivity Commission
The PC acknowledged some of the benefits of the existing default system but then stated that: “The listing of funds in modern awards is designed to mitigate some of the risks with employer choice, but is beset by a structure that restricts contestability between funds to obtain default members.
“Where bound by an award (and not all employers are), employers could face a choice of anywhere between one to 15 funds, depending on which of the 122 awards is relevant [see chart one]. Only a handful of funds are listed in more than 10 awards,” it said.
Pressure on industry funds
Reflecting the pragmatic view of industry superannuation funds, the Australian Institute of Superannuation Trustees (AIST) senior policy adviser, Karen Volpato acknowledged that the elements of the Government’s remaining Protecting Your Super legislation together with the Government’s agenda around defaults and governance would prove a challenge.
She said that while the AIST had supported many of the elements of the Protecting Your Super approach, it was not blind to challenges which were likely to emerge, particularly around defaults and governance.
Volpato said the simple facts of the matter were that the existing default super regime was not broken.
“Default super has delivered,” she said. “And we are not blind to the issue of underperforming funds.”
Volpato said that where underperforming funds were concerned, it was clear that the Australian Prudential Regulation Authority (APRA) had already been empowered and was moving to deal with the issue.
The degree to which Coalition superannuation policies sat outside the bounds of what the AIST believed was appropriate was indicated by the graphic created by the organisation just days ahead of the 18 May poll, shown in chart two.
AIST pre-election superannuation wishlist
Source: FE Analytics
Deloitte superannuation partner, Russell Mason also believed caution was necessary with respect to discounting the value of the equal representation model utilised by industry superannuation funds.
“It works, and you have to ask whether there is a better form of governance,” he said.
Mason also acknowledged the continuing pressure on the Government to change the default regime, but urged against pursuing the so-called “Top 10” model which had been recommended by the PC.
Like Volpato, Mason pointed to the problem of underperforming superannuation funds but said that APRA had been appropriately empowered to deal with the issue and was doing so.
While industry funds were noted as being likely to face some policy pressure from the Government in its next term, industry experts also predicted that retail funds sitting inside vertically-integrated structures would need to continue to work on their governance models consistent with recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services sectors.
The issue of the independence of superannuation fund boards within vertically-integrated structures was laid bare by the Royal Commission, with testimony suggesting that some trustees and executives were simply rubber-stamping the decisions taken by other parts of the business.
However, the Government is not expected to specifically legislate on the issue but, rather, leave it to APRA and the Australian Securities and Investments Commission (ASIC) to deal with the issue.
Of particular note will be the success or otherwise of APRA’s legal action mounted against IOOF, its board and its senior executives, notably the chair, George Venardos and the former managing director, Christopher Kelaher.