Getting the balance of superannuation change right in 2012

The superannuation industry recognises that 2012 will be a year of change generated by Stronger Super, but as Damon Taylor reports, their real concern is around cost and time frames.

When it comes to superannuation legislation and policy, 2011 was a year characterised by consultation, and its fair share of robust discussion.

The reforms implicit in Stronger Super, in Future of Financial Advice (FOFA), even in MySuper have become that much clearer, and more importantly, their implementation is now that much closer.

But while Russell Mason, Partner – Superannuation for Deloitte, believes the vast majority of super funds are keen to make preparations and move into implementation mode, the key ingredient missing remains draft legislation.

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“We spent last year hypothesising on what these changes would look like and what their impact would be, but for trustees and fund executives, what we really want is the legislation, or at least the draft legislation, so that we can exactly see what, for instance, the MySuper rules are going to look like,” he said.

“We’re all sitting there now saying that we know we have to do things, we’ve got a bit of an idea and we can start to implement some of the changes – but again, I want to see the legislation. 

“If I’m a trustee or a fund executive, I want to see what options I might have with the MySuper product,” Mason continued.

“I want to know what degree of reporting I’ll have to do, what changes I’ll have to make to my existing options, whether my existing default option for instance is adequate or not, is a lifecycle-type option going to be preferable?

“These are all questions that need answering, but most of them won’t be until that draft legislation becomes available.”

Echoing many of Mason’s comments, John Quessy, Trustee for industry fund NGS Super, pointed out not only the number of questions that remained unanswered, but also that time frame was an increasing concern.

“Now having said that, you’ve got to allow time for consultation and that [is] absolutely essential,” he said. “And I know that there have been a fair number of changes as a result of that consultation which, again, is good.

“But there’s no doubt that we’re getting to the sharp end of this,” Quessy added. “Going from the top, I think with the SuperStream stuff, that’s all fine and there was less contention around that.

“I think that was something that pretty well everybody, whether administrators, fund managers or funds themselves, everyone put their hand up and said ‘this is sensible, let’s go ahead with this’,” he said.

Continuing down the list, Quessy said it was obvious that a number of people were still keen to make comment on the FOFA reforms.

“I read something the other day that said that the big organisations and the very small boutique organisations will survive, but everything in the middle will get swallowed up,” he said.

“I’m not convinced that that’s right, but as with all of these reforms, we’ll just have to wait and see.

“In terms of MySuper, there are still a few unanswered questions there,” Quessy continued.

“But I think we’re going to have to wait for APRA (the Australian Prudential Regulation Authority) to produce their range of test scenarios so that individual funds can have a look at them, determine the ones that are similar to them, and ensure that they’re complying well before time.

“Personally, I’ve still got doubts about whether MySuper is going to achieve anything like what it’s supposed to achieve, but again, we’re going to have to wait and see,” he said.

Pauline Vamos, Chief Executive of the Association of Superannuation Funds Australia (ASFA), said that she too was concerned about rapidly approaching implementation timetables and the difficulty they would cause.

“It is going to make things a lot more difficult,” she said. “But we all know the concepts are there, and we all know the policy outcomes.

“The unknowns are more around the system builds and the process builds, but as often happens with legislation, I think you’ve got to make your calls now and then tweak things later,” Vamos continued.

“Despite the unanswered questions that are still out there, I wouldn’t wait for final legislation, because if you do, you will almost certainly run out of time.

“There is, after all, no guarantee that there will be any extensions on timing,” she said.

Of course, most funds already have the preparations Vamos is suggesting well underway.

However, the concern that remains for much of the industry is whether MySuper – as a piece of legislation – intended to simplify default superannuation arrangements, will actually end up being more complex than the current status quo.

According to Quessy, complex or not, there could be any number of problems with MySuper if it focuses on the wrong aspects of superannuation to achieve its goals.

“Whether it’s going to be overly complex or not, we’ll have to wait and see,” he said. “But I could never see that it was going to be simple.

“It potentially was going to dumb things down – but for me, we were always looking at a default superannuation product which I’d describe as ‘set and forget’,” Quessy continued.

“It’s a no frills product that will provide basic everything and look to minimise fees.

“Problem is, everyone in the industry knows that minimising fees means a serious potential for minimising returns.”

For Quessy, the industry’s new focus on management expense ratios (MERs) could easily be a disaster waiting to happen.

“You can get into all sorts of overlays that are fairly expensive, but they don’t show up in your MER,” he said.

“So is this simply going to be a way now of people trying to find some way to get a return on their members’ money, even if it’s an expensive exercise, just so long as it doesn’t show up in your MER?

“If that’s what this ends up being, then I think we’ve got a serious problem,” Quessy said.

Mason said that, complexity aside, his larger concern was that the industry was reacting to perceived problems with MySuper without having detailed knowledge of the final, or even draft, legislation.

“This industry seems to be reacting to the Government and to the regulators – APRA in particular – with concerns without knowing exactly what we’ve got those concerns about,” he said.

“So it may turn out that MySuper is a complex product, but it may also turn out that it still remains the relatively simple product that the Cooper panel and the Government intended.

“In fact, I would expect that for many funds – industry funds in particular – their current default option, with some minor tweaking, will probably end up being their MySuper option without too much concern,” Mason continued.

“I think that most corporate, industry and public sector funds, especially if they’re DC (defined contribution) funds as most of them are, that we could be tilting at windmills – that MySuper could be a relatively easy conversion.

“Yes, there’ll be work regarding reporting, amendments to licenses and perhaps looking at the liquidity of those products and the cost structure, but I don’t believe too many funds will have to do a major re-haul or revisit of their current default option,” he said.

However, beyond the logistics of putting MySuper in place, Quessy said that his greatest concern lay in what its impact on member engagement would be.

“It’s partly because my background is teaching and we’re an education fund, but what concerns me is that we’ve spent a lot of time, a fair bit of money, and a great deal of thought – as have a lot of funds – trying to get more members engaged,” he said.

“And not just members on the cusp of retirement, but those just commencing their working lives.

“Now we know we’re all fighting a bit of a losing battle with regard to engagement of members (especially young adults) in superannuation, but I think the whole concept of MySuper is going to become a set-and-forget,” Quessy continued.

“It’s going to, in fact, entrench disengagement.”

That’s my feeling, and I know it’s the feeling of some, but the Government says that’s not the case. Well, all we can do is wait and see.”

Yet if the overarching theme behind what is currently on the superannuation policy table is increasing information and catering for all levels of engagement, most within the industry seem to agree that such objectives are appropriate.

And despite all the issues and all the unknowns, Mason’s belief is that they are objectives that can be achieved.

“I think they can be achieved,” he said. “If you look at most trustees and fund executives, if you look at what’s top of their list of what they want to do, I believe it’s understanding their members and engaging those members.

“So if I was the trustee of a large super fund, I would want to say ‘do I understand my members, what information do I need, what can I do to better understand who these members are, what’s the profile of the membership, what’s their ability to pay extra contributions, what do they really want out of group insurance?” Mason listed.

“Because if you can answer those questions, then hopefully better engaging them will come as a matter of course.”

For Vamos, though a modernised superannuation framework is indeed possible out of these legislative changes, the industry will still need to contemplate a number of significant gaps.

“For us, the biggest disappointment is that MySuper doesn’t allow a pension to be paid out of it,” she said. “And also, that we don’t have capital gains tax relief.

“So from our perspective, there are some significant pieces that are missing, and unless the industry is able to invest ‘whole-of-life’, unless the assessment of the industry’s performance is long-term, we’re not going to get the fundamental changes that we still require.

“My concern is that there’s so much focus on implementation, and a lot of the detail of the legislation that trustees aren’t going to have enough time to look at their investment environment,” Vamos continued. “And this is the time that they really have to do that.

“This is a very difficult time for the industry because trustees and fund executives are already stretched, but unfortunately, that’s only going to increase,” she said.

Yet the gaps mentioned by Vamos, or more particularly, the prospect of legislative change and reform beyond what the industry currently has before, it is not necessarily a pleasant one.

Many within the industry – members included – have found various Governments’ constant ‘superannuation tinkering’ a source of frustration for a number of years, but according to Quessy, constant change is a trend likely to continue.

“It would be nice if there could be a moratorium on Budget night announcements about changes to superannuation,” he said. “I think there are two issues where change should still happen, and they go to the issue of adequacy.”

So certainly, we want to see the 12 per cent SG (superannuation guarantee), and certainly, we want to see capacity for people to make voluntary contributions and the like,” Quessy continued.

“And maybe the only other change that I think would be favourably entertained is a relaxing of the contribution caps.

“Other than that, and unless the current changes are a complete disaster, I think we should leave it alone for five years and see what happens. The politicians won’t do that, of course, but it would be very nice if they did.”

However, Vamos’ counter-argument to industry pundits’ criticism of constant change is that without change and improvement, the industry can hardly be expected provide Australians with the best retirement savings system possible.

“As I said before, there are still gaps, and because of the extent of this legislative reform, we’re going to have to review it as well,” she said.

“I think we have to understand that because this system is about peoples’ retirement, and the environment of retirement constantly changes.

“There will always be change, and I think people just have to get over it,” Vamos said.

For Vamos, the simple fact is that it is vitally important that the superannuation is able to ensure that Australians get the most out of their retirement.

“It must be fair, and it must be about driving adequacy,” she said. “But how you deliver that will necessarily change, and the social and the economic policy levers will change along with it.

“The key, however, is that policy should be looking substantially forward,” Vamos added. “What is not sustainable, is tinkering every year with no lead time and with no real thinking behind the policy. 

“That is untenable.”

Moving beyond what the Government and Australia’s super industry currently has on its policy plate, it seems the next area of focus is post-retirement.

But while there are various takes on the issue and various proposed solutions, Vamos said that current social security legislation had to be the first port of call.

“The first problem we have is that our social security legislation only really recognises an annuity and an allocated pension,” she said.

“And yet because a deferred annuity is treated as income – even though you’re not getting that income – there’s a disincentive there as well.

“Basically, we want to encourage people to take income streams, we want people to spend their superannuation, and we still want to make sure they have a good pension net,” Vamos continued.

“So there’s a big conversation to be had, because at the moment, it’s a bit of a ‘one size fits all’ approach. 

“So we’ve got people who are retiring on a small lump sum, people who are retiring on a large lump sum, and people with large lump sums want to take it as an income stream, but they’re not getting the choice that they deserve,” she said.

For his part, Quessy said that funds had to have a serious look at the different offerings available in the post-retirement space and start considering what would best meet their members’ needs.

“But I think the one issue that we have to focus on is an investment option for the drawdown phase that inspires confidence rather than fear,” he said.

“I hate to use the old capital stable-type language, but it’s about the sort of thing that I think people are retreating to.

“They’re starting to say ‘look, I’ve got my nest egg and I’ve got to live off it for the next 30 years, but I just don’t see how I can do that with so much volatility in investment markets’,” Quessy continued.

“And I think we’ve really got to pay a lot of attention to that.

“But whoever gets it right will do extremely well in the marketplace,” he said.

According to Mason, there are undoubtedly some very clever products developed specifically to handle post-retirement, but he also pointed out that they were, almost without exception, prohibitively expensive.

“My personal point of view is that we can’t develop a good post-retirement market until we have some sort of Government guarantee,” he said.

“And what I would like to see – and it happens in some countries now – is that if you agree to self-fund yourself to age 80, you will get a pension equal to say 50 per cent of your average weekly earnings.

“If you agree to postpone that to age 85, it will be 55 or 60 per cent, and so on,” Mason continued.

“So, as a member, I can know what I’ve got in my retirement savings and I can now target a date, because no matter what happens, you’ve got longevity risk accounted for,” Mason said.

The reality, according to Mason, is that no-one knows whether they’re going to live to 70 or 107, and so people will be conservative for fear of running out of money.

“And with the current test for social security, they can run out of money and still not be sure of receiving a retirement of age pension,” he said.

“Instead, by agreeing to postpone any social security entitlements to a reasonably advanced age, they can then have the certainty of knowing that their savings were targeting a specific date.

“It’s about being able to retire and actually target a certain age, knowing that there’s going to be a reasonable backup should you run out of money,” Mason said.

So with what is evidently a full policy and reform agenda in 2012, it seems trustees and fund executives must turn their minds to preparation. And though legislative unknowns persist, Mason’s advice is that funds focus on meeting these changes head-on.

“Engage with your service providers, seek as much information as possible, schedule strategy days and meetings, allow time in the agenda of your trustee meetings to address the changes,” he suggested.

“We have committees for compliance, for marketing, for investments, but perhaps funds need to look at legislative change or benefit change in a similar way.

“What funds need is to be able to do is sift through all the information that’s out there and be able to filter it through to the board,” Mason continued.

“That way, when changes need to be made or new legislation is about to be brought in, the board has enough information and is educated enough to make good decisions,” he said.

Looking to the year ahead, Vamos said this would not be a year of ‘business as usual’.

“That is, if there ever was a ‘business as usual’,” she said. “Black sun events are going to be happening regularly, and have been regularly happening for quite some time.

“The world is shifting dramatically, so funds need to be flexible and robust in their implementation and strategy,” Vamos added.

“Priorities will change on a weekly basis and funds will have to be flexible enough to deal with that.

“The challenge is for us all to be a lot more innovative in how we approach superannuation and the business that it represents.”