The Productivity Commission’s Final Report (Report) into the superannuation sector was publicly released on 10 January 2019. The Report provides 31 recommendations intended to address the shortfalls of the superannuation sector as it currently stands.
The concerns raised in the Report include excessive fees, minimal compliance to regulatory obligations and conflicts of interest resulting in member harm.
The recommendations contained within the report include suggested timeframes for implementation between December 2019 and December 2023.
Key Observations and Recommendations
Regulation of trustee board directors
A key observation the Report made is the regulation of trustee board directors. It considers that the standards for trustee directors should be increased by the Australian Prudential Regulation Authority (APRA). The recommendation includes all trustee boards maintaining a skills matrix and publishing a summary of the matrix annually.
Significantly, the Report considers that funds are not always acting with the best interests of their members. The Report suggests that this behaviour not only illustrates trustee misconduct but also highlights a lack of clarity around the ‘best interests’ duties and the expectations of trustees at a legislative level. The Report seeks further accountability to ensure that trustees are acting in accordance with their duty.
Self-Managed Superannuation Fund (SMSF) Minimum Balance
The Report has also considered the minimum recommended balance for an SMSF. Although the Report does not seek to set a minimum value, it considers that any SMSF with a balance of less than approximately $500,000 would see any generated profit greatly diminished by fees and insurance. The SMSF Association has responded by supporting the decision not to implement a minimum balance requirement and instead to focus on improving the standards of SMSF advice.
‘Best in Show’ Shortlist
Another key recommendation, a ‘best in show’ shortlist which the Report states should contain up to 10 superannuation products, has been met with disagreement from the Labor Party and the Australian Council of Trade Unions. Treasury Spokesman for Labor, Chris Bowen, expressed concerns that this recommendation, intended to be in place by no later than June 2021, may undermine the competition between funds. There was also a concern by the Association of Superannuation Funds Australia (ASFA) that this recommendation fails to address the ‘more serious problem of underperformance in the wider super system’.
Impact of the Changes
The impact of the proposed recommendations would be significant. The Productivity Commission states that with these changes, members could be better off by $3.8 billion each year. This could mean a new entrant into the job market could be $533,000 better off at retirement, in some cases doubling what their retirement balance would otherwise be.
The impact considers the overwhelming evidence of ‘excessive and unwarranted fees’ which are rife within the superannuation sector. There is also consideration given to the fact that around one third of superannuation accounts are unintended multiple accounts. This causes further unnecessary fees which the Report states reduces members’ balance by $2.6 billion per year. The recommendations intend to address the high fees and duplicate accounts in hope of aiding better outcomes for members.
What Comes Next?
In a recent media release, Federal Treasurer Mr Josh Frydenberg, stated that the Government will consider the report from the Royal Commission into Misconduct in the Banking prior to finalising its response to this Report.
Conversely, although Labor has expressed negative views towards the ‘best in show’ concept, the Party has welcomed an increased focus on member benefits and interests.
Overall, the key takeaway from this Report is the significant overhaul that will be required to ensure that the governance in the Superannuation sector improves. Focus on the benefits of the members and attempts to streamline accounts illustrate that the majority of recommendations are geared to assisting the public in hope of simplifying the superannuation system as a whole.
If you have any questions about how these recommendations may affect you, please do not hesitate to contact a member of our Financial Services Team.