Confronting the fallout from Super Stream and MySuper

Stronger Super has delivered a raft of new regulatory challenges for the superannuation industry but, as Damon Taylor writes, the objective is finding the right balance in looking after other people’s money.

Mike Taylor (chair), managing editor, Super Review: The tape is running gentlemen, so we all know where we are at.

The top issue obviously is Stronger Super. The government a couple of weeks ago handed down the final iteration and there’s been quite a lot of comment about what it will all mean.

I think I will start with the question of SuperStream, which I think is probably the most commonly agreed element of Stronger Super, in that everybody agrees SuperStream is the one thing, I guess, in the whole equation that was begging to be done, and probably should have been done sooner.

So I might throw to you David to put your view on where you see SuperStream fitting in, and how important it is to the overall scheme of things, and I guess any implications you see flowing from it.

David Graus, policy director, ASFA: Well, from our perspective we are very supportive obviously of SuperStream.

As you mentioned, it’s the least controversial part of MySuper, Stronger Super. We were pleased to see that there is going to be mandatory data service.

We believe that that’s a tremendous step forward, a movement forward from the previous government response, so that’s extremely helpful.

Clearly this will benefit the whole superannuation industry, but there will be pain upfront, and this can’t be underestimated — the sort of level of pain and initial cost that will go into tooling up and gearing up for SuperStream. So while we are supportive of it, we just caution about that initial cost in systems set-ups.

Andrew Bragg, senior policy manager, Financial Services Council: I think there’s probably two primary elements with Superstream.

The first is quite a consumer-centric reform which is empowering the consumer to bring together their super accounts. So there are 30 million accounts for a labour force of 11 million people. It’s obviously a big program we’ve been trying to address for a long time in our compulsory system.

I think a member walking into a new workplace and being presented with the capacity to bring together their accounts is an enormous step forward.

I think the other element of SuperStream addresses - it’s obviously a lot more boring - but it goes to the data that David referred to, I think, from the employer’s perspective: the employer will have the variation removed.

The employer is a compulsory part of the cog; the employer has to deal with different super funds with different requirements.

I think removing that variation from their perspective is a big step forward for the industry. I think historically the industry hasn’t always dealt well with employers, and I think part of this focus has been trying to understand what the employer has to look at when they try and deal with our industry, so I think both those are very positive.

David Graus, ASFA: There is a downside in that we were disappointed in the fact that there’s only going to be an advisory council now sitting over these new standards, and we were much keener on a governing body that is empowered to effectively impose things, and that was a disappointment.

Mike Taylor, Super Review: Fabian in WA, what’s the take of someone who is at the fund coalface on that?

Fabian Ross, general manager, wealth management, GESB: I think from our perspective, where SuperStream makes it easier for consumers to consolidate accounts, I think that’s a good outcome. But I do share the concerns of the table there, which centre on the employer element, employer readiness.

I think that we shouldn’t underestimate how big that will be going forward, but certainly from a consumer point of view I think it’s a great step forward.

From our fund point of view, from a tax file number (TFN) perspective, we’ve noticed when we were out with clients, we’ve already done some finance work on it — and we don’t see it as a huge step forward for us.

Mike Taylor, Super Review: Are you concerned, and I guess this is really more a matter for the administrators than the funds themselves, but are you concerned that there’s not an overarching body, as David has suggested, to kind of see the standards maintained?

Fabian Ross, GESB: Yes, I tend to agree with David there. I think that’s probably a disappointing aspect. It would have been more forward-looking to have a body that looks after this and really holds people to account [in light of] the standards, so I tend to agree with David on that.

Andrew Bragg, Financial Services Council: I think we have a different view on the ongoing governance of data standards.

I think if you look at the scope of what’s being reformed here, the government has said, “look, the industry is incapable of coming to agreement on standards which are going to be mandatory, effectively, so for contributions and for rollovers we are going to legislate”.

So when a government legislates something, the government owns it. So I think from our perspective we thought it was appropriate to maintain some industry input into how those standards are maintained, and how they are changed over time.

But ultimately having a legislative governance body with ministerial appointments and whatnot — I think is really a grandiose approach to what is a relatively simple problem.

The industry has grappled for over 10 years with standards and actually it was a failure, so we are happy to see more government intervention as opposed to less on this occasion.

Auto-consolidation — good or bad?

Mike Taylor, Super Review: One of the things that came out early on, and before the government even tabled its final iteration of the Stronger Super policy document, was the question of auto-consolidation.

To be fair, it is something which Stronger Super always sought to overcome — the proliferation of super accounts — but I think the concern of many people, and we discussed this at an earlier roundtable, is that there are many people out there who quite deliberately have multiple superannuation accounts and therefore it becomes a question of appropriate mechanisms for consolidating them, and whether it’s auto-consolidation or, dare I use the words, ‘opt-in’?

So, David, having seen the document now, have you any further views on that?

David Graus, ASFA: We are relatively comfortable with where the government has landed on auto-consolidation.

It was ASFA’s policy that for accounts below $10,000, that’s where we thought it was the appropriate level to be set.

That being said, the government has chosen a $1,000 level but will be reviewing it going forward, and they do refer to the $2,000 which was the subject of that research.

We are very keen that unintentional, unutilised accounts need to be consolidated.

We are very aware that a number of people intentionally have more than one account, and it’s terribly important to not just interfere with those arrangements, you know, potentially lose insurance, potentially stuff up asset allocation.

So where they’ve landed, you could have an alternative arrangement, to the effect that you are driving member communication and the person has got the right to opt out. We think it’s probably a reasonable outcome.

Fabian Ross, GESB: If I could just, on the basis of what you just said there, ask why is it ASFA’s view that $10,000 is the threshold rather than $1,000?

David Graus, ASFA: Well, we came to the view that really at $10,000, when you look at the average balances and member behaviour, that at that level people are not getting cannibalised by fees, by the fixed fees, and people tend to be engaging intentionally.

Mike Taylor, Super Review: Andrew?

Andrew Bragg, Financial Services Council: I think the consultation revealed that there was a range of views about, if we go to the path of having an auto-consolidation management, what that level should be?

Our view was $1,000; as David pointed out we pushed for $10,000, others pushed for no limit.

So you know, you would have the bizarre proposition that if you miss your mail, you miss your work consolidation notification, there goes your choice for your personal super account, or your consolidation into your default fund.

So we thought that that was an extreme proposition.

As David said, $1,000 appears to be about right. The other thing about $1,000 is that it needed to align with the member’s protection threshold, which is going to be abolished as part of these reforms, so there’s a bit of science to the $1,000.

I think the risk you identified, Mike, around the insurance fees, is [lessened] where people have chosen their insurance.

Typically those accounts are not going to have less $1,000 in them, so I think if you maintain a threshold of $1,000, you are not exposing consumers to the risk of losing their insurance inadvertently.

Mike Taylor, Super Review: Fabian, what’s your view on it? You know, do you have a particular view on auto-consolidation in terms of where your members are coming from?

Fabian Ross, GESB: Yes, from our perspective we think $1,000 is about the right level, which confirms that there’s a lot of members that kept their superannuation for insurance purposes.

Therefore making them consolidate at a higher threshold is fraught with danger from our point of view, so we certainly think that, we certainly believe that consolidation should happen, but certainly $1,000 is about where we see it as well.

MySuper and modern awards

Mike Taylor, Super Review: Let me just move the conversation along a little now, and I guess the other key thing out of Stronger Super is MySuper.

I think the Cooper review inspired MySuper — and there were a lot of critics in the immediate aftermath of it being announced. I can remember a certain recent ASFA conference, I think it was in Adelaide, where some rather harsh things were said about Jeremy Cooper by people who didn’t realise he was in the room.

But I’m just wondering: we now see My Super as being a replacement for defaults as we know them, but at the same time we have the default funds under modern awards, and that matter has yet to go before the productivity commission.

To me that seems to be the elephant in the room, which is, you are putting in place a policy that is conflicted with another policy, which won’t be reviewed until next year at the earliest.

So I guess I’ll throw this one to Andrew to start: can the government sensibly introduce MySuper, knowing that the whole modern award situation is out there?

Andrew Bragg, Financial Services Council: Look I think there’s an inevitability that the awards will be open to competition.

I think this is the first time the government has ever put some hard numbers around a whole product.

I think that when you commoditise the whole product it means that inevitably every developed product will be open to compete on its own merits, whether it’s under an industrial agreement, whether it’s under an award enterprise agreement.

So I think from our perspective it’s an inevitability, because obviously, unfortunately there are a lot of politics around that question. I assume the Productivity Commission will have a look at this issue and pick it up, say, next year.

David Graus, ASFA: Would we generally agree that we think the MySuper can proceed as it is, but it would be preferable for as early a resolution as the Productivity Commission can bring on.

However, the MySuper legislation can proceed in parallel or beforehand.Race to the bottom?

Mike Taylor, Super Review: One of the things that was raised at an earlier roundtable we conducted, David you were there, was that there is a danger with MySuper - and it’s based on cost and what have you — that it could ultimately end up being a race to the bottom.

Do you think, as it’s been outlined by the government at this point, and perhaps seeing the fine detail of the legislation, do you think that’s a problem?

David Graus, ASFA: It’s a potential problem and I don’t think it’s being driven by anything specific in the legislation, because they are not prescribing a move to index it.

But given a bit of transparency in the commoditisation that we talked about, just competitive forces will have the potential to drive things towards an indexing management, or to a more simple, cheaper investment. So there is a risk and a major risk.

Andrew Bragg, Financial Services Council: I strongly agree, I think it’s hard to find an example.

I think the legislation as proposed is not particularly intrusive. It’s not going to be an enormous structural change, MySuper, I think, from a transparency point of view.

One of the big changes will be APRA publishing quite detailed tables, performance tables and cost tables, for all and sundry to see.

I think that there will be an inevitability around a provider not wanting to have it reported that [for example] ABC MySuper is the most expensive My Super in that case - because for the first time the media will be able to pick up tables which will be truly comparable and have integrity around them for comparability purposes.

I think that if you were to sit there with My Super at 200 basis points, you might see that as being uncompetitive.

David Graus, ASFA: We would hope too that, in a world of comparability, trustees are properly held to account for their investment decisions.

Should they be choosing a more expensive investment approach, then it should deliver a superior performance.

So a net investment return, at the end of the day, will hopefully be better looked at.

Mike Taylor, Super Review: So what you are saying is you would rather see trustees going for best possible return rather than going for safety first?

David Graus, ASFA: That’s an interesting question — and playing off best-possible return against safety, you know, are the two mutually exclusive?

Not necessarily, so obviously you are not going to get adventurous, but as trustees do now, the duty is try and maximise returns. I think that that will continue in a hopefully more comparable and transparent way.

Andrew Bragg, Financial Services Council: We certainly believe in active management, so we don’t think that to raise concession in price is positive. We think it needs it, but you’ve just got to look at the dynamics around you and look at the way the media reports these things.

Clearly the main thing there, you look at costs and things. I mean, they are not going to give someone a pat on the back for having 200 basis points in MySuper, when someone has got 60 basis points for My Super.

So to summarise it, I would just say that it’s incumbent upon the industry to talk about the value of active management, to talk about the value proposition and that's not just about fees.

Avoiding short-termism

Mike Taylor, Super Review: I guess listening to all of you on this, one of the things I guess that’s going to be important in the approach APRA takes, is that in any assessment it does, it reflects the fact that superannuation is supposed to be a long-term investment, and that the monthly charts and tables we get reflecting monthly performance aren’t really that constructive.

So I’m just wondering, do you think the government really ought to be giving APRA a brief? Or perhaps APRA should be smart enough to assume the brief that you don’t go with a six-monthly, or even one-yearly approach, you really should be looking at five, 10 years? Do you see that as the appropriate timescale?

Tim Longhurst, futurist, Key Message: Yes.

Ken Shaw, BNP Paribas: Yes, five to 10 years. ASIC has also made its focus on long-term returns and disclosing long-term returns, and we support that.Impacting the future

Mike Taylor, Super Review: We’ll move the discussion on a bit. We have a futurist amongst us, so it doesn’t hurt to throw it to the future: I mean, what’s the superannuation industry going to look like, I guess, once Stronger Super and all the elements are in place?

My suspicion is, from having been covering this industry for a long time, it’ll be pretty much how it looks now, but I’m just wondering, Tim, how you see superannuation and savings in Australia evolving over time?

Tim Longhurst, Key Message: Well I’ve been fortunate to have recently travelled with BNP Paribas on a roadshow, talking to the heads of, or executives from, the various super funds, and we’ve invited them to consider what’s going on around the world with the way people are managing their money and finances.

The major theme of my presentation is that barriers are collapsing, and that can either be to the benefit of financial organisations like super funds, or to their detriment — certainly to the extent that they may actually themselves be a barrier to people understanding their finances, seeing where their money is being invested, you know, feeling a sense of agency about where this major investment in superannuation is actually being invested and why.

So basically we put it to the funds that on the one hand the barriers collapsing means that there’s huge opportunities: on the other hand, if you are one of the barriers, then this could be me telling you that you are about to collapse.

Specifically in terms of examples of what I pointed to, I’ll give you a really simple, quite a light example from the US.

It’s a website called prosper.com, which is a website that acts like an eBay for finance. You can go online and get a credit, the website performs a very sophisticated credit check just like a bank would, you basically appeal to the community, to the web for money.

You say, “I need $25,000 for a wedding”, prosper.com will say “well, you get an A+ credit rating and your interest rate is 9 per cent”, whereas for someone who is looking for some debt consolidation, you might be paying 30 per cent, or you know, 25 per cent because they are a high risk borrower.

The point is that you can show up to the site as an investor and look at the various risk and returns being offered, and invest as little as $50 or as much as the entire amount being requested, and what we are seeing is that people are more likely to honour a prosper.com loan than they would a loan from the bank, because there’s a perception that it’s peer-to-peer lending, that ‘all of these people that I don’t know come together to make this loan possible and so therefore I’m more likely to pay it back.’

That’s the conclusion that prosper.com have arrived at, and I raise that example because I don’t think superannuation funds have felt any great degree of obligation to offer a genuine dialogue with their members about where their money is being invested and why.

I think it’s interesting to reflect on the conversation that we just got to before your question, which was, should we be assessing superannuation on a 10-year time horizon? Well I think that that’s a really great question.

I’m wondering to what degree the philosophy of superannuation funds in Australia is along the lines of “superannuation should be set and forget, leave it to us, it’s far too complex for you the punter to understand, so just kind of trust us”.

To what degree [this is happening] I’m not sure, I haven’t done a cross-industry assessment, I can’t, but I’m getting a sense from the conversations that I’ve had that there’s a bit of that going on, and I’m wondering how long will that survive?

Because when you have someone like Richard Branson coming in, who travels the world looking for industries where margins are fat, where the operators are complacent, where there’s not a lot of engagement with customers, and he decides that he’ll make the margins slightly less fat but still healthy, and start engaging with the customers in a way that they feel that they actually are part of the dialogue, I think that the finance landscape in Australia could change dramatically.

That’s some headlines, but I’m conscious of the agenda for the whole conversation, so…

Ken Shaw, BNP Paribas: Can I give a slightly different perception?

Tim Longhurst, Key Message: Sure.

Ken Shaw, BNP Paribas: I hear it from my own children. My 23-year-old daughter received a letter in the post and she opened it up, she had no idea what it was.

She asked me, it was actually superannuation. She didn’t even know she was in a superannuation fund. She didn’t know what to do with the money that was set up, or what her options were and she asked me for advice.

Now you can talk about consolidation and all the rest of it, but when you look at it from young people, most people who will have multiple superannuation schemes running came through probably part-time jobs.

They end up within the tourism industry, or the hotel industry, and keep moving through until they finally get a job that they are comfortable with, which is nowadays in their late 20s, early 30s before you get some level of stability.

In that time they could have had five or six different super schemes quite easily, across five or six different industries, and not one of them would have any idea that they are there.

Hence you have these huge build-ups of money that is unallocated, not being managed properly from an individual point of view, not necessarily from a superannuation point of view, no education around it from the early days, from the minute that they commence work, or even from the minute that they move from the last couple of years of secondary school into university.

So they are all left, everybody is left, lacking.

I spoke to someone the other day about this, and even from a superannuation scheme point of view, how often do we engage with our members?

Every six months we send them a statement, it might be every year we send them a statement, and if we actually want them to do something, we have to engage on a far more regular basis and prompt them, because people will do nothing unless they are prompted, but prompting them once or twice is never enough.

You probably have to prompt them on a monthly basis if you want something to happen, and eventually it will sink in.

They will keep getting these emails, or these texts, or whatever it may be, and they’ll think, “I’d better do something about it, because until I do something about it I’m going to keep getting them…”

So from a young person’s view I think it is a big issue for the industry, that whole education and readying people from a very early age, because everybody as a general rule will commence some level of employment that generates superannuation terms of some sort from around about 18 years of age.