Policy change - a never-ending story

In the wake of both reform and Government inquiry, it seems opportunities for the super industry to truly take stock, to assess whether reform has met its intended policy objectives, remain few and far between. And yet that is exactly what trustees and their executives must do.

Indeed while David Murray's Financial System Inquiry may comprise much of the super industry's policy future, MySuper and SuperStream represents its past and for Danielle Press, Chief Executive Officer of Equipsuper, there are learnings to be made.

"In the case of the MySuper legislation, I think it was akin to using a sledgehammer to crack a peanut," she said. "From my point of view, if MySuper was about creating a simple, low cost superannuation solution, the default schemes within the superannuation system were generally low cost and simple products already."

"What it has done though, is encourage funds to take a step back and review what they're doing in the default space," Press continued. "And because this industry probably hasn't reviewed product as much as we should have, that's been a good thing."

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"I don't think that it was the legislative intent but MySuper has forced a real review of what we do for default members and, in that regard, its been hugely positive."

Yet according to Press, it is interesting to note what may have been the unintended and unforeseen consequences of MySuper's introduction, firstly in terms of product rebadging and secondly, with regard to how price is balanced against value.

"So when it came to actually implementing MySuper products, funds had very different approaches," she said. "Some funds simply rebadged their default, others really did take the opportunity to review and then change their default, and then in the retail space many chose to shift to a lifecycle investment approach."

"But the other thing that's come out of different funds' product development efforts is this really challenging conversation around price versus value," Press added. "And thats an important conversation to have because while someone will always be able to do superannuation cheaper, that doesn't necessarily mean that they're doing it better."

Similarly recognising that these as two key topics of conversation that had arisen during MySuper's rollout, Pauline Vamos, Chief Executive Officer of the Association of Superannuation Funds of Australia (ASFA), said that rebadging of default investment options had been a perfectly logical strategy for many super funds.

"Some funds did it because they felt that was all that they needed to do," she said. "Their default option was already low cost, well diversified and often actively managed."

"What they had already had the look and feel of MySuper," Vamos continued. "And while that's now the minimum standard that all funds have to comply with, the fact that some funds had that minimum standard right out of the gate was undoubtedly a good news story."

Yet for Vamos, the price versus value debate was clearer cut.

"So because so much of the conversation has been about comparing funds cost rather than net return, there seems to be a perception that funds are being pushed towards a more passive investment approach," she said. "And if that's the case, then we have a significant issue."

"The focus for this industry, including the focus that we communicate to consumers, has to be about one thing - what they're actually going to get in their retirement," Vamos explained. "The key questions we have to be able to answer are ‘what income are they going to receive' and ‘what type of lump sum are they going to be able to retire on.'"

"That's what people are interested in and that's where the true competition should happen across the industry."

Interestingly, David Haynes, Executive Manager Policy and Research for the Australian Institute of Superannuation Trustees (AIST), said that while product development and cost had received a great deal of attention, MySuper hadn't just been about the creation of a simple, low cost product.

"More importantly, it was about creating a product that had high levels of protections for disengaged members," he said. "And even though the issue of member engagement features at every single superannuation conference that you go to, the reality is that the level of engagement in super is still very very low."

In fact for Haynes, the broader member engagement question remains a work in progress.

"For instance, I don't think MySuper was ever intended to resolve issues of member engagement or disengagement by itself," he said. "There are other aspects of Stronger Super, particularly in relation to reporting and disclosure, things that provide usable and useful information, that should help people to have a better understanding of what their superannuation is doing and how to compare it to other products."

"To a large extent, what people need is to have confidence in their superannuation and, in the first instance, that confidences comes from knowing that someone is looking after your money when you're not particularly engaged with it," Haynes continued. "So did MySuper entrench disengagement? I don't think so."

"I think as peoples' account balances get bigger, as they get older, and as they naturally want to find out more about their superannuation, some of the tools that MySuper and Stronger Super have put in place, particularly some of the disclosure and comparison tools, will actually make it easier for them to be engaged and make informed decisions."

Offering a similar perspective, Press said that MySuper hadn't necessarily changed whether members were more or less engaged with their superannuation.

"But what we did see as a result of the MySuper changes were a number of members who we had incorrectly assumed were default," she said. "So when they received their 17 page letter about being rolled into our MySuper product, we had a number of people come back to us saying ‘hang on, I chose to be in that fund!'"

"So even though they were in our default investment option, they were there because of an active choice," Press continued. "And what that means is that we have to be very careful around engagement and what that means."

Thus for Press, it will always be incumbent on funds to ensure they're engaging members in the right way, at the right time and with the right information.

"But the problem is that our industry has a great desire to talk to itself as opposed to talk to our members," she said. "So we continue to do that and then say ‘oh, but everyone's disengaged.'" "Well maybe if we talked to our members in a way that worked for them and not us, and in a way that ensured their understanding, well maybe then we'd get better levels of engagement."

Of course not all aspects of the Stronger Super reform have been quite so topical. And while SuperStream's distinct focus on efficiency was clearly very different, Press said that it had been met with far greater success because at the end of the day, it just made sense.

"So think about the things that SuperStream was targeting," she said. "Taking six to eight weeks to do a rollover - I mean, really? Continuing to use cheques?"

"SuperStream has forced a change where there would have been no competitive advantage for funds to make the change early or by themselves," Press continued. "It had to be system-wide, all-in and so what SuperStream did was force that change and force that technological advancement."

"And to be honest, I don't think we've seen all the benefits yet - they'll come down the track from getting contributions online and having a regulatory framework in place."

Elaborating on Press' assessment, Haynes said that previous attempts to modernise the backoffice had faltered because there had been no first mover advantage.

"There wasn't much point in upgrading your systems and upgrading your capacity to communicate with other parts of the industry if those other parties didn't have access to the same technologies," he said. "So it made a whole lot of sense to introduce SuperStream under a government mandate."

"It meant that people would use the same data standards, hence universal data standards, and the same sorts of e-commerce," added Haynes. "But because it is such an enormous project, its important to realise that implementation is still under way."

"We've started with rollovers but with contributions representing more than 90 per cent of the industry's transactions, with different employers, different levels of readiness and capability, there's still a lot more work to be done."

According to Vamos, SuperStream continues to have three key components.

"The first part, which has been substantially delivered, is the build of the tax system," she said. "So that's the ATO (Australian Taxation Office) system and on the back of that, we've already seen enormous benefits for consumers in terms of their experience with super."

"They can now consolidate their accounts much more easily because the Tax Office has everybody's account details on file and, as a result, we're able to get far better levels of consolidation."

"So SuperStream's first order of business was improving consumer's experience with super and that's now happened with respect to account consolidation and finding lost super."

The second aspect, according to Vamos, was rollovers.

"So rollovers are in and, for the most part, electronic rollovers are happening," she said. "And again, that is a huge consumer win because rollover time is substantially reduced, account consolidation is easier and the fees consumers could potentially be paying two or three or four times over are minimised."

"But the third focus for SuperStream is the electronic collection of contributions and that's the piece that isn't finalised yet," Vamos continued. "We're still in build mode, still need to spend substantial sums of money as we create those new systems and on-board nearly 800,000 employers but the industry, the ATO and our regulators are working hard to ensure its successful."

"Its a complex project but this is where the true efficiencies lie."

Yet if the implementation of superannuation policy was defined by MySuper and SuperStream in 2014, then it seems a delayed rise of the Superannuation Guarantee (SG) from 9 to 12 per cent stood next to such reforms in stark contrast.

And while much of the industry recognises that the Government is under budgetary pressure, Haynes said that concerns over the ramifications and repercussions remained.

"The concern that I think the entire industry has is that this is perhaps a signal that the current government isn't as committed to superannuation as previous governments," he said. "And if you were to line up what the Government has done in relation to the SG and what they've done in relation to the Low Income Superannuation Contribution (LISC), which is going to be repealed from 2017, then those concerns are warranted because, to our mind, that particular reform was regarded as a very progressive measure and one that provided significant assistance to low income Australians."

For her part, Press said that she shared Haynes' concerns.

"You always sound vested saying this when you run a super fund but I don't think there's any doubt that delaying a rise in the SG has serious repercussions when it comes to peoples' adequacy in retirement," she said. "If you do the maths, nine per cent on most salary bases simply isn't enough to get you into a replacement income that looks like 70 per cent of your base salary, which is what most people are going to require."

"For me that's compelling, particularly when you consider Gen Z and Gen AA - an extra $2.50 per month gives you $15,000 to $16,000 in retirement if you start early enough."

Indeed for Vamos, the equation was simple.

"The only way most people can accumulate substantial balances is by putting in a little bit over the longer term," she said. "So if we want the majority of Australians to not rely on a full age pension and to have a comfortable rather than a modest standard of living in retirement, then we need to get to 12 per cent and even 15 per cent as quickly as we can."

Of course while MySuper, SuperStream and a delayed rise in the Superannuation Guarantee may represent policy either implemented or already in-train, it seems Australia's super industry will shortly receive further policy direction from David Murray's Financial System Inquiry.

And according to Press, while Murray made a number of important points within his final report, it was his focus on post retirement that was critical.

"So from my perspective, there was an interesting interplay between how the savings system works with or without the pension system," she said. "But regardless, that focus on post retirement and adequacy is critical."

"And contribution caps, preservation age, product - it all comes into it," Press added. "In fact, preservation age is a really interesting debate and discussion, particularly when you start changing the retirement age because if you start lifting the retirement age, there's a natural argument that would say ‘well surely the preservation age should lift as well.'"

"But I would actually argue that you want to have a gap between those two because there will often be instances where people just won't be able to work past 65."

Press pointed to Equipsuper's own members as the example.

"Most of our members are in blue collar work and they work hard, they work physically hard," she said. "They're not going to be able to work past 65."

"So if you say you can't touch your superannuation until you're 60 or 65 or whatever that gap looks like, what are they going to do in the mean time?" Press asked rhetorically. "So there has got to be a real debate and a real focus on what the preservation age is actually there for, what it means for people and how it interplays with both the pension and an individual's retirement age."

Not surprisingly, Press said that similar logic could be applied to contribution caps.

"If you want people to be self funding in retirement, then you've got to allow them to save," she said. "Some of the issues I have with contribution caps are that by the time you hit 40 (though it may be more like 50 or 55 now) and you've actually got the ability to put money into superannuation, many people can't."

"So there has to be a real focus on what is sustainable and what is equitable but also what the system is actually designed for," Press continued. "And the system is designed for getting people off the pension because the more self-funded retirees we have as a country, the better that pull on the pension is going to look longer term."

Highlighting Murray's focus on product, Haynes said that following the Cooper Review's recommendation that more design work was required, it had not been surprising to see Murray's own recommendations on that front.

"But where we part company with Murray is that he thinks there should be some sort of mandated hybrid post-retirement product," he said. "That hybrid being a product where you have retirement income streams on the one hand, which are account based pensions, mixed in with a longevity product which offers a lifetime income stream."

"And while we think there should be policy support given to the development of longevity products, their use and their structure shouldn't be mandated for all funds," Haynes continued. "There are a lot of industry funds, for example, who have a very large number of members but their average account balances are still quite low, even upon retirement."

"So for many of those members, perhaps even most, it's not going to actually make sense for them to be required to be in a longevity product when they retire, particularly when an income stream product is probably more appropriate."

According to Vamos, the Financial System Inquiry asked some all too valid questions around the goals of Australia's superannuation system.

"And as the Financial System Inquiry said, the goal of this system or the purpose of this system must be to provide an income stream that replaces or supplements the aged pension," she said. "And so we have to put a measurable goal around that."

"In our view, that means that for the system to be sustainable and to be effective, under 50 per cent of people by 2050 must have access to the full age pension," Vamos explained. "And taking that further, that means that well over 50 per cent should at least have a comfortable standard of living and that the cost of the system should be no more than 6 per cent of GDP (gross domestic product)."

"So what we need to do is look at those goals and set policy around that."

And to that end, Vamos said that the super industry was already well aware of what had to be done in order for it to achieve those policy aspirations.

"We know that in terms of income streams, there are significant regulatory impediments to actually developing income stream products," she said. "We've got to remove those impediments and the work that Treasury did last year will clearly go a long way to resolving that."

"We've got to move forward on this - we know the answer, we know that not everybody needs longevity risk managed but that they do need inflation risk managed," Vamos continued. "Not everybody needs flexibility in access to capital but some certainly do."

"All in all, there are six categories of income streams and how each of those categories interrelates to the age pension and social security is the next step of the journey here."

Of course if the industry were to take a step back, it certainly seems as though Australia's superannuation system is performing well above par. Benchmarking has proved that and policy to date has supported that but for Press, the question is what the industry, its regulators and the Government needs to do to ensure that status quo remains.

"The area that the superannuation system always seems to fall down on is around the post-retirement piece," she said. "And I think it is really important that we do start on focusing on what de-accumulation looks like because if we thought accumulation was hard, de-accumulation is even harder."

"So in my mind, 2015 will be the year of the pension product, whatever that actually ends up looking like," Press continued. "But the other thing I'd say is that we can't as funds just focus on that one piece."

Indeed for Press, while it is tempting to focus on pensioners and retirement and the work still to be done, super funds could not allow themselves to lose sight of the needs of younger members.

"We've got to make sure that we're still engaging with our younger members and making sure that we're still relevant to them as well," she said. "Because if we don't, they will shift into other funds, other products, other options."

"So I don't think there's any doubt that 2015 is going to be a challenging year for super," Press continued. "And I guess my hope is that we can focus on what actually matters and that's our members."

"We can't get caught up in policy arguments or debates around things at the margin as opposed to worrying about what actually matters to our members because, at the end of the day, that's why we're here."