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Parliamentary Joint Committee on Corporations and Financial Services
05/10/2012

HAYNES, Mr David, Project Director, Australian Institute of Superannuation Trustees

NOONAN, Mr Gerard, Vice-President, Australian Institute of Superannuation Trustees

[10:50]

CHAIR: Thank you for your submission to the inquiry. Would you like to make an opening statement?

Mr Noonan : In addition to being the Vice-President at the Australian Institute of Superannuation Trustees, I am the policy committee chair. I happen to also be the chair of one of the industry funds, Media Super. I should put in an apology for Ms Reynolds, who was due to be here but was called away to Melbourne overnight. I am here instead of her. She is the CEO of AIST.

The Australian Institute of Superannuation Trustees is a national, not-for-profit organisation whose members are superannuation fund trustee directors and officers of industry, public sector and corporate superannuation funds which operate with a representative board of trustees. Our 75 members manage about $450 billion of retirement savings for Australian workers. We as an organisation have been very strong supporters of the government's initiatives firstly to improve the efficiency of the superannuation industry—which is an important matter for us—through the SuperStream initiatives and, secondly, to improve transparency and fairness, primarily through the MySuper initiatives of the government.

We recognise that there are some differences between elements in the superannuation industry and some aspects of the reforms. We have heard some of them today, and we have heard some of them in the past. We think that some of them are exaggerated concerns, but we do note that there is general support from the overwhelming majority of people within the superannuation world for the reforms, even if they have kept us up late at night trying to accommodate them within the timetable set by the government.

However, as with all complex legislative change that impacts on organisations—and, sometimes, on vested interests—there are issues to settle. AIST would like to identify several issues that are of concern or interest with tranche 3. Mr Haynes, who is a project director, will be addressing the committee briefly on five matters, and we would be happy to deal with any questions after that. I hand over to Mr Haynes.

Mr Haynes : Our submission identifies a range of concerns held by AIST. These are concerns that were discussed with the government when they sat down with us and the FSE and the Law Council of Australia and the AFA and significant others last week. This is part of a significant and extensive consultation process that has continued, with a break, since the start of last year—a period of about 20 months.

CHAIR: I am sorry to interrupt you, Mr Haynes. Can I just clarify that you said that the Law Council were engaged last week in roundtable discussions about this legislation?

Mr Haynes : Yes, they were.

CHAIR: Thank you very much. That is different from the evidence we received earlier. I just want to put that on record.

Mr Haynes : That is why I mentioned it, Chair.

CHAIR: Thank you very much.

Mr Haynes : My introduction identifies the five key concerns and the way in which we think they should be addressed. Firstly, I sound a note of support for the legislation. Transition to a new system always involves challenges. This is especially the case with a system as complicated as superannuation. The arrangements for identification of accrued default amounts, which have been the key focus of the committee this morning, are a sensible approach to transition that offer the best transition for the largest number of people. Funds will have until 1 July 2017 to transition accrued default amounts. We say that this transition period is already too long and will result in many people paying higher fees and commissions on their super for longer than they should.

There should be no further carve-outs from the transition of accrued default amounts on to MySuper. The idea that accrued default amounts have to meet some sort of additional criteria is, we think, unhelpful and wrong-headed. There have been some earlier comments today about accrued default amounts which we say do not hit the mark. These comments did not acknowledge the active role of trustees in designing a suitable MySuper product for their members. My response is that funds will not be hamstrung to the extent that was suggested and this is a process that funds in both the retail and the not-for-profit sector are involved in as we speak.

The trustees will have some control over the process and structure of their MySuper offerings. Each trustee offering a MySuper product needs to design a product that meets the needs of their members and be MySuper compliant. This is not a role for government or the regulator; it is a responsibility of the trustee. Each trustee must ensure that their design product does not disadvantage their members. If they cannot do that then the proposed APRA prudential standard dealing with MySuper transition—that is, SPS 410—obliges the trustee to take other steps to protect the interests of members. For example, funds can have a cash heavy default option now and can have the same investment option as their MySuper investment asset allocation, provided that they can satisfy APRA that this is the appropriate diversified investment option having regard to the nature of their members.

Furthermore, the MySuper transition rules fast-track the authorisation process for funds whose MySuper default product is essentially the same as their existing default option. My understanding is that, for example, the BT Super for Life product can be and is likely to be rebadged as the BT MySuper product and is also likely to be using that fast-track mechanism. But of course that is a matter that can be checked with BT or the FSC if that is necessary. This will include circumstances where the fund has income protection insurance in both the existing default and the proposed MySuper product.

We all support engagement but there is almost universal acceptance that there are low levels of engagement now. This was a key driver in the design of the MySuper product. However, the earlier suggestion that 30 per cent of members are engaged with their superannuation is, we believe, significantly overstated. I believe the Cooper review found a significantly lower level. I understand that the industry standard for response to mail-outs, for example, is generally between eight to 12 per cent.

Our second issue—and I will deal with the remaining issues quickly in view of the time—concerns the requirements for a product dashboard. Disclosure is critically important but it must not be misleading and it must be designed to provide members with a real, accurate and useful understanding of a super product and assist comparisons with other super products. We believe that there are real problems with both the framework for the product dashboard in the bill and the more detailed structure unveiled by APRA in their recent discussion paper about reporting by super funds. That is why we say that the product dashboard provisions should be excised from this tranche of the legislation, subject to further consultation with the super industry, and be reintroduced in a clearer, more consumer-friendly version in the fourth tranche of the MySuper legislation, which brings me to my third point.

The reporting of super information to the government must be in a way that delivers on the policy objectives of the government and supports the efficiency of both the government and the super industry, because to do so otherwise would impose additional costs on ordinary Australians. Each government agency is focused on the fulfilment of their requirements under the StrongerSuper package. APRA is going to be implementing the investment reporting requirements. ASIC will be overseeing portfolio holdings disclosure. We support both of these are initiatives, but unless there is an overriding and explicit requirement to gather this information on a consistent basis and despite the best intentions of very high quality regulators, duplication, confusion and inefficiency can arise. That is why we propose a legislative basis to require cross-government consistency as well as the implementation of specific initiatives. Fourth, we draw the committee's attention to the proposal we make to allow funds to have a cap on asset based administration fees in order that they can deliver the most equitable fee structure for their members.

Fifth, and finally—again, in view of the time—we draw the committee's attention to the problems that will arise by allowing eligible rollover funds to continue to be a mechanism by which millions of Australians will continue to pay hundreds of millions of dollars in unnecessary fees every year as a result of what we say is an oversight in the legislation. This will arise in two ways. One, there is no requirement in the bill for an eligible rollover fund to locate missing members and reunite them with their missing super. Two, flipping of members into ERF in order to extract higher fees remains possible, even though many other avenues for flipping have been closed off. These problems are easily and simply addressed, and our submission proposes legislative wording about providing additional trustee obligations to locate missing members and providing prohibition on flipping into ERFs.

I emphasise, in concluding, that AIST is a strong, active and public supporter of the Stronger Super reform package and that these comments are made with a view to making the reforms even better and more robust.

CHAIR: Thank you very much. You paint a rather different picture of the level of engagement from what we have heard this morning.

Mr Haynes : I think this is a fundamental question. The Cooper review, after very extensive consideration of the Australian superannuation system, found that the overwhelming majority of Australians were not engaged with superannuation, that people were paying high fees for services that they were not aware of, and that in many cases—particularly in the retail sector—people were paying commissions for financial advice that, again, they did not know about and did not avail themselves of. In response, the Cooper review recommended a simple system that did not involve fee gouging or unnecessarily high fees for people in this category but supported initiatives to encourage people to be engaged about their super and to make active decisions that would see them move out of the MySuper regime and take more active decisions—in particular, in relation to their insurance strategy.

Mr Noonan : I think I can perhaps add to that. As far as engagement is concerned, were there to be higher levels of engagement that we were monitoring, we cannot see how there would be 33 million superannuation accounts when there are only of the order of 12 million people who are effectively eligible to have a superannuation account, other than cases of some odd expression of choice to maintain three—or four, in some cases. To us, those kinds of gross figures at an epidemiological level are indications of not much change in the level of engagement. I know within my own fund, Media Super, approximately 20 per cent of the membership has at some stage in the past, once, chosen to go to an option other than the default option. During the height of the GFC, even, we monitored movements of members in a choice regime—so they were able to move within the fund—and we were monitoring levels of the order of six to eight per cent. A few funds had slightly higher figures than that, but it was of that order. So our general submission is that the idea that there is far greater engagement than that is exaggerated.

CHAIR: Perhaps you could give us your insights into the issues that have been raised this morning regarding insurance and insurance products. You did mention it in your opening comments, Mr Haynes. There seems to be very significant concern raised here this morning about insurance, but you seem to offer a different view, because of the trustee's capacity to provide a product that might address that concern.

Mr Haynes : A MySuper product is a value-for-money product that has particular investment characteristics and for which a trustee has higher obligations. There are certain minimum requirements in relation to insurance in a MySuper product in terms of having death and TPD offerings, and there is the opportunity for funds to also offer income protection within MySuper and more widely. There are limitations on the sorts of insurance that can be offered within superannuation generally, and that is reflected within the MySuper product. But a person can have additional insurance within a MySuper product. They can have additional insurance within an existing default product, and they can have that additional insurance within an existing default product transferred—it will be automatically transferred—across to their MySuper product. So they will not lose insurance in that circumstance.

CHAIR: Is that the general case, that there will be no loss of insurance as things are transferred?

Mr Haynes : The exception, which is identified in our submission, is in relation to own-occupation insurance. AIST supports ongoing access to own-occupation insurance, but the prohibition on that is not specific to MySuper; it is the adoption of a rule that will not prohibit the offering of such insurance across superannuation generally.

CHAIR: Would you expand a little on your submission to us regarding eligible rollover funds.

Mr Haynes : ERFs have a special role in the superannuation system as a repository for small, lost and inactive superannuation accounts. There are almost 30 million accounts that have been reported as lost and very many of those are held within eligible rollover funds. Historically, and with the noted exception of AUSfund, those eligible rollover funds have tended not to take steps to relocate those members with their active super, or indeed to find current addresses for those members. A number of years ago the Inspector-General of Taxation found that if the tax office was allowed to use all the tools at its disposal it in fact would be able to find homes for $19 billion of the $20 billion worth of lost super money. What we are saying is that, as a superannuation fund with a special role, that special role should be clearly and explicitly identified within the additional trustee obligations of ERFs—one, that they should find current addresses for lost members; two, that they should take active steps to encourage those members to be reunited with their lost super; and, three, that the process of transitioning from a MySuper product into an eligible rollover fund should be subject to the same anti-flipping rules that protect members against being charged higher fees.

Mr FLETCHER: Regarding the comments you just made about insurance, I think I heard you say that there is no particular reason to be concerned about members losing insurance as a result of moving across to MySuper. Is that right?

Mr Haynes : That is correct.

Mr FLETCHER: Where you here this morning when others put a different view?

Mr Haynes : I have been here for some of this morning's hearing.

Mr FLETCHER: Did you hear anybody putting a different view to the one you have just put about insurance?

Mr Haynes : I heard the opening witnesses suggest that the hands of trustees may be tied in relation to their insurance offerings, to which my response is: it will be that financial institution that has designed the existing default option and the existing insurance offering that will be designing the MySuper offering. So it is really their choice about whether there will be a significant difference in the existing default option.

Mr FLETCHER: Can I just understand something on that point. As I understand the way the insurance works, typically there is an arrangement struck between the fund and an insurer. Is that right?

Mr Haynes : That is right.

Mr FLETCHER: And under that arrangement a premium is struck which typically varies by member age. Is that right?

Mr Haynes : Yes.

Mr FLETCHER: In terms of the amount of coverage you get per premium paid or per week, for example?

Mr Haynes : Yes, there are a number of ways of doing it, but that is one of the ways. There can be a fixed premium, or there can—

Mr FLETCHER: I suppose what I am getting to is that it is not entirely within the discretion of the trustee as to how the insurance arrangements are established, because they need to contract with a third-party insurer.

Mr Haynes : And the relationship with the insurer is central to the operation of a superannuation fund, and superannuation funds have been managing those arrangements with insurers throughout the existence of the Australian superannuation system.

Mr FLETCHER: What I would like to get your views on is the scenario that has been put to us by a number of witnesses. The logic, as I understand it, runs as follows: firstly, that there will be a communications process to members and if members whose holdings are caught within the definition in proposed section 20B in the SIS Act do not respond then they will be defaulted into the MySuper product. That is right, isn't it

Mr Haynes : Essentially, yes.

Mr FLETCHER: Then what I understand has been put to us is that the expectation is that there will be a proportion of people who do not respond.

Mr Haynes : Yes.

Mr FLETCHER: What has also been put to us is that that is likely to include people who have insurance cover which they had obtained through their existing superannuation product.

Mr Haynes : Yes, but there are steps before that to ensure that a member is not disadvantaged in that process.

Mr FLETCHER: Can you expand on that.

Mr Haynes : APRA has released a draft prudential standard called SPS 410, and that provides for, effectively, two mechanisms for the transition of members from an existing default into a MySuper product. One of those is in relation to funds who effectively just rebadge their existing default option as MySuper, and that is a fast-track mechanism. For funds who decide to have a different MySuper product, including in relation to changes in fees, changes in investment strategy or changes in insurance, that will trigger additional notification requirements and APRA will be actively engaged with those funds to make sure that the members of those funds are not disadvantaged.

Mr FLETCHER: So additional notification requirements might hypothetically mean that, rather than just one letter being sent to members, there are a couple of follow-up letters—that kind of thing?

Mr Haynes : I would imagine that APRA will take all necessary steps to ensure that members are not disadvantaged in the transition process.

Mr FLETCHER: Obviously I share your faith in the omniscient capacity of regulators, but let me take a more gloomy perspective, or ask for your views on the more gloomy perspective that has been put. The scenario, as I understand it, is that there will be members of a fund who do not respond, and the consequence is that their membership of the existing product is terminated and they are moved in the MySuper product.

Mr Haynes : First of all, my position is not that APRA is omniscient in this thing.

Mr FLETCHER: I accept that.

Mr Haynes : It takes two to tango, and the other party is the trustee. The trustee has a fundamental responsibility to manage—

Mr FLETCHER: Okay, accepting that point—

Mr Haynes : It is absolutely fundamental.

Mr FLETCHER: I understand, but other witnesses have put to us that some of these provisions attempt to impose duties on the trustee which are in fact difficult for the trustee to discharge. But let us put that to one side. I just want to keep working through and test and get your view of what has been put to us by several other witnesses. The scenario is that the member exits their existing product because they have not responded and they are defaulted into MySuper. It has been put to us that a potential consequence of that is that their existing insurance product ends because no more premiums are being paid.

Mr Haynes : I would say that a trustee who lets it get to that stage is being negligent in relation to the—

Mr FLETCHER: But let us be clear: the trustee is under a statutory duty to move the customer, the member, into the MySuper product if the member has not responded.

Mr Haynes : First of all, the MySuper product into which the member is moved will be a product that is designed by that trustee. There will be parameters and statutory rules governing the—

Mr FLETCHER: Understanding all of that, is it right or is it not right that the trustee would be under a statutory duty to move members who fit within that definition in proposed section 20B into the MySuper product if the member does not respond to the communications?

Mr Haynes : Not necessarily. If the trustee cannot come to the view that it cannot adequately protect its members in the transition process, my understanding is that SPS 410 requires that trustee to contact APRA to determine what alternatives are available in that circumstance.

Mr Noonan : Mr Fletcher, if I could add one thing. I think there might be a misunderstanding about what currently exists within what you would call default arrangements as far as insurance is concerned. As for almost all of the funds that we are associated with, members of those funds have different levels of insurance to begin with. They typically range from insurance cover of somewhere between $80,000 for life cover and up to a million dollars in some cases—and I know in my fund there are those as well. That would be also the case for total and permanent disability cover. So that is a matter of choice even though they are actually in the default one. Some funds have opt-in arrangements and some funds have opt-out arrangements and, as you mentioned earlier, there is a difference between people of different ages. So it is not as though in the current default structure there is 'one size fits all' insurance; there are many, many—

Mr FLETCHER: Thank you; I understand that. The question I am trying to get to is about your views on the evidence that has been put to us by other witnesses that a consequence of these provisions is that there will be members who are defaulted across to a MySuper product with the consequence that their existing insurance arrangements are terminated. It has been put to us that that could lead to members now needing to get, for example, life insurance or income protection insurance under the MySuper product but not meeting underwriting criteria that they met 20 years ago because they are older and more susceptible to injury, illness et cetera—recognising that those criteria are set not by the trustee but by the insurer. I would like your response to that. Is that a real risk in your view?

Mr Haynes : No. I think that situation would not occur because the trustee—and this really is not a MySuper specific question; it is about the ability of a fund to be able to get group insurance for its members and sometimes that is challenging but it is a challenge that the superannuation industry—

Mr FLETCHER: It is a quite specific question about the transitional consequences given that there is a substantial number of people today who have insurance under their superannuation fund. It has been put to us that there is a risk that when people are defaulted into MySuper their existing insurance arrangements will terminate and they will not be able to get insurance of an equal amount of coverage under the new arrangements.

Mr Haynes : No. I think there is no evidence to suggest that funds will be unable to obtain suitable insurance cover for their members in a MySuper product at least at the level that applies—

Mr FLETCHER: Let me make sure I am understanding that. What you are putting to the committee is that there is no risk that individual members when they get defaulted into a new MySuper product will have their existing insurance cover terminated and not be able to obtain cover at the same level.

Mr Haynes : There is no guarantee that a fund will always be able to get insurance cover, but in the case of MySuper there is actually greater protection because a MySuper product is required to have default levels of death and TPD cover.

Mr FLETCHER: Mr Haynes, that was not the question. The question is: is there a risk that because people who have coverage today will be defaulted into a MySuper product by the operation of the legislation they will end up with poorer insurance cover than they presently have?

Mr Haynes : I do not believe so, because of the obligations on the trustee and the potential protections that are provided by APRA.

Mr FLETCHER: What if the trustee is unable? What you are effectively saying is that the trustee will always be able to obtain an arrangement with an insurer with respect to the MySuper product that says, 'Every member who comes in who is defaulted into this MySuper product can preserve exactly the same degree of insurance cover as they presently have, bearing in mind it might in fact be from a different insurer.'

Mr Haynes : In relation to the specifics of your question, there is always a challenge for funds in getting appropriate insurance for their members. That challenge exists irrespective of the existence of MySuper and the transition of people into MySuper.

CHAIR: I notice in your submission that you indicate that originally this accrued default amounts transition to the MySuper structure was scheduled to be 1 July 2015. In subsequent conversation with the sector the date has been changed to 2017 to allow this period of consultation and change. I understand you are not particularly happy about the delay, but that is a response to the sector. Is that a fair reading?

Mr Haynes : I was very surprised to hear people say that there has not been adequate opportunity for consultation. The complaint I have heard from all parts of the industry is that we have been overwhelmed with consultation and very significant parts of the legislative package have changed in response to that, including the government extending by three years the period that is available to funds to transfer accrued default amounts. I would have thought that is a very significant concession and is much more than a reasonable period of time that is needed for people to address the sorts of issues that have been raised today.

CHAIR: You strongly urge us to resist calls to water down the provisions for the transition to MySuper. Do you want to give us a summary of why we should not do that?

Mr Haynes : It was the finding of the Cooper review. It has subsequently been confirmed I think in the Stronger Super consultations that as a whole people are paying too much in fees to have their superannuation managed and that many people are paying commissions for services they do not know about and/or do not use. The MySuper structure provides an alternative for the majority of Australians who are in that disengaged state and provides the ongoing challenge for people to become more engaged with their super.

CHAIR: Thank you very much, Mr Haynes and Mr Noonan. Thank you for your evidence today.