It is time that APRA, without ambiguity, allowed superannuation funds to offer advice which consider the totality of their members’ situations, argues PAUL SCULLY, a trustee director of State Super NSW.
Superannuation is an area that attracts its share of controversy and passion from time to time, not the least because we are getting older as a society and many of us are at or approaching an age when superannuation assumes an almost visceral importance. Advice is one such aspect of modern superannuation. What kind of advice should funds make available to their members? How should this advice be funded? APRA’s 2001 paper on the sole purpose test cautions that “if…..broader advice is offered, it would be inappropriate for the cost to be borne by the fund”.
Now let’s be clear about APRA having an opinion. It may be helpful to know what the regulator is thinking and as a general guidance note, and it may sometimes act in practice as if it had the force of law, but it is not law; it’s an opinion only. There are many others better placed than I am to discuss just what the law is. I have a more basic question: is the APRA view reasonable?
At the outset, I need to make clear that the fund’s intention is to allow and hopefully ensure members make informed decisions. That said, if it turns out that the law does restrict the scope of advice, then that would seem a perverse outcome. All of us, Government, regulators, trustees, fund executives, all manner of industry participants want fund members to make well-informed decisions about choice of fund, contributions levels, insurance and all the rest of it. In making informed decisions people surely need to look at their overall circumstances and not superannuation in isolation.
As always, a bit on the nomenclature: superannuation, pension and retirements income funds, schemes and systems can be used pretty well interchangeably for this discussion; the lump sum generated by a lump sum-only fund gets converted to income in full or in part at some stage one way or another.
Superannuation used to be about generating an income in retirement but you don’t necessarily have to be retired to enjoy the fruits of superannuation in a transition-to-retirement world. Sooner or later though, working or not, funds accumulated through superannuation will come to fund old age living either in full or in part. This is the fundamental purpose of superannuation: it is there to ensure as best we can, in conjunction with other measures, that we can live “reasonably comfortably” and purposefully in old age and can afford the vital services such as healthcare that will maintain us. And, along the way should tragedy befall us, that we are in position to deal with our needs in this event, or our dependents are in a position to deal with theirs’ through insurance-related benefits.
The World Bank has looked at these issues in perhaps the broadest context of any policy maker or commentator. In 1994 it came up with its Three Pillar model, and expanded that to Five Pillars in 2005/6. The first four pillars in the expanded model cover universal and social welfare schemes targeted at ageing and occupational and personal pension provisioning, whether voluntary or fully or partially funded. The fifth pillar is broad and covers financial and non-financial assets and formal and informal support outside superannuation.
Successive Australian governments have advised that they see the age pension as part of the overall superannuation system in terms of adequacy of income in retirement. The Retirement Income Taskforce (RIT) within the Federal Treasury, for example, tests the combined income obtained from SGC contributions and the age pension against the Henderson poverty line, the ASFA/Westpac ‘modest but adequate’ income standard and various replacement ratios. In my view the age pension was conceived as, and predominantly is, a social welfare measure. This is clear from the fact that means testing governs access to it; it is not a universal benefit that all Australians can factor into their retirement planning, but it is available for them to count as an insurance mechanism in case their other plans don’t work out the way they hope.
What might you find in a superannuation scheme? Contributions and account balances within regulated limits, investment income, taxation, insurance against death and total and permanent disablement, insurance against loss of income until a target age such as age sixty-five… Perhaps even access to ancillary benefits negotiated by the scheme managers in the nature of “frequent contributor” benefits?
What information do members need to decide how much to contribute and insure, and what strategies should be followed to generate a desired investment income? For contributions you need to take account of SGC requirements. You need to target a level of retirement living that is comfortable and realistic. You need to look at the total means available to you to reach and finance that level of living, including other assets such as the home, the goodwill in your small business etc and other benefits such as the age pension and pensioner healthcare cards. You need to decide the best place to fund your retirement living, either inside or outside superannuation. You need to look at what incentives exist that you can reasonably access, e.g. salary sacrifice, co-contributions ……The list goes on. Of course, contributions don’t exist in a vacuum and any projections of their future worth must take into account the investment strategy and environment and other aspects of taxation. The process is necessarily interactive.
In a pro-choice world, to choose an appropriate investment strategy, we need also to choose the fund in which that strategy will reside, and perhaps even the manager to pursue it on our behalf. We need to look at things like risk tolerance, both in an objective sense (based on facts such as age, current net worth etc) and a subjective sense (which is attitudinal in nature). Each potential outcome needs to be stress-tested in a variety of environments. We need to undertake market-wide research to ensure our choice is cognisant of all opportunities…Again, the list goes on. And again, all this must take account of amounts to be invested. The process is yet again interactive!
Now for the sole purpose test. The test requires that the fund is maintained solely for at least one of the prescribed “core purposes”. In addition, if it meets this requirement, it may also be maintained solely for it and at least one of the prescribed “ancillary purposes”. The lists of prescribed core and ancillary purposes are quite broad. Core purposes include benefits for members or their dependants on retirement, death and specified age-attained benefits. Ancillary purposes include termination, ill health and post-retirement benefits, and countenance both members and their dependants.
APRA’s 2001 paper on the sole purpose test (as far as I know this still stands as their view) also acknowledges that the nature of emerging “outcomes” doesn’t “conclusively” determine whether they are covered by the sole purpose test, but rather we should focus on the “purpose” for which the fund is “maintained”. “Provision” is also more than the payment of benefits. It takes account of “other activities” that “support” and enhance benefits “through sound investment practices”.
As APRA sees it, a fund’s governing rules, procedures and practices are the primary sources for judging whether it is maintained consistently with the sole purpose test, and the fund’s planning and corporate governance documents also illustrate the fund’s intentions. In looking at whether a service or action fits the sole purpose test, the fund should seek a “reasonable, direct and transparent connection” between it and the “core and ancillary purposes”. I maintain that genuine fiduciaries cannot assist members to make informed decisions about their superannuation without the advice service looking at their total situations. This has always been the case in my view, but it is even more so in a pro-choice environment – choice-based superannuation is compulsory after all. Not to do so runs the risk of sub-optimal outcomes for members and to adopt such a course in full knowledge of such a risk doesn’t seem to fit with the nature of fiduciary obligations.
It is also clear that the Government’s policy framework for assessing adequacy in old age goes beyond benefits that are specifically within the compass of a restricted definition of superannuation. That framework is constantly evolving as can be seen from the World Bank’s ruminations and the changes made to policy ever so frequently.
By APRA’s own admission, that the outcome may be a financial plan for the member’s overall situation doesn’t mean the fund’s intention, in providing funded access to advice, is to target benefits that might accrue outside superannuation. The fund’s intention is to ensure that the member’s core and ancillary benefits are calibrated within a best practice framework. The link between the financial plan and the fund’s purpose is reasonable, direct and transparent by any measure. To restrict the framework ab initio (from the beginning) runs real risks for the member. Surely that can’t be the regulator’s intention!
Paul Scully is a trustee director of State Super NSW and runs his own consultancy, Decision Horizons.