Minister for Financial Services Stephen Jones says the Your Future, Your Super performance test must not undermine the national interest by creating a superannuation industry made up of only giant funds.
Jones told the Investment Magazine Fiduciary Investors Symposium in Healesville there are important macro-economic reasons for why funds of all sizes should be allowed to flourish.
“For capital deployment reasons, for the effective deployment of capital within the economy, we need a diversity of size of funds,” Jones said.
“Big funds do big deals; middle-sized funds are more attracted to deals that might not necessarily hit the scale and the benchmarks that are required for the larger funds; and the smaller funds, same again at a smaller scale.”
Jones said the aim of the performance test is to ensure that “funds are viable, that our funds are able, are big enough and robust enough, to be able to provide the services and security that members need”.
“And we’ve seen through a bunch of, for example, cyber-attacks on major institutions, the importance of cyber, this importance of security as a part of a core offering, a core service provision of funds,” he said.
“And to be frank, that is challenging if you’re a small, a smaller, fund that hasn’t got other arrangements in place in order to meet that challenge.”
Viewing the landscape through a macro-economic lens, and specifically how superannuation funds operate as major deployers of capital, Jones said there is “a national interest in ensuring that there is diversity in size”.
“As long as that does not come at the expense of being able to do [those] basics in terms of investing members money efficiently and ensuring that their data their financial holdings are secure,” he said.
Jones said the test should also be focused on ensuring genuine competition between funds, for the benefit of members.
“There has been some debate around whether the existing trajectory is going to have us in the same situation that we have in the banking industry,” he said.
“I think we’re a long way from that concern [but] it would be reckless of us not to have an eye on it. So, I do have an eye on it. I do want to ensure that we have healthy competition and diversity within the industry.
“I think it’s important that we have… competition, not just competition inside the marketing departments of funds, genuine competition, and genuine offering within the funds. And that means there should also be a diversity in size as well.”
Performance test review
Jones said the review of the operation and impact of the performance test would be received by government in mid-December and the government aimed to have its response, including amending legislation, ready before June next year. He said the government was working to a very tight timetable.
“Assuming we can, inside government, come to a landing in February, March, that’s a very tight window to get draft changes out, consult with industry, ensure that there’s not any unintended consequences in our attempt to resolve unintended consequences,” he said.
Jones told the symposium the effective functioning of the superannuation industry relied in large part on developing and articulating an agreed objective for superannuation. He said agreement on purpose was critical to not having superannuation funds be targeted as the providers of capital for every “kooky” economic project dreamed up.
“We think there’s a need in the superannuation area to tie all of this back to a common understanding of what are we doing here,” Jones said. “That’s why the Treasurer has announced that we’ll be legislating an objective of superannuation. We want to get the horse and cart in the right direction.”
“There’s a lot of discussion around taxation measures, there’s a lot of discussion around investment strategies and values-based investment. And we think it’s really important that we anchor those discussions in a clearer understanding of what the objective of super is.”