The superannuation industry should follow the leads of the banking and insurance sectors and develop its own code setting out minimum service standards for fund members before government imposes ill-fitting regulation on it, the Investment Magazine Chair Forum has heard.
Former ASIC Commissioner and now chair of Insignia Trustees Danielle Press told the forum that if the industry does not develop a code for itself the government is “going to do it to us, and it is not going to be what we want, and it’s going to be tick-the-box”.
“I think we should think about having a customer code,” Press said.
“Banks have it, insurers have it. We don’t have a code. How do we hold ourselves to account and self-regulate ourselves? We’re always waiting for government to give it to us, and I think that’s really problematic.”
Press said waiting for government to set the rules is already holding the industry back from delivering better services and outcomes for members that are possible under existing settings.
Press said there is “no doubt in my mind” that further changes are needed to the regulation of financial advice to support funds offering retirement solutions to members. But there is a lot funds can already do, which many are not doing.
“I still believe fundamentally that we can do more under the current legislation than we currently are,” Press said.
“And we heard it earlier [in the forum] when someone said, oh, we had this great communication [program for members], and then we gave it to legal, and legal said ‘No’.
“Well, I think it’s incumbent on us to actually challenge that ‘No’, because when I sat at the regulator for five years, we were not saying you can’t talk to your clients. There’s a whole lot of stuff you can do under general advice that is not personal advice.”
Press said there is nothing currently preventing a super fund from communicating to members, for example, that there is 15 per cent tax on money in accumulation, but there’s no 15 per cent tax on money in pension phase.
“There is nothing wrong with saying that,” she said. “How we say it is important – you can’t go and say, ‘you should change your fund’.
“But there is a lot that we can do, and I just don’t think we’re doing it. I don’t think we’re brave enough. And even at Insignia, I’m challenging my communication team to say, ‘Well, what really does the law say?’.”
Don’t wait for government
Press said the key message to the chairs, boards and executives of superannuation funds is “don’t wait for government”.
“It’s about making sure we are challenging the ‘No’, not just going, Oh, OK, it’s too hard. Because I don’t think we can wait for government. It will be too slow.
Press acknowledged that achieving consensus within a sector as diverse as superannuation could be challenging, but that shouldn’t stop it.
“The banks have done it, both the listed and the customer-owned banks have done it,” she said.
“It happens, and it’s been done in very diverse industries many times.
KPMG national sector leader, asset and wealth management, Linda Elkins said an industry-developed customer code would be an opportunity to demonstrate to government and to customers that it is serious about addressing service standards generally and about addressing issues relating to vulnerable customers in particular.
“We’ve certainly been put on notice around death benefit claims,” Elkins said.
“But who are the other vulnerable customers? When we get into the retirement space, issues like dementia or elder abuse, they might be examples where within this code, [where] we get front-footed back to regulators to show how we’re thinking about those really, really serious issues.”
Elkins noted that as the superannuation industry continues to grow, it will be subject to increasing regulatory and public scrutiny and demands on it to serve members well will only escalate. And a growing pool of funds will make an irresistible target for fraudsters and scammers.
“Super funds will be receiving contributions, making pension payments, making one off payments to more and more a higher proportion of their membership,” she said.
“My hypothesis will be those members will also become more demanding around how that payment system performs.
“I would argue they’re going to expect their super fund to behave much more like a payment platform. And whether I’m right or wrong, super funds, pension funds, are going to need to have the operational capability and security at the same level as a payment platform.”
Elkins said this explains why the regulators are so keen on making sure controls and compliance are fit for purpose.
“When you look at the size of possible fines for breaches in this area, it still may not be systemic from a system perspective, but certainly at an individual fund level, it could be catastrophic,” she said. “[And] for the individual member that it might impact, again, catastrophic.”
On the RBA’s radar
Australian Retirement Trust chair Andrew Fraser said that “what it takes to run and lead these funds and to govern these funds has changed” over the past 10 years, and the growing stature of the sector was reflected in the attendance at the forum of Reserve Bank of Australia assistant governor Brad Jones.
“I’d connect Brad being here, as an assistant governor from the RBA and the very fact that he was here, that he was talking to us and what his message was, back to the point that … it’s a reflection of the size and the growth of the industry, and indeed, the funds inside the room,” Fraser said.
“That’s just an underpinning message for all of us that the game has changed
“What it’s going to take for the future means we need to think about what it takes for the future,” he said. “Nostalgia isn’t going to help us on that. We’ve actually just got to lean into that, and that’s our new reality.”
The new reality includes thinking about members’ best financial interests not only during accumulation but also as they move into decumulation, Fraser said. There’s a danger in things becoming over-complicated in the pursuit of hyper-personalisation, when there are some really simple, big wins that almost can happen by default.
“When we think about retirement, we as an industry have had a really discordant view about retirement [compared] to accumulation, in that a My Super product with group life insurance is, for the most part, especially in a lifecycle [product], a quite paternalistic product,” he said.
“We make all these decisions; we roll people through different asset allocations; we say here’s this group insurance product, it’s not specifically tailored to you, but it’s value for money, and it’s better than not having insurance at all.”
Fraser said the philosophy of defaults that works so well for most members in accumulation seems to be forgotten when a member retires.
“As one of our folk at ART likes to say, the default in the Australian system is staying in accumulation,” Fraser said. But when a member retires the conversation suddenly expands to say, “we need all these things, including particular advice for people to try and get the most personalized retirement outcome”.
“Actually because of the 15 per cent difference between paying tax and not, there’s a massive window where we don’t have to optimize to the last basis point to ensure many people are better off,” Fraser said.
“There is 15 per cent there that says if you put these people into an income-based account, a pension account, they’re going to be better off.
“The challenge for us is, why do we think so directly and with such clarity about what we should do all the way to the end of the My Super product, and then our system effectively says you’re on your own [in retirement] – it doesn’t actually make sense, in my view.”
A different way of thinking
Challenger managing director and chief executive officer Nick Hamilton said the industry should remember that, in effect, retirement is the inverse of accumulation.
“Everything that works for you in accumulation – time in markets, regular saving, compounding – works against you in retirement,” he said. “So that’s your baseline.”
Hamilton said it demands a different way of thinking by investment teams.
“You’ve got to be a little bit careful where you’ve got investment-led organisations, given the genealogy of our super system here,” he said.
“It takes time for those teams to understand the journey that’s it’s not about the pool of assets, about the outcome for the member. That is also developing at different paces across organisations.”
Hamilton said “retirement is a liability problem, it’s not an asset allocation problem”.
“Your retirement requires a series of cash flows to meet a series of liabilities,” he said.
“And when you think about it as an asset-liability matching problem, you think very differently about what ‘good’ looks like from a portfolio construction perspective.”
Hamilton said the industry must make the provision of retirement products simpler, and that must include reducing barriers to the provision of lifetime income products. Australian providers compete globally for capital, and right now the rules are working against them being allocated a fair share.
“Australia is out of step with the rest of the world in what’s required,” Hamilton said.
“It’s not out of step in a good, conservative way, it can deliver capital risk.”
Hamilton said Challenger is optimistic that as regulatory settings evolve, “the big funds, the small funds, will be able to innovate and deliver products, not just your at retirement lifetime income, but product that can help Australia’s pre-retirement, entering retirement and in your later stages of life”
“I’m very optimistic that’ll happen over the course this period; we’ve just got to as a group push and get this tranche 2 [of financial advice reform] through and get the regulatory settings appropriate so that the private sector can come and provide these fantastic solutions, which is going to create such better retirement outcomes.”
KPMG’s Elkins underlined the need to adapt to a different future by cautioning that “what’s made us so great in the past isn’t what we need for the future to be really future focused”.
“The fact that this industry has found ways to collaborate, just for the best interest of the system and members, is something that’s been really unique, and long may that continue,” she said.
“But … the expectation of our of our members is shifting, and that kind of forward thinking needs to really recognise what that different expectation is.”
