The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry is mandatory reading for all super funds and their Trustees. It provides clear guidelines about the sale of financial advice and the purpose of MySuper products, as well as the simplification of insurance and more stringent benchmarking of service providers. This will result in a sweeping focus across organisations to ensure that strategic plans and KPIs are appropriately aligned and managed. The report clearly reinforces organisational responsibility as front and centre in the solution.
The impact of the Royal Commission for many in the industry will be lasting. The key takeout for many industry participants should be that most providers face challenges in some shape or form. We believe the true test of an organisation will be; if another commission (hypothetically) were to be held in 5 or 10 years’ time, will providers have had the foresight to seek out the issues of tomorrow and solve them, or will they be doomed to repeat the mistakes of the past.
We have identified three key areas highlighted in the report, which we believe will substantially shape the industry going forward.
1. Greater accountability for Trustees
With further consolidation across the industry inevitable, Trustees will need to have the processes in place to appropriately consider potential merger opportunities and ensure they are making decisions from a position of “best interests” and not “power/control”, or face being held accountable.
Further to this, the issue of appropriately assessing service providers, whether they are related to the entity or not, and holding them to account will also be vital in delivering optimal member outcomes. This will require ongoing uplift and oversight of service providers, to ensure that value is being delivered at all times.
For those Trustees that fail to adhere to their best interest duties, the Commissioner recommends the application of civil penalties. The challenge for funds, and their Trustees, will be on how to structure appropriate KPIs and remuneration structures, especially at Board and senior management levels, and whether they will have the capacity to deliver services with reasonable care and skill.
2. The challenges of assigning one default account
The report highlights the strong need for the industry to converge to its true membership base. SuperRatings remains supportive of one default account being created upon entry into the workforce, which we also highlighted in our submission to the Productivity Commission’s review. However, this is a deceptively complex challenge.
The report does not explicitly state what ‘machinery’ would be developed to ‘staple’ a person to a single default account. We believe there are three main approaches that could eventuate and note that each is not without substantial administrative and implementation challenges. Thus, it is not surprising that despite broad agreement across the industry, this initiative is yet to be executed. We envisage that an:
1. Employee could be defaulted into a fund attached to their first employer, with that becoming their superannuation fund for life. This could result in significant concentration of default flows to a handful of providers;
2. Employee could elect a superannuation fund when they apply for a TFN. Employees at this age may lack the skills to make an appropriate decision, so advice or guidance would be paramount;
3. Employee could continue to be defaulted into a fund attached to their employer, but a rollover of their existing accumulation account to the new super fund would need to occur each time their employment changed. This would increase the administration burden borne by superannuation funds but could expose employees to different superannuation providers throughout their working life.
Options 1 and 3 would still see the corporate play a role in determining a default super fund when arguably they don’t want the burden. Option 2 removes corporates from the decision-making process, but this option could spell the end of corporate super as we know it, and with it, the benefit of tailored solutions which are in the members’ best interest.
3. Key implications for Corporates
The report recommends ‘no treating’ of employers, this is effectively the corporate version of no hawking. As such, funds will need to examine how to appropriately attract and service employers.
If corporates continue to nominate a default fund, the selection of this fund will need to be based on a robust framework. In lieu of set guidelines from the government, an assessment in-line with the member outcomes framework would be a potential minimum standard. We remain focused on the importance of reviewing investments, fees, advice, administration and governance arrangements as the pillars of a strong assessment of any fund.
The pricing models in this area should also give corporates pause for thought. Reflecting on the commentary about the charging models for advice and mortgage broking, a range of pricing structures also exist in the corporate tender management space. Evidently, we believe best practice pricing in this space is an up-front fixed fee model. While this is a cost for corporates, we believe it brings significant long-term benefits for their employees that outweighs the initial cost.
While the report may have lacked the theatre of the hearings, it has been clearly designed to address key issues identified by the Commission. As noted at the outset, we believe the key takeout for many industry participants should be that most providers face challenges in some shape or form. What providers do about them is the true test.
We are seeing providers act in advance of legislative change wherever practical, which is pleasing to observe. However, the path ahead for some will be more challenging than others. As historical issues are addressed, it will hopefully also provide an industry less divided across historical battlelines. Given the path forward in advice remains one of the most tricky to foresee, we hope that this will provide a key opportunity for these sectors to more effectively work together.