The long-awaited Cooper Review of superannuation, as expected, has recommended a basic superannuation product to be made available to all superannuation fund members, as part of an effort to “re‐cast” superannuation “to a member‐oriented, rather than an industry‐oriented, perspective”. The review also proposes greater transparency and comparability of funds, and suggests another initiative already flagged, “Superstream”, to reduce back-office costs.
The Review, released early this afternoon, argues the combined impact of the proposals would be to reduce system costs of, in the long run, $2.7b pa, cutting fees by 40% for average superannuation members and lifting their final superannuation balance by around $40,000.
The centerpiece of the Review recommendations is “MySuper”, a simple, low-fee, unbundled, diversified investment product that, if it met a range of requirements, would be permitted to be classified as a default fund to be nominated by employers. No other products would be permitted to be used as default funds.
Behind MySuper is a fundamental change in philosophy about the relationship between most of us and our superannuation.
If members wanted to pursue the choice of other investment options, Cooper says, they should be encouraged to, but one of the Review’s central tenets is that people’s disengagement from superannuation must be accepted. This overturns much of the logic of the Wallis Review in 1997, which treated all investors as “rational and informed”, when real-life experience suggests that when it comes to superannution, many of us are anything but. Under the Wallis approach, ensuring investors were fully informed was the primary regulatory requirement, so that they could make informed decisions, thereby imposing market discipline on superannuation funds. Cooper proposes an entirely different approach.
“The Panel recognises that there are segments of the community very much engaged with their super and who spend time thinking and making active decisions about superannuation,” but:
If members want to engage and make choices, then the system ought to encourage and facilitate them doing so. If members are not interested, then the system should still work to provide optimal outcomes for them. The super system should work for its members, not vice versa. This is the basis of the Panel’s new ‘choice architecture’.
MySuper providers would also be required to demonstrate each year that they had sufficient scale to optimize outcomes for members. The Review identifies scale as a pressing issue for the industry and a key impediment to healthier fund performance. “Many funds lack the scale necessary to provide optimal outcomes to their members and, in some cases, trustee self‐interest has hindered rationalisations that are clearly in members’ interests.”
“Superstream” would use great reliance on tax file numbers, greater use of online communication and e-commerce, greater consistency of information-gathering processes and reduction in regulatory requirements to significantly cut administrative costs for superannuation funds.
APRA would have additional powers to set standards in relation to transparency and comparability of fund products, along with “standard product ‘dashboards’ “and standardised performance reporting to “lift the fog”. Funds would be required to provide detailed operational and management information on their websites, and identify their holdings.
The superannuation industry has already flagged resistance to the MySuper proposal. The Review’s essential philosophy of accepting disengagement will also face resistance from some parts of the financial planning industry, because it forms the very basis of the business model and regulatory framework within which they’ve operated for nearly two decades.