Cooper Super Review – what the recommendations

could mean

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Cooper Super Review – what the recommendations could mean July 2010 What’s in this report? 10 key reform areas Product and advice implications Self managed super implications What this means for you and your clients Cooper Super Review – what the recommendations could mean On 5 July 2010, the Government publicly released the final report of the review into the governance, efficiency, structure and operation of Australia’s superannuation system. More commonly, this has been referred to more commonly, as the Cooper Review. In this paper, we look into the recommendations made and the potential implications they could have from an advice perspective. The final Government report can be accessed here: www.supersystemreview.gov.au 177 Recommendations made The Cooper Review was conducted by a panel of eight members, and chaired by Jeremy Cooper, a former Deputy Chair of ASIC. In its final report, the Panel have made 177 separate recommendations for reform. These recommendations have been grouped together into 10 separate packages for reform, with each package focussing on a particular area of the superannuation system. The 10 packages are listed below. Click on each of the titles for an analysis of the main recommendations arising from each package. 1. MySuper and choice architecture 2. Trustee governance 3. Investment governance 4. Outcomes transparency 5. Insurance in superannuation 6. Integrity of the system 7. Retirement 8. Self-managed super solutions 9. SuperStream 10. Regulatory settings

There is a strong focus on two major areas of reform from the final report, and these have been the

point of much industry discussion already, being:

The introduction of a standardised “MySuper” fund – a low cost, low feature super offer for

many members, and

The need to introduce efficiencies through a move to e-commerce and electronic data

transmission / communication.

http://www.supersystemreview.gov.au/

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Recommendations don’t just have product implications

Many of the recommendations made by the Panel have a product focus, rather than an advice focus,

as they relate to the structure and operation of the superannuation industry as a whole. However, a

number of these recommendations will have a potential flow on impact to the advice that planners

provide to their clients. Some of the major recommendations (in addition to the two noted above)

are:

MySuper funds will be required to offer an intra-fund advice facility to their members.

Under the Future of Financial Advice (FoFA) reforms already proposed by the Government,

the current intra-fund Class Order relief from ASIC will be extended to a number of different

areas, including transition to retirement and retirement planning generally. With advice on

these matters being available to all MySuper members (at potentially little or no cost),

advisers may see a reduction in the number of investors seeking personalised advice as they

obtain it from their fund instead.

This raises a concern about the relevance of the advice being received via MySuper

arrangements as it is necessarily restricted to the individual’s membership of that fund,

rather than taking their whole circumstances into account. As part of current industry

consultation on the FoFA measures, there is a push for an ability for advisers to be able to

provided “limited” advice on an equal basis to that of intra-fund advice by superannuation

trustees. However, it isn’t currently known whether any changes will be made in this regard

or the nature of potential changes.

It‘s important to note that if the provision of intra-fund advice results in more Australians

actually receiving advice for the first time, this is a positive outcome. If the correct intra-

fund advice is provided, it should then lead to more clients becoming engaged with their

super and considering the move to more holistic advice which cannot be provided through

the intra-fund relief.

MySuper funds will be required to formulate a single diversified investment option that

applies to members of that product.

Even though MySuper trustees will be required to formulate an investment strategy

appropriate to the fund’s membership, practically it may not be the best outcome for each

member since every person’s circumstances are different. This raises the importance of

personalised advice in considering other investment opportunities for members.

MySuper funds will be required to offer a retirement product to their members.

If this retirement product is also only able to offer a single investment option, the need for

personalised advice becomes even more critical as it is during retirement that individual

members’ tolerance for risk in their portfolios will change more frequently. For example,

when a member first commences to draw down on their super, they may be more willing to

have a higher level of growth assets, whereas once there retirement balance has reduced

significantly they may prefer more capital stable investments. A single investment option

across a membership base cannot cater for these changing circumstances. Personalised

advice becomes critical for such members.

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The Panel has endorsed the FoFA recommendation for the banning of up-front and trail

commissions from superannuation, but goes further to recommend the banning of

insurance commissions through super - whether a personal or group policy.

Although commissions on insurance were not banned as part of FoFA reforms, they are

being considered by the Government as part of the FoFA consultation process.

Only life, total and permanent disability (TPD) and income protection policies will be able

to be offered through a superannuation fund. All other insurance offerings will be

banned.

Whilst a trauma policy is not generally held through a superannuation fund (as the events

giving rise to a payment under the policy don’t generally equate to a condition of release

from super), some members have these policies associated with their super (particularly in

the SMSF environment) due to the bundling of these products together and the associated

reduction in premiums.

The cost of advice must be unbundled from superannuation offerings, and the Panel

supports the Government’s announcement under the FoFA reforms for an annual opt-in

requirement for ongoing fees being paid from a superannuation fund.

The “opt-in” versus “opt-out” debate has already been subject to much discussion in the

industry generally, and will likely play out as part of the Government’s FoFA consultations.

The Panel has recommended that any advice fees traditionally associated with an

employer fund arrangement must be paid by the employer, rather than recovered as a fee

against all members of that employer plan. Employees would retain the ability to “opt-in”

for personal advice.

If implemented, this will have a significant impact on the way many corporate

superannuation arrangements with financial advisers attached are structured. The business

model for many advisers and their advice proposition may need to adapt. Unless an

employer is willing to cover these costs, members may miss out on many of the education

opportunities that financial planning firms traditionally provided as part of a corporate plan

membership.

Interestingly, Intra-fund advice does not need to be offered by the super fund on an opt-in

basis. That is, the cost of providing intra-fund advice can be either a user pays system

(members who use intra-fund advice pay for this out of their account), or it may be cross-

subsided by all members through an increased administration fee within the MySuper fund.

New (or enhanced) capital adequacy requirements on a risk weighted basis for

superannuation funds (excluding SMSFs) have been recommended.

Currently, public offer funds have a $5million capital adequacy reserve requirements, but

this will be extended across all funds (at a value still to be determined). The issue for many

funds will be how they generate any reserve requirement if they currently do not operate

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with reserves. It is likely that this measure will result in a contraction of the number of

superannuation funds in the market place.

Self managed super implications

One area of the report that will clearly have implications for the advice industry is the proposed

recommendations around the self managed superfund industry. Whilst the self managed super

solutions package summary contains more details of these, some of the major considerations from

the recommendations are:

The Panel supports the FoFA recommendation to remove the accountant’s current AFSL

exemption for establishing SMSFs, but does not support the introduction of any replacement

concession or limited AFSL. If adopted, the Panel’s recommendation will mean that only

financial planners can recommend the establishment of a SMSF to clients.

SMSF advice is to be introduced as a specialist area of advice under RG 146, requiring a

specific and higher competency requirement on advisers. The exact level or scope of this

competency requirement has not been stated, but will no doubt form part of the expert

panel to be established under the FoFA reforms to look at education standards generally.

The advice industry has already largely self regulated to introduce an enhanced competency

requirement for SMSF advice, but disappointingly the Panel has not looked to extend a

similar competency requirement to other service providers to SMSFs.

The Panel has recommended abolishing the ability of SMSFs to invest in in-house assets or

personal use and collectible assets, and recommend a five year transition window for SMSFs

to divest themselves of any such existing investments. This is half the timeframe initially

proposed and does not have regard to the potential benefits that such investments could

provide to longer term retirement savings.

The Panel has not recommended an increase in the current maximum SMSF member limit of

four. This is despite many submissions calling for an extension of this limit, albeit potentially

restricted to direct family relationships. This means advisers and their clients, for whom

SMSFs are appropriate, will still be faced with issues when there are more than 4 members

of the family group who would have benefited from being in the same super fund. This has

the potential to lead to an increased number of SMSFs being established, with lower account

balances, as families try to ensure equality through superannuation estate planning

arrangements, and is potentially counter-productive to the optimal outcome for the family

and the industry as a whole.

The Government’s response

In releasing the Report, the Government has noted its support for initiatives that will move

superannuation to a more efficient environment, particularly through the use of increased

technology, as well as any other moves to make super more cost effective and easier to understand.

Ultimately the Government is looking at those measures which will assist members to have more

saved for their retirement.

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Having said that, at this point in time the Government has not committed to any of the

recommendations made by the Cooper Review, nor have they ruled any out. Rather, they have

indicated their intention to consult closely with industry and affected parties on the range of

recommendations that have been made in order to formulate those recommendations which are to

be implemented. It is likely that many of the Panel’s recommendations will form part of the current

consultations around the FoFA reforms, particularly in the areas of:

Banning of commissions (including on insurance),

The annual advice renewal proposal on an opt-in basis,

The extension of intra-fund advice,

The removal of the accountant’s exemption for establishing SMSFs, and

The education standards applying to the financial services industry.

What this means for you and your clients

At this stage, all we have are the Panel’s recommendations and a statement from the Government

that it will undertake further consultation on these recommendations. No changes to client

strategies should be made as a result of the release of this Report.

It’s also important to remember that we do not have a policy statement on these changes as yet

from the Government (although it is expected in the near future, and may be delayed by the

forthcoming Federal election). As with the FoFA reforms, we fully expect the Government to engage

with stakeholders through an extensive consultation process.

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Package 1 - MySuper and the choice architecture

Highlights:

Commitment to the choice architecture model.

MySuper to be introduced, and will be the only type of fund that can be nominated as a default

fund by employers or under Australian awards or other industrial instruments.

MySuper funds will be required to provide an intra-fund advice facility for their members.

Across all types of superannuation funds, and consistent with Future of Financial Advice (FOFA)

recommendations, no up-front or trail commissions can be paid from a superannuation fund.

However, this has been extended to include commissions on individual and group insurance

arrangements through a superannuation fund.

Advice fees must be unbundled.

Given the anticipated growth within the superannuation system, the review Panel believes that now

is the time to “position the superannuation system for the challenges of the future1”. Two major

concerns acknowledged in the report were:

i. the lack of engagement from superannuation members, and

ii. product and advice fees being bundled together.

The Choice Architecture

The Panel has reaffirmed their commitment to the choice architecture model being adopted as the

structure for Australia’s superannuation industry. The choice architecture model is not too

dissimilar to the options available to members currently, although the model is member focused,

not product focused.

Source: Super System Review: Final Report – Part Two: Recommendation packages Chapter 1 p 7

1 Super System Review: Final Report – Part Two: Recommendation packages: chapter 1 - p6

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Under the model, members will be categorised on whether they have made a choice about their

superannuation and also the nature of the choices made. Those who do not express choice will be

placed into the MySuper option (previously referred to as the universal segment).

It is now clear from the final report that it will be possible for members to move between categories

(or to be in more than one category at the same time). The exact mechanism how members can

move between categories (disclosure, forms required etc) was not detailed in the report and is as

yet unknown.

MySuper

The Panel anticipates that the MySuper option will provide members with a simple, cost effective

product with a single diversified investment option. The Panel has recommended that the

Superannuation Guarantee Act be amended to ensure only a MySuper product be eligible as default

fund nominated by an employer, or a default fund under an Australian award or other industrial

instruments. In addition to this, trustees of a MySuper product would be required to maintain a

facility for providing intra fund advice. This will have a significant impact on the financial planning

industry given the volume of advice sought on SG contributions. Financial planners will need to

demonstrate the value of their advice and have appropriate advice charging models in place.

The report reinforces the Government’s stated position in the FoFA reforms to remove conflicted

remuneration structures by prohibiting trustees of MySuper products from paying product based up

front or trailing commissions or any payments that relate to volume, including on insurance

premiums (whether a personal or group policy).

Further, the Panel has recommended that any advice fees traditionally associated with an employer

fund arrangement must be paid by the employer, rather than recovered as a fee against all members

of that employer plan. Employees would retain the ability to “opt-in” for personal advice.

If implemented, this will have a significant impact on the way many corporate superannuation

arrangements with financial planners attached are structured. The business model for many

planners and their advice proposition may need to adapt. Unless an employer is willing to cover

these costs, members may miss out on many of the education opportunities that financial planning

firms traditionally provided as part of a corporate plan membership.

Interestingly, Intra-fund advice does not need to be offered by the super fund on an opt-in basis.

That is, the cost of providing intra-fund advice can be either a user pays system (members who use

intra-fund advice pay for this out of their account), or it may be cross-subsided by all members

through an increased administration fee within the MySuper fund.

If implemented, MySuper trustees will also be required to supply its members with retirement

projections. This won’t negate the need for financial advice as the projections suggested in the

report do not consider any Centrelink entitlements, other than accumulated benefits, and changes in

current salary or contribution levels. The Panel supports this measure as they believe “standardised

retirement projections are the best way to seek to raise members’ awareness of their likely financial

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position at retirement.2” This awareness may prompt more people to seek financial advice to

discuss their options.

Choice funds

The report acknowledges that members can actively choose to remain in a MySuper option however

they would also have the choice to select a fund other than a MySuper fund. Although the report

recommends only a MySuper product should be able to be nominated by an employer as the default

fund, choice of fund will still apply. This means that an employee can exercise choice if they choose

an alternative fund.

Choice funds will offer members more investment options than a MySuper product. Members will

be responsible for investment choices however trustees of choice funds will be responsible to

undertake due diligence on the investment options offered. Those members who select choice

funds will be more likely to seek financial advice.

Like MySuper, choice funds should not offer any ability to bundle advice fees, nor pay any

commissions (upfront or trailing) on any advice, product or insurance arrangements.

Package 2 – Trustee Governance

Highlight:

The Panel believes that improvements to trustee governance may lead to increased confidence

by members in the way superannuation funds are run and managed.

Many submissions into Phase One- Governance raised the concern that the role of the trustee

governance structures has not kept pace or evolved with the industry. A common theme from both

the submissions and the preliminary findings from Phase One was that:

The ‘one size fits all’ approach to fund governance is not flexible enough to take into account

industry developments, and;

The lack of cohesion between the Superannuation Industry (Supervision) Act, the

Corporations Act, as well as other regulatory regimes, has led to confusion in duties of

trustees and trustee directors.

The report makes a number of key recommendations. These include:

The creation of a new office of ‘trustee-director’ with all statutory duties set out in the SIS

Act;

2 Super System Review: Final Report – Part Two: Recommendation packages: chapter 1 - p27

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Not mandating equal representation and all boards would be required to have some non-

associated trustee directors;

Development of a detailed conflicts policy; and

Development of a code of trustee governance.

These recommendations will have a minimal impact on the financial advice industry. The Panel

believes that members may benefit from improved trustee governance as the measures seek to

allow only appropriately qualified people to run funds, conflicts to be better managed and improve

accountability to members.

Package 3 – Investment Governance

Highlights:

The performance of investments should be considered on an after-tax basis

Changes are proposed to the issues which trustees must have regard to when formulating and

developing an investment strategy. These additional requirements are not intended to apply to

SMSFs.

The report acknowledged that good investment performance is dependent on a number of key

factors, one of which is investment governance. Although sound investment governance will not

mandate a fund to deliver good investment performance, the Panel stated that “poor investment

governance put at risk the achievement of the super funds goals.3”

In this part of the final report, the Panel has sought to address the issues associated with the

investment of super fund assets. Specifically it seeks to indentify conflicts of interest between fund

managers/asset consultants and super funds/members.

The Panel identifies that disparity may exist with remuneration and fee structures for investment

managers and results achieved for members. The complexities surrounding fee structures can make

it difficult for members to clearly see what fees they are paying and in turn makes it even more

difficult to evaluate trustee performance.

The Panel has proposed a number of recommendations to achieve sound investment governance.

These include:

Trustees must have regard for costs, taxation and valuation information when developing

their investment strategy,

APRA to develop a new performance fee standard to reduce the possibility of trustees

agreeing inappropriate performance fees for fund managers, and

3 Super System Review: Final Report – Part Two : Recommendation packages Chapter 3 p74

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Investments managed for after tax returns.

The Panel believes that improved investment governance has the potential to achieve better

returns. The avoidance of inappropriate fees, fee structures and focusing on after tax benefits may

also assist to boost retirement benefits for members.

The majority of these changes recommended are proposed to be made through amendments to

Section 52(2)(f) of the Superannuation Industry (Supervision) Act. This sets out the various

covenants that trustees must bear in mind when formulating an investment strategy for their fund.

The proposals contemplate amending this section to specifically include requirements for trustees to

consider, as part of their investment strategy:

The expected costs of the strategy, including those at different levels of any interposed legal

structures and under a variety of market conditions,

The taxation consequences of the strategy, in light of the circumstances of the fund, and

The availability of valuation information that is both timely and independent of the fund

manager, product provider or security issuer.

In the recommendations, that panel state that these changes should apply to APRA fund trustees.

By definition, this would exclude SMSFs, although unless carefully implemented these could

ultimately apply in a SMSF context.

Package 4 – Outcomes transparency

Highlights:

Super fund fees and costs to be disclosed on a pre-tax basis.

Super fund investment performance to be disclosed after accounting for fees and taxes.

Greater transparency on costs and performance may lead to increased member understanding

and engagement.

The final report focuses on the need for transparency in operating an efficient saving system. The

report describes Australia’s superannuation system as having a “lack of transparency, comparability

and consequently, accountability.4” The recommendations focus on improving the transparency of

fees, costs and investment returns to ensure more meaningful reporting.

The Panel believes that transparency has the potential to improve understanding, awareness and

engagement at various levels within the superannuation industry. The report acknowledges that the

existing requirement for disclosures to be clear, concise and effective has not worked within

superannuation. The Panel believes that the MySuper option may remedy this for its members,

however other changes must occur. The Panel has outlined a number of these including:

4 Super System Review: Final Report – Part Two: Recommendation Packages chapter 4 p 99

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Prevention of fees and costs being obscured through the use of intermediaries,

Disclosure being targeted at industry participants to enhance competition, and

Simple, standardised and forward looking information being supplied to members.

Under the proposals, trustees must disclose all forms of costs and fees on a pre tax basis. The Panel

believes this will enable trustees to provide better transparency of fees and costs outcomes to

members.

In addition to this, the Panel has recommended APRA in consultation with ASIC develop ‘outcomes

reporting standards’ which will overlay existing accounting standards to facilitate consistent and

comparable reporting of investment performance and costs at an investment option level. This

measure will require trustees to calculate and disclose fees, costs and performance for MySuper and

investment option levels. This measure may equip members to make more informed choices as it

should improve comparability of investment performance.

In addition, funds will be required to publish a forward looking risk and return matrix and past

investment return information must be accompanied with volatility information and stated net of all

costs and after tax. The Panel believes this approach would enable members to assess possible

future performance outcomes, rather than relying on past performance information.

Many of these measures are aimed at improving transparency, comparability and accountability

within the Australian Superannuation industry. The Panel believes that improved transparency and

comparability may enable members to make more informed decision about their investments. More

engaged members are more likely to engage in choices about their super, and as such may be more

likely to obtain financial advice.

Package 5: Insurance in superannuation

Highlights:

MySuper funds must provide life and TPD insurance on an opt-out basis. Other funds are not

required to offer insurance.

Trauma insurance cannot be offered through a superannuation fund.

Up-front and trail commissions on all forms of insurance through any superannuation fund to be

banned.

Binding death benefit nominations to be ruled ineffective in certain situations, but the

timeframe for renewal to be extended from three to five years.

The Panel has acknowledged that insurance plays a key part in the superannuation system; ensuring

dependants are covered following a member’s premature death or disability. Accordingly, the Panel

has recommended that for MySuper products (the members of which are least likely to give

consideration to their insurance needs), life and total and permanent disability (TPD) cover must be

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offered on an opt-out basis. MySuper products may also offer income protection cover, but this will

be at the discretion of the trustee.

For ‘choice‘ offers (including SMSFs) it will be at the discretion of the trustee whether insurance is

offered.

Only life, TPD and income protection is to be allowed within superannuation. Other products, such

as Trauma cover, will not be allowed and a phase out period for funds to cancel such cover is

proposed.

Trustees of MySuper products and trustees of large APRA funds (i.e. those other than operating

small APRA funds) that offer insurance will be subject to a statutory duty to manage insurance with

the sole aim of benefiting members.

The Panel has endorsed the Future of Financial Advice (FoFA) recommendation for the banning of

up-front and trail commissions from superannuation, but goes further to recommend the banning of

insurance commissions through super - whether a personal or group policy. Although commissions

on insurance were not banned as part of FoFA reforms, they are being considered by the

Government as part of the FoFA consultation process.

To provide consistent and comparable insurance information, the Panel has recommended that

superannuation funds should standardise the disclosure of insurance features and premiums. This

will assist planners making a recommendation to switch from one superfund to another, allowing

them to clearly contrast the features and costs of the insurance provided by the exiting fund and the

recommended fund.

The Panel has recommended that trustees of MySuper offers have an intra-fund advice facility for

insurance and that such advice be pro-actively offered. As a result, members (particularly younger

members) of MySuper funds will be better informed and perhaps incentivised to seek external

advice not just on their insurance needs but all areas of financial planning. This could lead to an

increased demand for personal advice

In conjunction with the recommendation that trustees should have a statutory duty to manage

insurance is the recommendation that trustees should be required to devise and implement an

insurance strategy, similar to the requirement for an investment strategy. Finally, the Panel has

recommended that the requirement to renew binding death benefit nominations be extended to 5

years, and that such nominations automatically lapse upon the occurrence of certain life events such

as divorce. At this time, it is unclear whether these changes will apply to existing nominations or

only nominations made after the date of implementation, and how this impacts on SMSFs which can

have non-lapsing binding nominations.

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Package 6: Integrity of the Super System

Highlights:

Super funds to be subject to new (or increased) capital reserve requirements.

The Government should not mandate that superannuation fund trustees participate in any

particular investment class or vehicle, including infrastructure.

The Panel has made a number of recommendations the aim of which is to increase the public’s

confidence that the superannuation industry is stable and that retirement savings are secure.

The recommendations include:

New capital reserve requirements (to be phased in) ensuring funds have sufficient capital to

cover losses that may arise as a result of operational error.

The requirement that administrators be licensed and subject to supervision by APRA

Required risk management plans to include a liquidity management component to ensure

that trustees identify and manage liquidity risk at both the fund level and the investment

option level.

The most significant of these recommendations is around capital adequacy. Currently, trustees of

public offer funds are required to meet a minimum capital requirement of $5million. There is no link

between the level of risk faced by a fund, the amount invested in superannuation through that fund

and the amount of capital required.

It is proposed that new capital requirements for trustees on a risk weighted basis should be phased

in over time, and include:

A requirement that all large APRA funds must hold a minimum level of operational risk

weighted reserves

Legislation should set a minimum dollar figure for these reserves, and a maximum expressed

as a percentage of the assets in the fund (i.e. the maximum is not a fixed dollar amount).

APRA should have the power to increase the minimum capital requirement for particular

funds on a risk assessed basis.

With many funds not currently having a significant level of reserves, introducing such a requirement

could lead to a contraction of the market, with less funds actually being available for members to

choose from. This is not an unintended consequence of this proposal as the Panel have previously

commented on the fact that the number of superannuation funds is likely to contract as a result of

this process and some funds will become significantly larger as a result.

It is also important to note that any changes to these capital requirements are in addition to, and

separate from, any capital adequacy requirements under other legislation, such as that required to

obtain an Australian Financial Services Licence.

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It is also interesting to note that during the course of its review, the Panel had commented on

occasions of the ability of some overseas superannuation schemes to invest into large scale

infrastructure projects. Whilst still noting the benefits of such investment opportunities, the Panel

does not recommend that the superannuation funds should be required to invest in any particular

investment class or vehicle.

Package 7: Retirement

Highlights:

No recommendation for compulsory annuitisation of super in retirement.

MySuper offers must include a retirement option for members. A separate investment

option must be formulated for those MySuper members in retirement.

The Panel noted that whilst the ultimate purpose of superannuation is to provide benefits in

retirement, the majority of the industry’s attention to date has been paid to the accumulation

phase. This is not surprising given that the industry is, relatively speaking, still in its infancy. For

example, it is only since 2002 that workers have had the benefit of the 9% SG level.

However greater focus needs to be given to the retirement or drawdown phase given our ageing

population, baby boomers now entering retirement phase, plus higher life expectancies.

With this in mind the Panel has recommended that the MySuper product include one type of income

stream product. As to the nature of this product, the Panel has left this decision to the Government

but has suggested that it only be made after comprehensive consultation with industry bodies.

The Panel notes some of the benefits that Australians experience with no compulsory annuitisation

of retirement savings. This is reflective of the inequity that may arise as annuity product features

and payments may vary from day to day depending on the prevailing market conditions at that time.

The Panel also notes that there appears to be no evidence to suggest a systematic problem of

retirees drawing down on super savings too quickly with a view to intentionally “double dip” into the

age pension system.

As a result, the panel has made no recommendation for compulsory annuitisation in retirement.

This is in contrast to the Government’s response to the Henry report on Australia’s Future Tax

System which leaves this question currently unanswered.

From an advice perspective, there is no recommendation to alter the current flexibility that exists

with regards the ability to take a super benefit as either a lump sum or pension, or the ability to start

a transitional pension. Nor is there any recommendation to change the tax treatment of these

options. As such retirement strategies currently recommended by financial planners are not

affected.

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The Panel has also recommended that trustees of MySuper products be required to put in place a

separate investment strategy for post-retirement members. This should have regard to the existing

factors – risk, diversification, liquidity and the ability to discharge liabilities, as set out in Section

52(2) (f) of the Superannuation Industry (Supervision) Act; plus two new factors – inflation risk and

longevity risk.

Furthermore it is recommended that the MySuper product provide intra-fund retirement advice on a

proactive basis. In this regard the Panel has suggested that members could, for example, first be

approached at age 45 and then at five yearly intervals.

With this level of education, MySuper members may be prompted to seek external advice from a

financial planner on alternative products, plus Centrelink advice.

Package 8: Self-managed super solutions

Highlights

No mandatory training of SMSF trustees, unless there has been a breach of legislation.

Supports the Future of Financial Advice recommendation to remove the accountant’s current

AFSL exemption for establishing SMSFs, but does not support the introduction of any

replacement concession or limited AFSL.

SMSF advice to be introduced as a specialist area of advice under RG 146, requiring a specific

and higher competency requirement on advisers. This is not extended to other service providers

to SMSFs.

No minimum asset size or trustee structure to be legislated.

No further investment by SMSFs in in-house assets or personal use and collectible assets, with a

five year transition window for SMSFs to divest themselves of any such existing investments.

No increase in the current maximum member limit of four.

Whilst acknowledging that the SMSF sector is largely successful and well-functioning, the Panel has

highlighted a number of issues that it believes need to be addressed.

The Panel does not believe a minimum level of education or accreditation is required before a

person can become a member and trustee of a SMSF. However they have recommended that the

ATO be given the power to enforce mandatory education for trustees who have contravened SIS

legislation.

In contrast, the Panel is of the view that the competency standard for advisers dealing with SMSFs

needs to be raised. They have recommended that ASIC, in consultation with the industry, amend RG

146 to include a specialist SMSF knowledge requirement that must be obtained before advisers can

provide advice in relation to SMSFs.

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The Panel supports the Government’s Future of Financial Advice recommendation that the

accountants’ financial services licence exemption for advice on the establishment of an SMSF be

removed, but go further to say that a limited AFSL is not the answer either. As a result, the provision

of any advice to a SMSF whether it is with regards establishment or investments would, in the

Panel’s view, require the adviser to hold an AFSL or be the authorised representative of an AFSL

holder. This will remove the unlevel playing field that currently exists between accountants and

financial planners in relation to the establishment of a SMSF.

In contrast to removing the potential inequity that currently exists for establishing SMSFs, the Panel

is of that view that the competency standard for advisers dealing with SMSFs needs to be raised.

They have recommended that ASIC, in consultation with the industry, amend RG 146 to include a

specialist SMSF knowledge requirement that must be obtained before advisers can provide advice in

relation to SMSFs.

However, the Panel has not specifically recommended an increased education or competency

requirement for any other service providers to the SMSF market:

For accountants and administrators, the Panel believes the professional accounting bodies

are best placed to introduce any required change (although to be effective, accountants and

administrators would need to belong to such bodies).

For auditors, the Panel has recommended that ASIC establish a registration process and

determine the eligibility requirements for registration and develop approved auditor

independence standards

The Panel does not believe it is necessary to mandate a minimum asset size for SMSFs, despite the

availability of statistical data that questions the viability of funds of $200,000 or less, showing them

to lack investment diversification, have higher relative costs and underperform larger sized SMSFs.

The Panel’s view is that with appropriate advice, disclosure and an increase in comparable data,

people will be able to make informed choices that are in their interests. This, they believe, will

ensure that SMSFs are established for a suitable purpose, resulting in a reduced instance of small

sized funds.

A similarly approach has been adopted with regards the optimum trustee arrangement. At present

the majority of SMSFs have individuals as trustees rather than corporate trustees. This is of concern

to the Panel due to a number of additional benefits corporate trustees have over individual trustees.

Once again, the Panel believes that by lifting the standard of advice provided to SMSFs, more

corporate trustees will eventuate, but they have not gone so far as to mandate a required trustee

structure.

A number of recommendations have been made regarding SMSF investments:

Leverage

The Panel has reiterated its concerns regarding the 2007 relaxation of the ability of a

superannuation fund to borrow. The Panel believes that the borrowing arrangements

introduced in 2007 are inconsistent with Australia’s retirement policy. Their fear is that

borrowing may become a significant focus of superannuation funds and in particular SMSFs.

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Whilst noting the Government’s recent announcements to implement additional safeguards

(i.e. have these borrowing arrangements classified as “financial products” under the

Corporations Act, plus the introduction of amending legislation to clarify the restrictions on

such borrowings), the Panel has recommended that the Government review these

borrowing arrangements in 2 years time to ensure that borrowing has not become a

significant focus of superannuation funds.

To assist in this review it has also been recommended that legislation should be passed to

require credit providers to collect and provide APRA with data that will enable the RBA to

publish statistics on the level of finance being provided to superannuation funds. These

statistics should be able to distinguish between the level of finance being provided to SMSFs

and APRA regulated funds.

Related Party Investments

The Panel believes that the current 5% in-house asset limit still provides an avenue for

potential abuse of the sole purpose test by SMSF members.

The Panel has therefore recommended that in relation to SMSFs only, the 5% in-house asset

limit be removed with current in-house assets to be sold within a 5 year transition period, or

alternatively the SMSF convert to a small APRA regulated fund within that period.

This 5 year transition period is half that proposed in the preliminary Phase Three report

released by the Panel. From an advice perspective, it is important to remember that the

definition of an in-house asset specifically excludes business real property, so such

investments (and leases back to related parties) would still be permitted. However,

investments into related companies and trusts may be affected if not already excluded

under exemptions to the current in-house asset definition.

Acquisition and Disposal of Assets from Related Parties

The Panel believes that current arrangements allow transaction date and asset value

manipulation to illegally benefit the SMSF or the related party. To address this, it is

recommended that all acquisitions and disposals from related parties be done on market,

where a market exists. If there is no market, then the transaction must be supported by a

valuation from a suitably qualified independent valuer.

Collectable and Personal use Assets

The Panel is of the view that assets such as paintings, jewellery, antiques, stamp collections,

cars etc pose particular issues in relation to the application of the sole purpose test. Such

assets may lend themselves to personal enjoyment and a range of non-investment factors

and therefore may involve significant current day benefits.

The Panel has recommended that SMSFs be prohibited from acquiring such assets. Current

investments in such assets are to be sold within a 5 year transition period, or alternatively

the SMSF could convert to a small APRA regulated fund within that period.

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As recommended elsewhere in the final report, the Panel believes that commission based

remuneration for advice to SMSFs should be prohibited. Similarly, commission based remuneration

for risk insurance advice to SMSFs should also be prohibited.

A number of additional recommendations (or recommendations for no change) have been made.

These include:

The current four member maximum limit to be retained.

The ATO to remain the regulator of SMSFs, with a more flexible penalty regime enabling it to

tailor penalties that are commensurate with the contravention.

Legislation be passed requiring SMSFs to value their assets at net market value, coupled with

guidelines to standardise valuation practices.

SMSF members be provided with certain key information annually, beyond the current

requirement.

Establish an online SMSF resource centre to help SMSF trustees build skills and make better

decisions.

Amend the Superannuation Industry (Supervision) Act to reduce the need to amend trust

deeds each time the law changes.

Package 9 – SuperStream

Highlights:

A move to electronic data transmissions between employers and super funds, and between

super funds, to assist and speed up consolidation of superannuation savings.

TFNs to be used as a unique identifier within the superannuation system.

All forms of contributions by employers (with super guarantee, salary sacrifice or post-tax

contributions) to be made at least monthly.

Trustees may have the ability to automatically consolidate multiple accounts of members

In the final report, the Panel acknowledge that manual transactions, lack of data within the industry

and existing processing are inefficient and costly for members. The Panel have put forward

“SuperStream”, which they believe will make the system more efficient, quicker and less costly for

members. SuperStream has 6 key components. These are:

Industry-wide standards to improve the quality of data

EFT for all participants

Better use of technology

E-commerce solutions to replace paper

TFNs as identifiers

Elimination of redundant processes

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Quality of Data

Many submissions into phase two – operation and efficiency outlined a concern around employers

not always understanding the data that they must supply with employee contributions. Where

inaccurate or incomplete information had been supplied, the costs associated with rectifying the

situation are considerable. To remedy this, the Panel has recommended that legislation be

amended to impose an industry wide standard to improve the quality of data.

The recommendation requires employers to provide a super fund its ABN and:

On first making the contribution for an employee, the employee’s full name, date of birth,

current address, email address, mobile phone number, TFN, date they commenced

employment as well as the contribution amount.

Subsequent contributions will require the employee’s full name, TFN and the contribution

amount.

The Panel has suggested that employers should be liable for an administrative financial penalty

where they fail to meet their obligations. In addition to this, funds should not be permitted to

accept contributions with insufficient data.

Where employees fail to supply the employer with the required information, the employer’s

superannuation guarantee (SG) obligations are satisfied provided they supply the ATO with the

information they have and the contribution. The Panel has indicated that the ATO would treat the

contribution as unclaimed money. If the employee’s TFN is subsequently quoted the ATO would

then remit the contribution to the employers default super fund with any additional relevant

information they have attached to that TFN.

These measures will have significant impacts for the financial planning industry. Firstly, clients that

fail to supply the relevant information to employers will need to be educated on what is required

and understand that their superannuation will not accrue any interest while being held as unclaimed

money. Secondly, this measure may see a sharp decline in lost super. Where applied correctly,

employees will benefit from these measures ensuring all their super benefits are accounted for and

potentially larger balances dues to the reduction in lost super. This may encourage more people to

seek financial advice.

Efficient use of Technology and E-Commerce

That Panel has stated that there are efficiency gains to be had through the use of electronic

transmission of data and money. The Panel has recommended imposing a fee on employers who

remit contributions in a non electronic manner and without sufficient details to identify the

member.

In addition to this, the report stated that all APRA regulated funds should have the capacity to

transact with employers, members and other industry participants via EFT. The use of straight-

through processing (STP) was an initiative that the Panel had put forward in their preliminary

findings from Phase Two and has supported this measure in their final report as they believe STP has

the ability to reduce resource requirement in the back office, reduce manual processing errors and

speed up settlement times.

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Tax File Numbers

“TFNs are a unique number issued by the ATO to identify individuals, companies and others who

lodge income tax returns.5” Many submissions acknowledged that the absence of a key identifier is

an obstacle to cost savings within the industry. The report recommended amendments to legislation

to enable superannuation trustees to:

Use TFNs to link contributions and rollovers with member accounts

Seek confirmation from the ATO in relation to accuracy of quoted TFNs

Seek confirmation from the ATO where the rollover is to a SMSF member

exchange the TFN with other trustees where members have multiple accounts

Lost and Inactive Accounts

Lost and inactive accounts add considerable cost to the industry and ultimately to the member. The

Panel has put forward a number of recommendations to reduce the number of lost or inactive

accounts. One recommendation seeks to amend legislation to allow trustees to auto consolidate

accounts without prior reference to the member. However, they have stated that they will seek

further consultation for this measure.

In addition, it is proposed that trustees should have the power to auto consolidate accounts within

the one fund where there is no evidence of the member knowingly establishing additional accounts.

This could cause issues around advice where separate accounts have been deliberately established,

for example to hold non-concessional contributions or insurance only to achieve future estate

planning objectives

Contributions

Currently employers are required to remit SG contributions quarterly and monthly for member after

tax contributions. To enhance efficiency and improve the compounding periods, the Panel has

recommended that employers should be required to remit salary sacrificed and SG contributions no

less frequently than is required to remit members after tax contributions, i.e. monthly. In addition

to this, aligning SG payments with employers’ payroll cycles may also assist to enhance efficiency

and improve member superannuation savings.

It is evident that many of the recommendation will have considerable impact on the financial

planning industry. As the focus is to drive down costs and increase efficiencies, this may lead to an

improved confidence in the integrity of the system, which in turn may prompt more people to seek

advice. As cost reduction is paramount, members may stand to benefit from improved

superannuation savings.

5 Super System Review: Final Report – Part Two: Recommendation packages Chapter 9 p 290

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Package 10 – Regulatory settings

Highlights:

APRA to have an extended mandate for the oversight of the operating environment for

superannuation.

CGT roll-over relief recommended to remove a barrier to consolidation and product

rationalisation

The Superannuation Industry (Supervision) Act to be restructured and rewritten.

In order for is many recommendations to be adopted and implemented, the Panel recognises that

the superannuation regulatory regime must be fully effective.

To assist in achieving this, the Panel has recommended that APRA’s role should be changed or

enhanced to:

Include the task of overseeing and promoting the efficiency of the funds it regulates and the

system in which they operate

Allow it to issue standards in relation to superannuation, which will be binding on APRA fund

trustees, to address the Panel’s recommendations and drive efficiencies in the system.

In addition, the Panel recommends that the Government should explore, in conjunction with APRA,

ASIC and the ATO, ways in which these regulators can work more closely together.

Within the superannuation industry, there are many legacy products which are closed to new

members, but still hold substantial member benefits. These legacy products add costs to the

operation of superannuation funds, but there has been no effective mechanism to consolidate these

legacy products into existing fund offers. To facilitate necessary consolidation and product

rationalisation within the industry, the Panel has recommended that permanent CGT rollover relief

should be afforded to superannuation funds looking to achieve these outcomes, such that CGT

consequences are not a barrier to this consolidation and rationalisation.

The Panel has also recommended that after its MySuper proposal is enacted, no more Retirement

Savings Accounts (RSA) or Approved Deposit Funds (ADF) should be established. In addition, a

mechanism should be developed to facilitate the transfer of monies from existing RSAs and ADFs to

a MySuper account or other appropriate superannuation fund.

Finally, the Panel has recommended that the Superannuation Industry (Supervision) Act be re-

written and restructured, to group together those requirements or obligations that apply to all

superannuation funds generally, and to separate out the specific requirements that apply to

separate classes of funds (e.g. MySuper offers v SMSFs).

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