The clock is ticking for Australia’s superannuation providers to prepare an application for a MySuper licence under new rules designed to protect disengaged fund members from paying unnecessary or excessive fees.
As of July next year, only products that meet MySuper standards will be able to accept contributions from employees who aren’t actively involved in choosing their super fund.
The new regime has widespread implications for the industry, considering that four out of every five Australians have their retirement savings invested in a default fund.
When the legislation was first tabled last year, the Australian Prudential Regulation Authority (Apra) estimated it would receive upwards of 400 applications for MySuper licences, but now that figure has been reduced to 150, suggesting many super providers are rethinking their strategies.
Apra administers a total of 344 corporate, industry, public sector and retail funds which together manage A$988 billion in retirement savings, or 66% of the country’s total fund pool. (Much of the remainder is held in self-managed funds, which are overseen by the tax office and aren’t required to comply with MySuper.)
The drop-off in application estimates indicates that several funds might be considering getting out of the business, says Tom Garcia, chief executive officer of the Australian Institute of Superannuation Trustees (AIST), an industry body that represents 80 not-for-profit funds.
“We expect the vast majority of our funds to make an application, but my guess is that a lot of corporate funds are treating the arrival of MySuper as a line in the sand,” says Garcia. “They will be thinking about the heightened trustee duties and the increased reporting requirements and questioning whether it makes sense for them to continue running a superannuation fund. They might decide to outsource the job to another super fund.”
Mergers are already taking place, and in its most recent quarterly bulletin, Apra reported that at least two corporate funds had transferred their assets to industry funds in the three months to December 2012.
"If a fund is not authorised in time to meet the January 2014 MySuper deadline it will have to inform its employers it can no longer accept super guarantee contributions," Garcia continues, explaining the consequences of non-compliance. "All accrued default amounts would need to be rolled out to another provider. This could effectively mean the end of the fund."
The government has already extended the deadline for applications by three months – from October this year to the end of December – but even this might not be enough to win over funds that have already deemed the new rules to be too expensive and too onerous to implement.
Garcia, who took over the helm at AIST two weeks ago, says the institute has been doing its best to explain the letter of the law and guide its members through the application process. MySuper sets minimum standards for trustee obligations, performance reporting and insurance coverage.
“It’s such a comprehensive change that the legislation has had to be introduced in four stages,” he says. The final piece of legislation is not due to be passed in parliament until next month.
"This final Bill ties up loose ends from the other three tranches, but we are seeking that it cover some really important issues like the composition of the product dashboard, and a better balance between trustee obligations and consumer protections," says Garcia.
In particular, the industry is calling for trustees to be protected against the likelihood of vexatious litigation brought by disgruntled members regarding investment performance.
“Where there are clear breaches of fiduciary responsibilities, AIST supports the consumer's right to legal action,” says Garcia. “But it is important to remember that trustee boards make decisions as a collective, so their ability to make decisions must also be protected.”
Another outstanding matter not covered in the legislation is the ability for funds to apply fee caps for members with higher account balances. “MySuper doesn’t dictate whether administration fees should be charged at a flat rate or as a percentage of assets,” explains Garcia.
“If a fund charges a percentage then someone with a $1 million balance is paying significantly more for administration than a person with a $100,000 balance. There needs to be some cut off – some ability to apply a cap, and this doesn’t exist at present.”
Despite these unresolved issues, Apra is already processing MySuper applications and in the past two weeks has approved licences for Sunsuper and Cbus.
Garcia says funds are spending up to A$1 million to prepare an application. “A lot of funds are trying to simplify the process by re-badging their old default products, but even this requires some thought. It involves working out how to distribute costs equitably between the MySuper fund and other products in the stable.”
In general the MySuper initiative has been welcomed by Australia’s superannuation industry, and there are hopes that it will eliminate the old practice of putting apathetic members into high-commission, high-fee products with poor insurance.
“There were instances in the retail sector where people were put into a super product that paid a trailing commission to a financial adviser, and yet these members never received any advice,” says Garcia. “Other advisors were getting a cut every time a super guarantee contribution was made to a fund, which just seems crazy. These practices certainly weren’t in the best interest of members.”