Who could even question the requirement that super funds act in the best financial interests of their members?
Labor’s new assistant treasurer, Stephen Jones, is who.
While the treasurer himself has been working on Thursday’s main economic statement, Jones has asked the treasury to consider concerns related to the “regulatory complexity” of a requirement that funds act in the best financial interests of their members, a requirement than at first glance. it’s simple
Interestingly, he titled the ad “Review to strengthen super”, a title he may have to rework if the review believes the duty should be weakened.
The Coalition strengthened the requirement a year ago as part of a suite of reforms called “Your future, your super”, changing it from a duty to act in the “best interests” of members to the best “financial” interests of members.
The difference between the two is that while spending members’ funds on things like corporate hospitality or wellness services or news websites might be in the members’ best interests, it need not be in the best interests of the members
And that’s what retirement funds are supposed to be: growing rather than spending the trillions entrusted to them for workers’ retirement.
To make sure the funds do, the Coalition reversed the onus of proof. If asked, fund managers had to be able to demonstrate that their spending was in the best financial interests of their members, or at least in what they thought at the time was in the best financial interests of their members.
“Best Financial Interests” under review
This could be the “regulatory complexity” the deputy treasurer refers to – a requirement for directors to use their members’ funds to increase their members’ funds and to be able to demonstrate that this is what they were trying to do if asked .
It’s good news for members, whose mandatorily-vested funds are managed by directors, but worrying for some directors (in industry funds most directors are union and employer representatives), and Jones heard from directors .
It has supported them in another concern.
The Coalition’s bylaws require funds to detail their spending on political donations and payments to related parties and industry bodies, as well as their spending on marketing, in a statement to members before each annual meeting.
Transparency to review
Jones has drafted regulations that remove the detailing requirement while leaving in place the fund requirement to report totals to members.
It won’t save the background work (they still have to itemize each payment to prepare the totals), but it will save them embarrassment.
And he is handling perhaps the most important super reform of all.
Last year, for the first time, each of the 80 MySuper funds (the funds that new employees can join) was ranked according to their performance.
Your future, your super had already achieved a lot before you put it on pause. (Unsplash: Melissa Walker Horn)
Performance test for review
Thirteen have failed. They were not being qualified in absolute returns. That would have been unfair. They were ranked based on their past seven-year returns taking into account their stated investment strategy.
If your strategy had been, say, to invest all of your members’ funds in stocks, and stocks did poorly, you’d be fine as long as the fund’s stocks didn’t do significantly worse than the stock market as a whole over seven years . — which is a way of saying it’s a hard test to fail.
Under Your Future, Your Super rules, the 13 funds that failed had to write to their members telling them they had performed poorly and suggesting they switch to a better-performing product.
The second test will be this year. Any fund that fails two years in a row is barred from accepting new members.
Not likely to come to that. Eleven of the 13 have merged or are in the process of merging with better funds, which is how the system is supposed to work. It is weeding out defective funds and advancing members’ interests.
Even the fear of failure advances members’ interests. Industry watchers say funds that are likely to fail are cutting their fees to make sure they don’t. The performance test is on returns net of commissions.
Twelve month break
From next year, the test was to be extended to all super funds, default or not, so that mistakes could really be weeded out. The Productivity Commission found that non-default funds performed significantly worse than default funds.
But Jones says he will halt the extension, “pause” is his word, for 12 months while the Treasury re-checks the system for “unintended outcomes”.
Hundreds of funds (some of them bad) will be suspended, which was not intended when the system was established.
There are real concerns about the test. It is retrospective, as it should be, and struggling funds will make it worse by an exodus of partners when the results are released.
But these are concerns of fund managers, not their members. And Australians spend more money on super than on anything other than housing.
A landmark 2018 Productivity Commission inquiry found much of the system was a “mess” that allowed underperforming funds to produce $660,000 less in retirement than well-performing funds.
Your Future, Your Super was the government’s response to this. Much has already been achieved. Until the new minister paused, he was about to get more.
Peter Martin is visiting professor at the Crawford School of Public Policy, Australian National University. This piece first appeared on The Conversation.