The Super System Review chaired by Jeremy Cooper handed down its final report to the Government on its scheduled date of 30 June 2010. The Government released the report to the industry on 5th July.
The report has provided its recommendations under ten key areas.
The report has provided a total of 177 recommendations under these key areas. To access the full report, go to the 'Super System Review' Government website - superannuation system review.
Below we have completed the hard work for you and highlighted the main recommendations that we believe would be of interest to adviser businesses and your superannuation clients.
View from the water cooler
There is a fair bit of 'review fatigue' going around at the moment. (Oh it's Monday – must be time for another 500 page review to land on the desk to be read and digested by lunchtime…). The Cooper Review comes in on top of the Government's 'Future of Financial Advice' policy announcements, which came after the Henry Tax Review, which was preceded by the Ripoll Enquiry.
There is no doubt some of the recommendations in Cooper will add value. Improvements to back-office efficiency through Superstream, the tax and regulatory reforms, are in general welcome, as is the 'hands off' approach to SMSFs. SMSFs have largely been left alone, other than changes to investment rules such as removing any right to invest in in-house assets, collectibles and personal use assets.
Other recommendations in Cooper are not so understandable. Removing all commissions on life insurance premiums in super flies directly in the face of the 'Future of Financial Advice' policy agent - which has clearly deferred decision making on this area. The MySuper proposal itself – a single vanilla super arrangement for employer super members that haven't exercised choice of fund, will remove options these members already have in their current arrangements. All in the name of 'saving money'- even though we will have to build a whole new product for it (which will cost money…).
And it is difficult to gauge the likelihood the reforms will be fully implemented. We have a federal election happening soon, that may change the Government (if so most of the Cooper recommendations may be ditched) and even if the Gillard Government is returned to power, it is a distinct possibility there will be a new Minister in charge. Also PM Julia Gillard has shown over the mining tax that she is quite willing to throw out radical proposals from public servants, in the interests of pragmatism.
1.8 Intra-fund advice
Neither advice to members (other than intra-fund advice), nor advice to employers should be 'bundled' with MySuper products.
1.9 Paying for intra-fund advice
Advice to members of a MySuper product (other than intra-fund advice) should only be provided on request and trustees should only be able to deduct the costs of advice about superannuation from a member's account with the member's written agreement.
Comment: The cost of intra-fund advice will be borne by the members who choose to take advantage of the service however, unless the scope of intra-fund advice is expanded, it will not take into consideration a client's total situation. This may not be an advantage to those seeking simple but holistic advice and they may need to seek this from a licensed financial adviser.
This provides an opportunity for advisers to create a new business segment and take this business opportunity by aligning themselves with smaller superannuation funds (ie churches, corporate funds, other special interest groups).
1.10 Cost of services to employers
The cost of advice or services provided to employers should not be borne in any way, directly or indirectly, by MySuper members.
Comment: This will impact employers who have previously relied upon a default fund when satisfying their choice of super and employer guarantee commitments.
1.11 Ban on commissions
Trustees of MySuper products should not:
(a) pay or fund any product based up-front or trailing commission or other similar payment; or
(b) make or fund any payment that relates to volume, in respect of superannuation advice or other products or services provided to members.
Comment: This does not come as a shock given the Government's previous announcements and the interim reports on fees. Advisers obviously need to be aware of this fact; however, it will not prevent members from seeking advice and paying for advice as per recommendation 1.12.
Obviously, an adviser will need to be charging on a fee for service basis within this market segment with a set advice package to the provided. It is doubtful whether this would be a cost effective exercise for a client seeking simple advice.
1.12 & 1.25 Annual advice renewal notice
Members of MySuper and Choice products should only be provided with advice about superannuation (other than intra-fund advice) under arrangements that require the member to renew the advice service each year on a renewal notice from the adviser.
Comment: This is consistent with the Government's view on annual renew notices for client's receiving advice from financial advisers. The type of advice within this sector is more transactional and less complex in nature which means advisers will need to charge their clients for the true cost of the advice and not amortise it over a period of time. However, as mentioned beforehand, it is doubtful whether this would be a cost effective exercise for a client seeking simple advice.
For Choice members, the concern exists if the member opts out of the advice, the adviser will be unable to make appropriate ongoing recommendations (ie reweighting of portfolios due to significant changes in market conditions). The industry is concerned as to what the adviser's ongoing liability will be in the future.
1.14 Commissions on insurance
Trustees of MySuper products should not pay premiums for insured member benefits that include or fund an up-front or trailing commission or like payment.
Comment: This should lower the cost of insurance premiums for super members within this segment. Unless the trustee of the fund can provide a risk insurance analysis within the intra-fund advice regime, an opportunity may exist for an adviser. Converting clients from a MySuper account into a Choice account will need to form part of an adviser's client development strategy and targeting specific client segments (ie wealth accumulators).
1.18 Two year transition period
The superannuation industry should have at least two years to transition to MySuper and the new Choice architecture.
Comment: This short lead time concerns the industry; and the Government will need to draft and make the changes law before super funds will be likely to implement the changes.
1.20 More fee bans
Trustees of Choice sector products should also be unable to charge entry fees and should only charge exit fees on a cost recovery basis.
Comment: This marks the end to entry and exit fees within this sector. This will have a significant impact on advisers who have chosen exit fee products as part of their remuneration structure. This does not come as a shock to the industry as this had been mentioned in media releases, preliminary reports and industry discussions.
1.21 Cost of advice
Neither advice to members (other than intra-fund advice), nor advice to employers should be bundled with Choice products or with any other product in the Choice architecture model, including products offered to SMSFs.
Comment: As highlighted above within the MySuper model, any cost of advice will not be borne by the members of the fund as a whole. This will mean no ongoing trail commissions will be paid (see recommendation 1.24) by super fund trustees to advisers should they choose to offer an advice package in this segment of the market.
1.22 Payment for advice
Advice to members of a Choice product or of any other product in the Choice architecture model (other than intra-fund advice) should only be provided on request and trustees should only be able to deduct the costs of advice about superannuation from a member's account with the members' written agreement.
Comment: Client consent to the cost of advice being deducted from their superannuation account is consistent with current practice within the industry. However, the cost of advice deducted from the member's account will be strictly limited to the advice about superannuation.
1.23 Indirect payment for cost of advice
The costs of advice to employers should not be borne in any way, directly or indirectly, by members of Choice products or by members of any other products in the Choice architecture model.
1.24 Additional fee bans
Trustees of Choice products or of any other product in the Choice architecture model should not:
(a) pay or fund any product-based up-front or trailing commission or other similar payment; or
(b) make or fund any payment that relates to volume, in respect of superannuation advice or other products or services provided to members.
Comment: The fee for service based advice model will become the norm and advisers will have until 30 June 2012 to transition across. For clients and super fund members, this means the true cost of advice will be known and the need to demonstrate the value of the advice provided will be essential.
1.26 No commissions on insurance
Trustees of Choice products or of any other product in the Choice architecture model should not pay premiums for insured member benefits that include or fund an up-front or trailing commission or like payment.
Comment: This appears contrary to the Government's previously stated position under 'Future of financial advice' to leave out the issue of commissions on insurance until next year. Granted the Government is seeking to make the cost of advice and products more transparent and less opaque. However, this recommendation is a cause for concern for the industry due to the level of underinsurance within Australia, whether this will contribute towards it and if the recommendations within area five of the report will address this problem.
3.4 Tax consequences of investment strategies
That section 52(2)(f) of the SIS Act be amended to include 'the taxation consequences of the strategy, in light of the circumstances of the fund', as one of the factors to which APRA fund trustees must 'have regard', and to ensure that trustees consider those taxation consequences when giving instructions in mandates to investment managers.
Comment: Increasing the focus on the taxation consequences of investments is a positive step forward as the taxation implications to a member are not always transparent – that is the tax is paid by the fund. Not all super funds use mandates, so the true extent of this recommendation will come to light as the Government consults the industry.
3.5 Valuation information
That section 52(2)(f) of the SIS Act be amended to include 'the availability of valuation information that is both timely and independent of the fund manager, product provider or security issuer', as one of the factors to which APRA fund trustees must 'have regard'.
Comment: Timing, accurate and availability of valuation information has been a constant issue within the industry. Driving improvement within this area will ensure members will have an accurate depiction of the true value of their investments. Whether or not this will impact larger APRA funds with direct assets (such as properties or infrastructure) remains to be seen.
3.6 Trustee proxy voting
All large APRA funds should publish their proxy voting policies and procedures, and disclose their voting behaviour to members on their websites.
Comment: Not all APRA fund trustees take advantage of proxy voting. However, those that do can have an impact on companies held with the member's superannuation portfolio. As superannuation funds become larger and further consolidation occurs, it will be important for APRA fund trustees to publish their proxy voting policies and disclose their voting behaviour to members. Members of the funds may have a clear conflict of opinion and seek to understand why the trustee has taken such a stance.
4.1 to 4.20 Transparency and comparability
The Australian superannuation system is characterised by a lack of transparency, comparability and, consequently, accountability. There is no standardised methodology for calculating and disclosing relevant fund or investment option information.
These recommendations attempt to compel standard terms and disclosure in both MySuper and Choice accounts.
Comment: There is currently limited ability for members to meaningfully compare the performance of their superannuation fund. In part, this is because no two funds are the same. MySuper is an attempt at a fast food style which may result in different offerings of MySuper being easily comparable. For Choice funds, members will still benefit from receiving professional financial advice regarding the products which best suit their needs.
5.1 MySuper
Life insurance cover and TPD cover (where available, depending on occupational and demographic factors) must be offered on an opt-out basis in MySuper products.
5.2 Minimum level of cover
The requirement for a minimum level of life insurance that must be offered by eligible choice funds should be repealed. Refer Regulation 9A and Schedule 1 to the Superannuation Guarantee (Administration) Regulations 1993.
5.6 Choice funds
In the Choice sector, trustees should be allowed to offer life and TPD insurance on an opt-out or opt-in basis, or not at all.
Comment: Choice funds have been recommended to have greater flexibility around providing members with their insurance options in comparison to MySuper accounts. Importantly, advisers will need to incorporate any insurance cover already included in a clients MySuper account.
5.7 SCT extended powers
The Superannuation (Resolution of Complaints) Act 1993 should be amended to allow the SCT to consider complaints in respect of TPD claims when the claim has been lodged with the trustee within six years of the member ceasing employment and the complaint has been made to the SCT within two years of the trustee's decision.
Comment: This provides super fund members with the opportunity to have the decision independently reviewed if they believe their claim under TPD insurance has not be fairly dealt with.
5.9 Income protection
Income protection may be offered on an opt-out or opt-in basis, or not at all by trustees of MySuper or Choice funds.
Comment: Further importance of electing a Choice super fund like IOOF Pursuit Select that offers its members a flexible income protection insurance option.
5.11 Large APRA fund disclosures
Trustees of large APRA funds should be required to publish on their websites the terms and conditions applicable to each type of insurance offered by the fund, along with other information relevant to members, including:
(a) a plain English explanation of the policy terms;
(b) premium tables showing the gross premium charged for each category of member (if relevant) at each $1,000 of cover at current age with a standard frequency of payment. Any additional cost associated with the insurance should be noted as part of this disclosure; and
(c) TPD claim success rate on a basis to be determined after consultation with the industry.
5.13 MySuper
MySuper trustees should pro-actively offer intra-fund advice to members in relation to their insurance in MySuper.
5.14 Binding death nominations
The SIS Act should be amended so that binding death nominations would be invalidated when certain 'life events' occur in respect of the member. The current systems used by States and Territories under which testamentary dispositions are invalidated could be used as guidance for creating a single national model.
5.15 Binding death nominations
Subject to recommendation 5.14 being implemented, the SIS Act should be amended so that binding death benefit nominations only have to be reconfirmed every five years.
Comment: This would reduce the burden for advisers and super members regarding maintaining a valid binding nomination. Note that Pursuit Select superannuation product currently notifies members and their advisers when their binding nomination is up for renewal. Also if the life events issue (eg becoming divorced or birth of a child) is implemented, advisers will need to constantly be looking to see if any of these events have occurred and reminding clients often through the ongoing review process.
7.1 MySuper
MySuper products must include one type of income stream product, either through the fund or in conjunction with another provider, so that members can remain in the fund and regard MySuper as a whole of life product. The Government should consult comprehensively with the industry before mandating the post-retirement arrangements to apply to MySuper products.
Comment: Is this back to the future? Hasn't the Government been focusing over the years of trying to provide retirees with greater flexibility, choice and transparency for retirement income products, both inside and outside of super?
7.2 Intra-fund advice
Trustees should be required to offer intra-fund advice proactively to MySuper members as they approach normal retirement age. Over time, advice should be available on as broad a range as possible of the financial issues that members will face in retirement, subject to the requirements of the sole purpose test. In the near term, advice should address investment allocation and alternative retirement products offered within the fund.
7.3 Promotion of Intra-fund advice
Trustees should offer intra-fund advice proactively to MySuper members in the retirement phase at periodic intervals.
Comment: Many have argued that it is difficult for a trustee to offer intra-fund advice regarding retirement needs and objectives if the fund is only able to offer advice on their superannuation product. If trustees are not able to take into account a member's personal financial circumstances, it may be difficult to provide holistic advice; let alone clear, concise and effective advice. This recommendation appears to be contrary to the objective of improving the standard of advice.
It is our understanding that a trustee is unable to incorporate a member's non-super investment assets, insurance outside of super, retirement, social security benefits and estate planning issues. We would have thought, as an industry, we look to improve the quality of advice and not limit it to a small part of the overall picture.
7.4 MySuper retirement investment strategy
Trustees must devise a separate investment strategy for post-retirement members in MySuper products which has regard to the factors as set out in section 52(2)(f) of the SIS Act (investment strategy and objectives) as well as inflation and longevity risk.
8.6 RG 146 and SMSFs
The Government should task ASIC, in consultation with the industry and the 'expert advisory panel', to develop the SMSF specialist knowledge component of RG 146, which would focus on increased knowledge and competency with respect to the SIS Act.
Comment: This recommendation is consistent with Cooper's theme of acknowledging that service providers play a significant 'gatekeeper role' in SMSFs and are used in some form by the majority of trustees. The IOOF TechConnect team is available to assist with adviser training and ongoing support through the provision of high quality information.
8.13 Related party transactions
SIS legislation relating to acquisitions and disposals between related parties in SMSFs (but not APRA regulated funds) should be amended so that, either:
(a) where an underlying market exists, all acquisitions and disposal of assets between SMSFs and related parties must be conducted through that market; or
(b) where an underlying market does not exist, acquisitions or disposals of assets between related parties must be supported by a valuation from a suitably qualified independent valuer.
Comment: Advisers should prepare to assist SMSF clients to identify and review any future related party transactions and ensure that appropriate valuations are obtained.
8.14 Collectables
SIS legislation, in relation to SMSFs, should be amended so that:
(a) the acquisition of collectables and personal use assets by SMSF trustees be prohibited;
(b) SMSFs that own collectables or personal use assets be provided a five year transition period, in which to convert to a Small APRA Fund (SAF) or, alternatively, dispose of those assets. No acquisitions of collectables and personal use assets would be permissible during the transition period; and
Comment: Advisers should review the assets of SMSF clients to determine if collectables are held and consider alternative structures for clients holding collectable assets. Importantly, this recommendation varies from the preliminary recommendation in that the transitional period is halved to five years.
IOOF (through AET Super Solutions) is one of a very small number of organisations that offer SAFs. We may be able to provide you with early guidance as to whether any collectables that your SMSF clients currently hold may be acceptable in a SAF.
8.16 Market values
The Government should legislate to require SMSFs to value their assets at net market value.
Comment: Unlike all other superannuation funds, SMSFs are not currently required to value assets at their market value for accounting purposes. Typically, listed assets and managed funds are valued at market value; however, private assets may not have been valued for many years. It would be timely for advisers to review the currency of the asset valuations in clients' SMSFs and be prepared to update sooner rather than later.
8.29 Insurance
The Government should amend the investment strategy operating standard so that SMSF trustees are required to consider life and TPD insurance for SMSF members as part of their investment strategy.
Comment: It is widely acknowledged that the levels of death and disability insurance held in SMSFs are even lower than the insurances held in retail superannuation. In many instances, this may be because the age demographic and level of personal wealth of SMSF members is such that insurance is unnecessary. In other instances, it may be that SMSF members are unaware of the advantages of holding insurance in super. This provides an opportunity for advisers to revisit both the insurance arrangements and the investment strategies of their SMSF clients.
Nil Superannuation Complaints Tribunal (SCT)
The preliminary Cooper Review report contained a preliminary recommendation that SMSF members have access to the SCT for death benefit disputes, including death benefit distribution and payment of insurance amounts. It was also recommended that the SMSF supervisory levy was increased to fund additional SCT work.
Comment: This recommendation was reversed in the final report acknowledging that the majority of SMSFs would not utilise the SCT which would create cross-subsidisation of the few SMSFs who would use the services of the SCT. It was also acknowledged that, in the majority of cases, disputes would not be limited solely to superannuation matters and would ultimately be decided in court. Access to the SCT for one part of the dispute would therefore not increase efficiencies.
10.11 CGT rollover relief
CGT rollover relief should be given to superannuation funds in the terms previously afforded by the Tax Laws Amendment (2005 Measures No.2) Act 2005 and should be permanently available to the industry.
Comment: This recommendation extends the current temporary relief past the current exemption to 30 June 2011 indefinitely. Importantly, the recommendation also encompasses the ability to carry forward unrealised capital gains, as well as the current temporary ability to carry forward capital losses. If accepted, this recommendation may provide an additional opportunity for advisers to revisit merger opportunities for smaller funds that they are involved with.
10.13 Approved Deposit Funds (ADFs)
New Approved Deposit Funds should not be allowed to be established after MySuper becomes effective and a mechanism should be considered for facilitating existing ADFs to be transferred to MySuper or other superannuation products.
Comment: This recommendation provides an opportunity for advisers to proactively review any clients who may still hold ADFs and convert them to a superannuation product. IOOF Pursuit Select accepts rollovers of any ADFs.
Viewpoint
Contents
Newsflash: Drawdown relief for account-based pensions extended into 2010/2011 financial year
Newsflash: The Super System Review Final Report – Cooper Review
Technical Strategy: Limited recourse borrowing arrangements
Technical Strategy: Henry Tax recommendation to marginal tax rates – what could it mean?
Technical Strategy: IOOF Pursuit provides added strategy benefits
Technical Strategy: Small APRA Funds
Product Spotlight: Creating wealth tax effectively via WealthBuilder
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