2 June, 2021
The Treasury Laws Amendment (Your Future, Your Super) Bill 2021 introduces several schedules which make changes to Australia's superannuation system. Superannuation works in concert with the aged pension and voluntary savings to deliver Australians a relatively high quality of life in their later years. Australians now have over $3 trillion invested in super. I'd like to thank all those that have contacted my office to give feedback in relation to this legislation. Australia's superannuation system is highly regarded around the world, despite the rants that we've heard in this place. Australia is ranked seventh in the OECD in terms of private pension assets as a proportion of GDP. Overall, the Melbourne Mercer Global Pension Index ranks the Australian retirement system third in a field of 37 countries. In my view, it is essential that Australians are comfortable and secure and can lead a great life in their twilight years, and super is integral to that goal. Yet there is always room for improvement.
The recent Retirement Income Review, the royal commission into banking misconduct and several Productivity Commission reviews create the case for further change to the super system. I should note: if only we heard the same passion from the member for Goldstein in relation to the recommendations of the royal commission into banking. Seeking to implement recommendations arising from these reviews, overall, this bill makes some sensible amendments to improve the function of the super system. But there are some elements that are very concerning and which seem to ignore industry and community feedback and should be rethought.
Schedule 1 of the bill will make changes to the Super Guarantee (Administration) Act 1992 to limit the creation of multiple superannuation accounts for employees. The amendments implement the government's responses to recommendation 1 of the Productivity Commission's report, Superannuation: Assessing Efficiency and Competitiveness, and recommendation 3.5 of the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. This phase of reform will commence on 1 July 2021. From then, employers will no longer automatically create a new superannuation account in their chosen default fund for a new employee. Instead, this schedule will establish a stapling system whereby the employer obtains information about the employee's fund from the ATO if not provided by the employee.
This will mean that, as an employee, your super fund follows you between jobs. This is a good thing, and will ensure that your money is compounding in a single account over time instead of multiple accounts. This provision will also reduce red tape and paperwork for businesses and individuals. Generally, this provision could make the system more efficient and more effective, but there is a concern. Funds should be performance tested before they are stapled. We can't have a situation where employees are stapled to a nonperforming fund. Right now, a poorly performing fund could be linked to an individual, and this will lead to suboptimal financial outcomes for that person. The government is aware of this deficiency and should take steps to fix it.
Schedule 2 of this bill will amend the Superannuation Industry (Supervision) Act 1993 to require the Australian Prudential Regulatory Authority to conduct an annual performance test for MySuper products and other products which will be set out in regulations. MySuper is the type of account you can have with a super fund. It's the default account that your employer will pay your super into unless you choose a different option. MySuper accounts typically offer lower fees and simple features. According to the bill's explanatory memorandum, these amendments will seek to ensure that superannuation products have their performance assessed against an objective, consistently applied benchmark, giving greater transparency to beneficiaries and protecting beneficiaries from underperforming products.
A superannuation trustee providing such products will be required to give notice to its members who hold a product that has failed the performance test. Where a product has failed the performance test in two consecutive years, the trustee is prohibited from accepting new beneficiaries into that product. The regulations will specify circumstances which must be satisfied in order for APRA to lift the prohibition. Future regulations will prescribe other products to be included in the testing. APRA will also be provided with a prudential standard making power in relation to resolution making. This schedule will, if applied correctly, increase transparency and accountability in the super system, and I support that. Members of funds will be the beneficiaries if this is properly applied.
I've outlined some concerns about performance testing previously. All products must be tested. So I call on the government to make sure that the regulations mandate that all funds be tested. In addition, the government should consider increasing the lead time on the commencement of this schedule from after this bill receives royal assent to later this year or the next. This is because some products won't be tested in time to be vetted before stapling, and we could have a situation where people are stapled to funds that have not been performance tested, and that would be a compounding disadvantage for many years. The government should set out the mechanism in the regulations where trustees can appeal decisions taken by APRA in relation to performance test outcomes. Time should be taken to sort through these issues.
I have grave concerns about certain elements of schedule 3. It's quite interesting that these powers are in fact being provided by a coalition government, because much of schedule 3 goes against liberal values when it comes to not intervening in the market. Schedule 3 makes amendment to the SI(S) Act to require each trustee of a registrable superannuation entity and each trustee of a self-managed super fund to perform the trustee's duties and exercise the trustee's power in the best financial interests of the beneficiaries.
The intent of this aspect is to increase the accountability of superannuation trustees in relation to the execution of their fiduciary duties. While it might seem sensible on face value—certainly after the blustering that we've heard in this place—it may have far-reaching consequences that will not be in the best interests of members, and it could impact, in fact, the interests and wellbeing of members. It's because, when considering whether something is in best financial interests, we could also capture a large number of activities and investments that exist in a grey area and that may become beneficial. For example, it could be that Australian Ethical super purchasing carbon offsets or spending money planting trees to reduce emissions—something which their members arguably want—could be prohibited under the best financial interests covenant as, without a price on carbon or an emissions trading scheme, it simply won't be given a financial value.
Adding 'financial' to 'best interests' is something I'm concerned about. The government claims that this change arises from the 22nd recommendation of the Productivity Commission's review into superannuation, which recommended the government pursue a clearer articulation of what 'best interests' means but also left open by what mechanism it could occur. The Law Council of Australia, Commissioner Hayne of the banking royal commission, the Australian Industry Group, the Australian Institute of Company Directors and so on have all rejected the need for any legislative change. Commissioner Hayne, for example, stated:
I consider that the existing rules, especially the best interests covenant and the sole purpose test, set the necessary standards. Those standards should be applied according to their terms and without more specific elaboration.
The Australian Institute of Company Directors said that this issue:
… was recently considered by Justice Jagot of the Federal Court in in APRA v Kelaher  … It was the submission of all parties in that case (including APRA), and accepted by Justice Jagot that "the best interests of the beneficiaries are normally their best financial interests".
The Law Council, in its submission to the exposure draft of this bill, stated that it understands that the current effect of section 52 is that the best interests of beneficiaries are normally, but not always, considered by the courts to be their best financial interests and that this provides for appropriate flexibility, practically, when applying this clause. So I ask: why is it therefore necessary to amend that section, if it normally means best financial interests and is believed to have all the necessary flexibility and practicality built in, especially as it could have far-reaching negative consequences for many different activities?
The reversal of the burden of proof set out in schedule 3 makes amendments which reverse the evidentiary burden of proof in relation to civil proceedings in the event of a contravention of the covenant of best financial interests. This is problematic. Reversing the burden of proof is usually reserved for grave civil or criminal offences. Compounding this, the provision also lacks a materiality threshold. Anything and everything could be considered by the regulator. I quote CPA Australia, who outlined the problems with this arrangement:
… this means … that a decision of any magnitude can be queried by the relevant regulator, requiring trustees to produce evidence on all occasions that trustees have acted in the best interests of members.
APRA should therefore provide guidance as to what level and kind of expenditure will be scrutinised. They should also detail what kinds of records are to be kept, because we have to be clear. An increase in operating costs that would flow from this compliance requirement will be passed on to members, so ultimately it will be members of funds that will pay the price.
Schedule 3 has one more change that needs to be highlighted. The bill amends the SI(S) Act to allow regulations to be made to specify that certain payments or investments made by trustees or registrable superannuation entities are prohibited, or prohibited unless certain conditions are met. I find this is a most outrageous provision, certainly coming from a Liberal government. The government claims that this regulation-making power is appropriate to ensure there is sufficient flexibility for the government to respond quickly to evolving industry practices as needed, and any regulations made would be subject to parliamentary scrutiny and disallowance. This highly politicises a question of commercial decisions. This means the Treasurer is being given the power to overrule the fiduciary duty, the commercial decisions, made by the trustees of superannuation funds. This power was not a recommendation of either the Productivity Commission report the government is relying on or the royal commission final report. The government states that it was recommended by APRA, but APRA also did not say what form this power could take. So it does beg the question: why is the government seeking this power?
Of all the sections in this bill, this one is the most alarming for my constituents in the feedback I have received. They fear that it could be used to block investments in clean technologies or programs that promote social good. I agree with the Australian Institute of Company Directors, which believed that this clause would 'allow the government of the day to fetter the discretion' of superannuation funds and directors and their ability to make 'legitimate expenditure'. The Australian Industry Group also stated:
The approach would create a red tape nightmare in the oversight of superannuation funds. Instead of concentrating on running funds in the best interests of their members, funds would be embroiled in compliance with an exceptionally intrusive regime.
The threat of this ban and the uncertainty it generates would also affect how assets are priced due to increased regulatory risk. This is compounded by the latest draft regulations, which offer no forward guidance about the criteria for banned activities. To remedy this the government should amend the provision to that banning of investment activities so that it must meet a public interest test and must be first referred to the minister by APRA at the very least.
This bill will introduce some measures to make super more efficient and effective. While it may improve efficiency, it is undermined by the very problematic provisions of schedule 3. Whilst the government claims to be focused on efficiencies and better delivering for members, I would argue that there are some really concerning interventions and inclusions in this schedule that should raise a lot of alarm bells. I recommend the government go back to the drawing board on schedule 3 and re-engage with stakeholders.