Labor Senators
Introduction
Labor strongly supports the intentions of the Treasury Laws Amendment (Your Future, Your Super) Bill 2020 (the bill). Superannuation is a strong Labor legacy, and Labor has always stood for high-performing superannuation. Labor Senators welcome the government's late commitment to action on serious issues such as multiple accounts and underperforming superannuation funds.
However, this bill as written will not deliver better outcomes for Australian superannuation members. The evidence provided to this inquiry makes it clear that the government's proposed approach to superannuation would damage retirement outcomes for ordinary Australians, and subject our superannuation system to considerable risk.
Evidence presented to the inquiry identifies critical flaws in the bill:
Political override power: The bill includes an extraordinary power that would allow the Treasurer to personally override any investment decision or payment decision made by a superannuation trustee.
Stapling to underperforming funds: The implementation of the stapling mechanism would cause up to three million Australians to be stapled to underperforming funds.
Impact on insurance: Australian workers in certain industries could be left without adequate insurance coverage as a result of the bill.
Failure to cover all APRA-regulated funds: The bill explicitly excludes up to one-third of all superannuation funds regulated by APRA from performance measurement.
Flawed performance measurement: Stakeholders have identified numerous flaws in the performance benchmarks originally proposed by the government, including the exclusion of administration fees and the potential to discourage investment in Australian assets.
Administrative burden on funds: The drafting of the proposed "best financial interests duty" provisions could place undue administrative costs on superannuation funds, which will be passed on to members in the form of higher costs.
Administrative burden on employers: The proposed start date of the bill— less than three months from the tabling of this report—could have significant impacts on employers, who will be required to implement changes to payroll processes in a very short timeframe.
Labor Senators cannot recommend passage of the bill in its current form. We encourage the government to reconsider the issues raised by stakeholders, and revise the bill before returning it to Parliament.
Concerns relating to the bill as a whole
Lack of draft regulations
It should be noted that this bill delegates significant power to legislative instruments. As the government has only released partial draft regulations for this bill on the day before this report is due to be finalised, it is impossible for the committee to fully assess the impacts of the bill on the superannuation system.
It should be noted that the Chair of this committee previously recommended that regulations should be presented in a timely fashion so the Senate is able to review legislation as a whole. The Senate should note that this did not occur.
Scope of delegated powers
The fifteen powers delegated by this bill include:
requirements in relation to what a stapled fund is;
details of the processes that must be followed by employers in relation to the stapling system;
all elements of the performance benchmarking system;
the ability to proscribe exemptions from the performance system;
requirements to comply with the best financial interests duty; and
defining any given payment made by a superannuation fund as not being in the best financial interest of members.
It is clear the significant scope of the powers granted under this bill would give Treasury ministers unprecedented power over the superannuation system. The Senate Scrutiny of Bills Committee's report on the bill explicitly drew attention to the scope of the delegated powers in this legislation, which has been highlighted in the Chair's draft.
Labor Senators are of the view that the government should consider whether some of these matters would be better dealt with by primary legislation.
Lack of consideration of regulatory impact
The government has claimed that the bill implements the government's response to the Productivity Commission's extensive inquiry into the superannuation system. As a result, the Treasury certified the Productivity Commission inquiry into the bill as an appropriate substitute for a full regulatory impact statement.
However, evidence provided to the committee makes clear that the bill will not faithfully implement the recommendations made by the Productivity Commission.
Dr David Bell, of the Conexus Institute, noted in his evidence to the committee that, in relation to the stapling model set out in the bill to address multiple accounts:
…this proposed model is quite different from the model proposed by the Productivity Commission, because the model proposed by the Productivity Commission introduced what I call institutional competition in the form of 'best in show' model.
Industry Super Australia noted in their submission that the bill's coverage does not match the recommendations of the Productivity Commission:
Contrary to recommendations of the Productivity Commission, the performance test excludes 'Choice' products unless they are 'Trustee Directed Products'—a category to be defined in yet-to-be-released Regulation.
The broader issue was noted by Mr Alistair Kinloch, of AMP, in his evidence to the committee:
…the explanatory memorandum states that the Productivity Commission report, Superannuation: assessing efficiency and competitiveness, has been certified, I think, by the office of regulations, as equivalent to a regulatory impact statement. By any standard, that can't be considered a valid statement.
The government's decision to certify a Productivity Commission report that bears limited resemblance to the bill as an appropriate substitute for a regulatory impact statement is a questionable decision.
Start date and administrative costs
This bill will make significant changes to the administration of superannuation in Australia. These changes do not only affect superannuation funds. Every employer in Australia will be required to change the way that they manage payroll systems and pay their employees superannuation.
Given the significant scale of the bill, it should be noted that the start date of the bill is less than three months away from the tabling of this report.
Labor Senators are concerned that this does not allow stakeholders much time to prepare and implement these changes. These issues are compounded by the fact that the government only released draft regulations for the bill—which contain much of the content of the policy—on the day before the tabling of this report.
These concerns were echoed by stakeholders—both in relation to the capacity of superannuation funds to adjust to the proposed changes, and the capacity of employers to implement the proposed changes to payroll and employment systems.
Dr Martin Fahy, of the Association of Superannuation Funds of Australia, stated:
…the proposed commencement date of 1 July 2021 is now between 80 and 90 days away. Given that the bill has not yet been passed and we haven't seen the draft regulations and some of the complexities that have been alluded to in the submissions that you have received, the question of whether there is sufficient time to implement the measures efficiently and successfully has to be addressed.
Mr Blake Briggs, of the Financial Services Council, made a similar observation:
Without draft regulations, it's virtually impossible for superannuation funds to fully understand their new obligations and to start working to prepare for the changes.
Employers will also find the start date a difficult in making sure fund go into the right accounts. Mr Richard Webb, from CPA Australia, stated:
A start date of July this year is going to be nigh impossible for most employers.
The submission by Ai Group, a major employer peak body, noted that:
…businesses are not confident that should the bill be passed, that there would be enough time to ready themselves for a 1 July 2021 date of effect.
Labor Senators believe that the government should reconsider the start date of the bill in light of these concerns.
Concerns relating to the stapling measures in Schedule 1
Schedule 1 of the bill aims to reduce the number of multiple accounts by overriding the existing system of industrial determination for superannuation funds. It must be noted that this measure does nothing to address the current stock of unintended multiple accounts.
Labor does support the implementation of Recommendation 3.5 of the Banking Royal Commission, which clearly states that 'A person should have only one default account'. However, Labor Senators do have concerns with the way the government has approach implementing this recommendation.
A number of significant issues have been raised by stakeholder in relation to this matter, many of which have been highlighted in the Chair's report.
Stapling and underperformance
The most concerning issue raised by stakeholders in relation to this measure is that it could result in stapling members to an underperforming fund. Rather than enhancing outcomes for Australian super members, it could lead to worse outcomes in the long run.
Dr Peter Burn, from the Australian Industry Group, stated:
The approach to reducing multiple accounts is flawed. Unlike the relevant recommendations in the Productivity Commission report, it fails to secure the quality of stapled funds and thereby adds to the risk that superannuation fund members would have a high proportion of their superannuation savings in a poor performing fund.
Mr James Pawluk, from the McKell Institute, highlighted in his evidence that the cost of stapling members to underperforming funds could exceed the benefits of reducing the number of multiple accounts.
Multiple accounts are one of the inefficiencies identified by the Productivity Commission. However, they also identified underperformance as the biggest problem that really hurts members, and for that reason they themselves made recommendations on the sequencing of reforms to ensure that you dealt with underperformance first, so that when you introduce a stapling measure it will at least ensure that members are going to be stapled to high-performing funds rather than low-performing funds.
Notwithstanding that, we still do have some concerns with the stapling measure as proposed, and that's why we've recommended that the smart way to move forward is to deal with underperformance and use the time you then have available to investigate better ways of doing the stapling than what's put forward in the legislation.
A key issue raised in relation to this matter was the issue of sequencing. As the stapling measure will come into effect on 1 July 2021, before the performance measures come into effect, underperforming funds will be able to keep accepting new members and become their stapled fund.
This view was supported by Mr David Haynes, from the Australian Institute of Superannuation Trustees:
We're also concerned that premature implementation of stapling will result in people being stapled to underperforming funds, saying that this could easily be addressed by sequencing the reforms to substantially address underperformance first.
This is not an insignificant concern. In a response to a question on notice, Treasury stated that:
21 out of 77 MySuper products are underperforming…[and] [t]hese products held over $100 billion in assets across 3 million accounts and charged $1.2 billion in fees annually.
In addition to the three million Australians with underperforming MySuper accounts, there is an unknown number of Australians who hold underperforming choice accounts. The fees charged to these members represents a very significant portion of the $1.8 billion in benefits claimed by the government in relation to this measure.
Labor Senators believe that no Australian should be stapled to an underperforming superannuation fund. The government should address concerns related to performance and the sequencing of reforms when revising this bill.
Leaving members with inadequate insurance
Stakeholders also raised the issue that the stapling measure would mean that some employees would not receive insurance appropriate to their profession or occupation. Workers in high-risk occupations who are stapled to funds that do not provide insurance cover for high-risk occupation could lose important insurance protections, and be worse off.
Ms Kim Shaw, from Maurice Blackburn, explains:
We're concerned that the bill might allow someone to be stapled to a fund with default insurance which is inappropriate to the worker's occupation or change in occupation. The Hayne royal commission highlighted the fee-for-no-service issues impacting fund members. This was where members paid for premiums for insurance on which they could never claim due to exclusions or very narrow eligibility definitions.
Supporting this view was Mr Justin Arter, from Cbus:
The bill will see many workers who join the building and construction industry stapled to a fund that doesn't provide insurance designed for workers in their industry. There are 34,800 new entrants to the construction workforce annually. Building and construction is the third-highest sector for fatalities in the workplace. Most workplace accidents occur among workers new to the industry, typically young men. The Productivity Commission recommended a mechanism to prevent adverse outcomes from stapling, including being stuck with unsuitable insurance. Without one, workers in the building and construction industries and their families are at risk of being left high and dry when tragedy strikes.
Mr Scott Connolly, from the ACTU, said in his evidence to the committee:
The impact is even worse under these proposed laws should the worker be one of the millions who move from a low-risk industry to a high-risk industry. According to ABS data, this represents over 25 per cent of people under the age of 25. These workers currently rely on important default fund insurance products that ensure their occupational risk profile is considered and that they receive valuable affordable insurance cover. It was this recognition that saw the parliament amend the 'putting members' interest first' laws. This provided a dangerous occupation exemption, whereby the parliament recognised the importance of insurance in superannuation for workers in hazardous industries like police officers, construction workers, emergency health professionals and truck drivers. Stapling under these proposed laws will leave these workers at risk of being stapled to a fund that does not provide them this insurance that they need. While the ACTU is not supportive of the recommendations in the Productivity Commission report, even it recommended that stapling should only occur after all underperforming funds have been removed from the system.
These changes may result in workers in high-risk industries who miss out on insurance provisions tailored to their industry. As a result, they may not qualify for payments in the event of death or total permanent disability. It should be noted that Parliament has previously provided carve-outs for these workers in other superannuation legislation.
Labor Senators are of the view that workers should be able to receive appropriate insurance coverage for their profession through their superannuation.
Concerns relating to the performance measures in Schedule 2
Labor strongly supports the implementation of a performance measure. However, the proposed measures in Schedule 2 are significantly flawed. Some stakeholders have indicated that the government's proposed performance measures could reward underperforming funds, incentivise funds to increase administration fees, or drive investment away from Australian unlisted assets.
Labor Senators understand that the government has attempted to address some of these issues in the draft regulations released on 28 April 2021—notably, in relation to the treatment of unlisted assets and the inclusion of administration fees. However, without adequate time to scrutinise these draft regulations, Labor Senators cannot be certain that these issues have been fully addressed.
Failure to cover all APRA-regulated funds
The stated intent of this legislation is to demand the highest level of accountability and performance for every Australian from their superannuation fund. On this test alone, this bill fails this measure.
Schedule 2 of the bill fails to capture all APRA-regulated superannuation products. It will cover two categories of superannuation product: MySuper products, which are already subject to increased levels of regulation, and a new category of product called "trustee-directed products". This definition has not previously been used in superannuation legislation.
Evidence from APRA indicates that these definitions will exclude one-third of all assets from performance measurement:
…based on our data from 30 June last year, the coverage of MySuper and choice trustee-directed products would be expected to cover two-thirds of the assets in APRA-regulated entities.
Mr Ian Silk from AustralianSuper stated:
We also recommend in our submission that all APRA regulated superannuation products be subject to performance benchmarking and annual performance assessment, not just MySuper and trustee directed products. It's unclear to us the policy merits of excluding any products if the policy objective is transparency around comparative fund performance.
These views were supported by the McKell Institute, Australian Institute of Superannuation Trustees, and Industry Super Australia as stated below:
Certainly it would be very high risk and dangerous to pass it without including all products, both choice and so-called member-directed rather than just trustee-directed. It also should be able to be passed, if you are going to pass it, with administration fees; that should happen if you are going to pass the bill. But the question of the risks around the performance formula itself is something that requires due consideration and care, and I think you'd really want to satisfy yourself that you're not going to lead to adverse outcomes, ultimately.
There are millions of people in 11 million choice products who might not be given any protection by this bill, and there are large numbers of people who will be stapled to underperforming funds. The government proposes to do the opposite of consumer protection in relation to those members: it intends to legislate consumer harm.
The key measures, in our view, are around the performance measures of the bill. When it comes to measuring performance, not a single superannuation fund or product should avoid rigorous performance testing. This is a clear message of the Productivity Commission and royal commission. Our submission shows that the exclusions flagged by the government and enabled by the bill will result in over eight million members, with almost $900 billion in assets in the APRA regulated sector, not benefiting from performance benchmarks.
When pressed about this issue of choice products not commencing at the same time as MySuper products by Labor Senators, Ms Danielle Press, from ASIC confirmed:
Obviously, the underperformance of choice products is not part of the Your Super, Your Future program of work at the moment. That would be a matter for government and the parliament to change the legislation.
Labor Senators are of the view that the government should ensure that all superannuation products are meeting the performance standards that Australians expect.
Australian Investment Penalty
A major concerned raised by stakeholders in relation to this bill is that the proposed performance benchmark could penalise trustees for investing in Australian unlisted assets—such as infrastructure, venture capital, or privately-owned businesses. The proposed mechanism would benchmark these long-term investments against international indexes that do not reflect the performance of Australian assets.
This view was explained by Mr Esposito, from Rest Super, and Dr Peter Burn, from Australian Industry Group:
I think it will have an impact on the types of investments undertaken, depending on the benchmarks that are settled on. The implementation of the proposed benchmarks would potentially lead to a lower level and different mix of investment because there'd be an inability to focus as much on optimal long-term returns. That will also have broader implications for the Australian economy. Some of these infrastructure and venture capital funds that you mentioned are also behind substantial unlisted investments in Australia. One example is in relation to the proposed infrastructure benchmark. The proposed benchmark has mainly North American infrastructure assets in it. About 80 per cent of that benchmark is comprised of infrastructure assets in North America and there is also a concentration of railways and electricity assets. Those may not be the types of assets that Rest would choose to maximise the best financial interests of its members. Rest may see better returns in other areas, but these benchmarks would discourage investments in those valuable assets.
The flaws in the measurement of performance would carry a high risk that the actual relative performance of funds and products would be misrepresented. There is further a high risk that the investment behaviour of funds would be adversely affected by the adoption of unsuitable benchmarks and that could impact negatively on fund performance and reduce the extent of super fund investment in areas like domestic infrastructure, for instance.
Senator Sheldon's interaction with Mr Blake Briggs, from the Financial Services Council, also supports the view from Mr Esposito and Dr Burn:
Mr Briggs: There's a generic 'other' category for benchmarking a whole range of different asset classes, like unlisted property, unlisted infrastructure, private debt, catastrophe bonds and all of those kinds of things. They're lumped into the 'other' category. A superannuation fund may have some concerns about investing in those assets if the benchmark doesn't properly reflect the underlying assets in that class, whilst a fund manager who specialises in one or more of those areas may be concerned that if their cyclical movements aren't coinciding with broader markets they may look poor relative to other types of assets, even though their asset class has actually performed quite well.
Senator SHELDON: And we're not necessarily talking about poorly-performing assets, we're talking about assets that won't fit the criteria of measurement, and so, as a result of that, they have a greater likelihood and potential of being excluded. Mr Briggs: Yes, that's correct.
Senator SHELDON: Even though they may be higher performing or equally performing?
Mr Briggs: It depends on the time frames, right? Broadly that's correct, but with the caveat that it's about whether or not any individual asset class performs well or not relative to other asset classes at that point in time. In a rising interest rate environment, some assets, such as illiquid investments, may not perform as well as liquid assets like the stock exchange, and so trustees may shy away from them because they underperform over a period. That being said, conversely, as interest rates have dropped over the last decade, illiquid assets have performed very well because the methodology for calculating their value has made them look very attractive. So markets have turned. Those who have ridden high over the last decade may no longer look so flash, and I think that's causing a bit of concern in the industry at the moment.
Dr David Bell, of the Conexus Institute, also stated:
There is a risk that members will remain in an underperforming fund, and that's because the performance test isn't effective at identifying underperforming funds. The reason for that is the two issues that we identified before. One is the benchmarking process, which creates a huge amount of noise in that assessment piece. The other issue is that the assessment of performance ignores asset allocation decisions.
Just to give you one example, if you'd allocated just 10 per cent more to global equities, compared to Australian equities, over the last eight years, that would have added 43 basis points of performance per annum over those eight years. They are important decisions for member outcomes, just as implementation decisions are. All these things are important. The impact of asset allocation is also important, and that's ignored in this test. Unless all elements of performance are captured in the performance test then the risk remains that the test won't work at identifying good or poor funds. The concern that you've raised, Senator Sheldon—that members may be placed in poorly performing funds or that they do not identify they are in poorly performing funds—is a real risk.
Labor Senators note that the government has attempted to address these issues through the draft regulations issued on 28 April 2021.
Ignoring administration fees
Stakeholders also noted that the government's initial proposal for benchmarking the performance of superannuation funds excluded consideration of administration fees.
Labor Senators note that the Productivity Commission identified high administration fees as a key factor causing low returns for superannuation members.
Ms Vicki Doyle, from REST Super, provided evidence to the committee highlighting 90 per cent of funds fees can come administration fees where she states:
To avoid detrimental impact on members, total fees and costs must be factored into the performance measurements. Excluding administration fees from the performance measurements will not provide a true indication of how a fund is delivering member outcomes. Our Rice Warner research shows that the administration fees can make up as much as 90 per cent of a member's total fees, and the impact to members with a $10,000 balance is disproportionately significant. We estimate there are millions of Australians with balances under $10,000. Measuring returns net of investment and administration fees will provide a more accurate view of how a fund is working in their members' best interests and delivering on their members' retirement outcomes.
This is supported by Mr James Pawluk, from the McKell Institute, and Mr Ian Silk, from AustralianSuper:
Also it does not cover all expenses—and, therefore, show the true outcome for members in the performance benchmark—by excluding administration fees. We believe that should be rectified in the legislation if you were to proceed with anything. If this doesn't occur, this is where you end up with that risk of distorting the market and leading consumers, when they do exercise choice, to make a bad one that's not actually in their interests.
We recommend that underperformance be assessed against a net benefit measure that of course includes administration fees, rather than net investment return alone. Members are entitled to strong investment performance, but at the end of the day it is the net return to members—that is what they receive in their accounts after investment performance fees and charges are all applied—that is most important to them.
Labor Senators note that the government has attempted to address these issues through the draft regulations issued on 28 April 2021.
Other performance issues
Labor Senators also note that a number of other concerns were raised by stakeholders in relation to the proposed performance benchmark. Some of these consequences, if realised, could have significant negative impacts on member balances.
Dr Martin Fahy, of the Association of Superannuation Funds of Australia, identified the issue of "index-hugging" as a significant potential issue.
There's also the possibility that funds, because of the short-term nature contrasted with the multiple decades over which pension liabilities are managed, might start to hug the index. That, depending on your perspective, could be seen as irrational. I know Senator Bragg has legitimately raised this question: why would an overperforming fund potentially move away from that strategy to hug an index. I think the challenge is that, given the possibility of a one in four chance you'll underperform, for somebody who is interested in the decades long returns of a member, running that risk would see you probably dialling down investments in non-indexed assets that make up the performance measure and, therefore, dial off some returns, which I think is at the heart of what Dr Bell talked about.
Dr David Knox, from Mercer, also concluded:
We believe that the test, together with the proposed benchmarks, will inevitably impose a constraint on the investment decisions made by super fund trustees and their investment committees—that is, due to the significant consequences of failing the test, trustees will limit the range of investments they're prepared to consider due to the risk of deviating from the benchmark. With this additional constraint placed on their investment choices, we believe that in many cases this will lead to lower long-term investment returns and therefore poorer outcomes for members.
One aspect of the proposed test is that it ignores the concept of risk or volatility in the investment returns. We all know that in the capital markets there is a strong correlation between high returns and high risk. In our submission, we've highlighted the fact that some funds which have achieved lower volatility of returns for their members could fail the test because their return was below the benchmark, despite having a better risk adjusted return than the benchmark would indicate. That is not a good outcome and is likely to lead to funds following the benchmark without necessarily seeking better outcomes for their members.
Mr Justin Arter, from Cbus, also made the point:
What we see in these benchmarks is, frankly, a rushed attempt to set out a group of benchmarks that all funds would need to adhere to. They are what are called passive benchmarks, which means that they are, at the margin, incentivising people to invest passively and not take what is called active risk or make a deliberate decision to go into illiquid assets and thereby generate better risk-adjusted returns for members. I've found over that period of time that, where you tinker with these sorts of benchmarks at the margin, it disincentivises people to take that risk-adjusted opportunity in infrastructure or real estate assets, as we would, for example, with our Cbus property subsidiary. At the end of the day, that has a chilling effect, and I'm quite sure it would not be the intention of anyone to disincentivise or create a chilling effect on investments elsewhere. The prospect of a benchmark is good to measure performance, of course, but it needs significant work so that it doesn't create perverse disincentives to get involved in strategies and investments that we will undertake and other large funds will undertake as part of the rebuild process out of COVID.
Labor Senators believe the government missed an opportunity to adequately address some of the performance benchmark issues by not presenting draft regulations to be scrutinised well ahead of the reporting date.
Concerns relating to the best financial interests duty in Schedule 3
Schedule 3 of the bill purports to create a new "best financial interest duty" for superannuation trustees, requiring them to prove that any payment made by a fund serves the financial interests of members.
Labor Senators are of that view that superannuation trustees are already required to act in the best financial interest of members, under existing legislation that requires them to act in the best interests of members.
APRA should use its existing powers to address cases where trustees are not acting in the best interests of members. The additional measures included in this schedule are redundant or actively damage the interests of superannuation members.
Mr Luke Barrett, from the Law Council of Australia, stated that:
In our view, trustees already have a duty to act in the best interests of members. This has an established meaning in case law. When you unpack that concept, what it really means in law is that a trustee has an obligation to exercise their powers and discretions in good faith, for a proper purpose and having regard to relevant considerations, and to do so fairly. This is a very versatile duty. It means that powers that are meant to be exercised for financial reasons must be exercised on financial grounds, but it also means that powers that were never meant to be used to produce financial gain can be exercised safely and sensibly without there being a demonstrable financial gain.
Stakeholders have raised some very significant issues in relation to this schedule. In light of these issues and the redundancy issues highlighted by the Law Council of Australia, Labor Senators are of the view that the government should reconsider whether any change to the best interest duty of trustees is necessary.
Political override power
Section 117A, in Schedule 3 of the bill, gives the Treasurer the power to make regulation to declare any particular payment or investment made by a superannuation fund as "not being in the best financial interests of members".
This power is not subject to any sort of test, and could be used to ban payments that are in the best financial interests of members. This is an extraordinary power that allows the Treasurer to intervene in the decisions made by any board.
This power could be used by any future Treasurer to prevent any particular investment that they oppose—for example, a wind farm or a coal mine in a sensitive electorate.
This power has been opposed by Australia's business community, including the Australian Institute of Company Directors:
[The Australian Institute of Company Directors (AICD)] supports strong accountability measures and robustly enforced duties for superannuation trustees.
However the AICD along with the LCA and IFM Investors do not support the BFID.
The measure will create a sovereign risk issue for investment in Australian assets. Dr Peter Burn, Australian Industry Group, commented:
It creates a sword of Damocles over every investment decision: will or will not the Treasurer intervene to enforce us to get rid of this investment and the costs of that? These investments are often long-term investments and the payoffs are over a number of years. In the first few years, in many of these large investments, the returns will be negative. If there's a transaction cost as well, in a period of negative returns, and the Treasurer's said he or she doesn't like it, you've got the exit costs. It's a crazy system. You will then have behaviour of 'We've got to avoid that,' 'We're not going to do anything the Treasurer mightn't like,' and 'Who knows who the government is going to be next year?' So it's not sensible.
Mr Ian Silk, from AustralianSuper, commented:
I think for the first time, into the $3 trillion Australian superannuation system real concerns about sovereign risk. Superannuation funds are big investors. They make big investments, often with joint-venture partners, and I would say an international organisation is going to think twice about partnering with an Australian investor in the knowledge that politicians might override a decision to enter a contract that has been made in good faith by a superannuation fund on behalf of its members, even, according to the explanatory memorandum, when to do so is in the best financial interests of those members.
Labor Senators are of the view that this power should be removed from the bill.
Undue administrative burden
The proposed best financial interests duty imposes a positive duty on superannuation trustees to prove that any particular payment made by a superannuation fund is in the best financial interests of members, with no materiality threshold.
This means that the bill imposes a "reverse onus of proof". Rather than requiring regulators to prove that any particular payment goes against the best interests of members, funds will be required to prepare a case
This may result in additional administrative costs for funds, which will inevitably be passed on to fund members.
Dr Peter Burn, Australian Industry Group, noted that:
The approach taken to protect members' interests is poorly conceived and poorly designed. It fails to clarify what is meant by acting in members' best interests. It proposes an illogical and unprecedented power for regulators to prohibit actions that are in members' best interests, and it proposes an overly prescriptive and burdensome approach that conflicts with good regulatory practice and the government's commitment to reducing compliance burdens. Compliance with these regulatory burdens would divert attention and effort away from funds and focus on the interests of their members.
Dr Scott Donald noted that:
At lower levels, for specific transactions and other things, you'd expect that a trustee, looking at the way the proposal is currently drafted, might feel the need to document almost everything, and that could be quite crippling in terms of the ability of a fund to be administered in an efficient way. We need to be very careful as we look to these regimes. Over the years, we have added many, many layers of regulation to the superannuation system in an attempt to address problems and there is no doubt that has increased the cost of compliance in some of those things.
Dr Martin Fahy, of the Association of Superannuation Funds of Australia, noted:
I think what we're going to see here is the introduction of a unidimensional singularity into the decision-making of trustees. It's a singularity that will mean that, in making decisions, trustees will be required to focus on the financial interests of their members and, therefore, the ability to quantify that. The risk is that this system will not just create a burden in terms of accounting, documenting, attesting and providing assurance around that; in the absence of a materiality test, it will also see a vast amount of resources and efforts going into documenting, within a very narrow scope, the costs and benefits of every single decision—failing to take account of the cumulative impacts, the interdependencies et cetera. I think what we need to understand is that the promise of superannuation is a 40-year promise. For young people coming into the system, it's a 40-year promise to allocate investments and to manage funds on a day-to-day basis to the singularity of a narrow financial interest test. We all know we are in the business of generating retirement outcomes as measured by people's retirement balance, but it's important to understand that a day-to-day, short-term focus on this could have a distortionary and negative impact on long-term returns.
Ms Nadia Bromley, from QSuper, noted:
The reversal of onus of proof on trustees represents a significant departure from both general and trust law, and, in our view, rather than directing attention to outlying aberrant behaviour in the industry, characterises all trustees' decisions as falling short of their obligations. So our concern is that this measure may fetter the exercise of the discretion of trustees in their decision-making process and impose additional cost and administrative burden on trustees.
Senator Sheldon's interaction with Ms Nadia Bromley from QSuper highlighted that the imposition of a reverse onus of proof would put super fund trustees on similar legal footing to suspected terrorists and child sex offenders:
Senator Sheldon: Are you able to give us some examples of where there's other legislation that has reverse onus of proof?
Ms Bromley: Those are very rare. A number that I am aware of are child sex offences committed outside Australia and terrorism provisions.
Dr Martin Fahy, of the Association of Superannuation Funds of Australia, similarly noted:
In most common-law jurisdictions—and, as you can probably tell from my accent, I didn't grow up here—the presumption of innocence is a pillar of the rule of law. The withdrawal of that presumption of innocence has in recent decades only been addressed, in most Western democracies, in the areas of terrorism and the right to silence.
It should also be noted that there is no materiality threshold in relation to these requirements. The same requirement applies whether a payment is being made to purchase office stationary, or purchase hundreds of millions of dollars worth of commercial property.
Labor Senators are of the view that the government should consider whether these measures will actually reduce costs for superannuation fund members.
Conclusion
Labor Senators note that the issues identified in this dissenting report are not the only issues identified by stakeholders in relation to the bill. Many of these issues have been identified in Chapter 2 of the Chair's report on this bill.
Given the extensive issues identified in relation to this bill, and the potential for significant harm to both superannuation fund members and the broader Australian economy, Labor Senators do not support the bill in its current form. We recommend that the government review and reconsider the issues raised through this inquiry, and return to Parliament with revised legislation that will actually achieve the intent put forward by the government.
Recommendation
Labor Senators recommend that the bill not be passed.
Senator Anthony ChisholmSenator Jess Walsh
Acting Deputy ChairSenator for Victoria
Senator Alex GallacherSenator Tony Sheldon
Senator for South AustraliaSenator for New South Wales