Cooper Super Review what the recommendations could mean

Transcription

1 Cooper Super Review what the recommendations could mean

2 Cooper Super Review what the recommendations could mean July 2010 What s in this report? 10 key reform areas Product and advice implications Self managed super implications What this means for you and your clients Cooper Super Review what the recommendations could mean On 5 July 2010, the Government publicly released the final report of the review into the governance, efficiency, structure and operation of Australia s superannuation system. More commonly, this has been referred to more commonly, as the Cooper Review. In this paper, we look into the recommendations made and the potential implications they could have from an advice perspective. The final Government report can be accessed here: Recommendations made The Cooper Review was conducted by a panel of eight members, and chaired by Jeremy Cooper, a former Deputy Chair of ASIC. In its final report, the Panel have made 177 separate recommendations for reform. These recommendations have been grouped together into 10 separate packages for reform, with each package focussing on a particular area of the superannuation system. The 10 packages are listed below. Click on each of the titles for an analysis of the main recommendations arising from each package. 1. MySuper and choice architecture 2. Trustee governance 3. Investment governance 4. Outcomes transparency 5. Insurance in superannuation 6. Integrity of the system 7. Retirement 8. Self-managed super solutions 9. SuperStream 10. Regulatory settings There is a strong focus on two major areas of reform from the final report, and these have been the point of much industry discussion already, being: The introduction of a standardised MySuper fund a low cost, low feature super offer for many members, and The need to introduce efficiencies through a move to e-commerce and electronic data transmission / communication. 2

3 Recommendations don t just have product implications Many of the recommendations made by the Panel have a product focus, rather than an advice focus, as they relate to the structure and operation of the superannuation industry as a whole. However, a number of these recommendations will have a potential flow on impact to the advice that planners provide to their clients. Some of the major recommendations (in addition to the two noted above) are: MySuper funds will be required to offer an intra-fund advice facility to their members. Under the Future of Financial Advice (FoFA) reforms already proposed by the Government, the current intra-fund Class Order relief from ASIC will be extended to a number of different areas, including transition to retirement and retirement planning generally. With advice on these matters being available to all MySuper members (at potentially little or no cost), advisers may see a reduction in the number of investors seeking personalised advice as they obtain it from their fund instead. This raises a concern about the relevance of the advice being received via MySuper arrangements as it is necessarily restricted to the individual s membership of that fund, rather than taking their whole circumstances into account. As part of current industry consultation on the FoFA measures, there is a push for an ability for advisers to be able to provided limited advice on an equal basis to that of intra-fund advice by superannuation trustees. However, it isn t currently known whether any changes will be made in this regard or the nature of potential changes. It s important to note that if the provision of intra-fund advice results in more Australians actually receiving advice for the first time, this is a positive outcome. If the correct intrafund advice is provided, it should then lead to more clients becoming engaged with their super and considering the move to more holistic advice which cannot be provided through the intra-fund relief. MySuper funds will be required to formulate a single diversified investment option that applies to members of that product. Even though MySuper trustees will be required to formulate an investment strategy appropriate to the fund s membership, practically it may not be the best outcome for each member since every person s circumstances are different. This raises the importance of personalised advice in considering other investment opportunities for members. MySuper funds will be required to offer a retirement product to their members. If this retirement product is also only able to offer a single investment option, the need for personalised advice becomes even more critical as it is during retirement that individual members tolerance for risk in their portfolios will change more frequently. For example, when a member first commences to draw down on their super, they may be more willing to have a higher level of growth assets, whereas once there retirement balance has reduced significantly they may prefer more capital stable investments. A single investment option across a membership base cannot cater for these changing circumstances. Personalised advice becomes critical for such members. 3

4 The Panel has endorsed the FoFA recommendation for the banning of up-front and trail commissions from superannuation, but goes further to recommend the banning of insurance commissions through super - whether a personal or group policy. Although commissions on insurance were not banned as part of FoFA reforms, they are being considered by the Government as part of the FoFA consultation process. Only life, total and permanent disability (TPD) and income protection policies will be able to be offered through a superannuation fund. All other insurance offerings will be banned. Whilst a trauma policy is not generally held through a superannuation fund (as the events giving rise to a payment under the policy don t generally equate to a condition of release from super), some members have these policies associated with their super (particularly in the SMSF environment) due to the bundling of these products together and the associated reduction in premiums. The cost of advice must be unbundled from superannuation offerings, and the Panel supports the Government s announcement under the FoFA reforms for an annual opt-in requirement for ongoing fees being paid from a superannuation fund. The opt-in versus opt-out debate has already been subject to much discussion in the industry generally, and will likely play out as part of the Government s FoFA consultations. The Panel has recommended that any advice fees traditionally associated with an employer fund arrangement must be paid by the employer, rather than recovered as a fee against all members of that employer plan. Employees would retain the ability to opt-in for personal advice. If implemented, this will have a significant impact on the way many corporate superannuation arrangements with financial advisers attached are structured. The business model for many advisers and their advice proposition may need to adapt. Unless an employer is willing to cover these costs, members may miss out on many of the education opportunities that financial planning firms traditionally provided as part of a corporate plan membership. Interestingly, Intra-fund advice does not need to be offered by the super fund on an opt-in basis. That is, the cost of providing intra-fund advice can be either a user pays system (members who use intra-fund advice pay for this out of their account), or it may be crosssubsided by all members through an increased administration fee within the MySuper fund. New (or enhanced) capital adequacy requirements on a risk weighted basis for superannuation funds (excluding SMSFs) have been recommended. Currently, public offer funds have a $5million capital adequacy reserve requirements, but this will be extended across all funds (at a value still to be determined). The issue for many funds will be how they generate any reserve requirement if they currently do not operate 4

5 with reserves. It is likely that this measure will result in a contraction of the number of superannuation funds in the market place. Self managed super implications One area of the report that will clearly have implications for the advice industry is the proposed recommendations around the self managed superfund industry. Whilst the self managed super solutions package summary contains more details of these, some of the major considerations from the recommendations are: The Panel supports the FoFA recommendation to remove the accountant s current AFSL exemption for establishing SMSFs, but does not support the introduction of any replacement concession or limited AFSL. If adopted, the Panel s recommendation will mean that only financial planners can recommend the establishment of a SMSF to clients. SMSF advice is to be introduced as a specialist area of advice under RG 146, requiring a specific and higher competency requirement on advisers. The exact level or scope of this competency requirement has not been stated, but will no doubt form part of the expert panel to be established under the FoFA reforms to look at education standards generally. The advice industry has already largely self regulated to introduce an enhanced competency requirement for SMSF advice, but disappointingly the Panel has not looked to extend a similar competency requirement to other service providers to SMSFs. The Panel has recommended abolishing the ability of SMSFs to invest in in-house assets or personal use and collectible assets, and recommend a five year transition window for SMSFs to divest themselves of any such existing investments. This is half the timeframe initially proposed and does not have regard to the potential benefits that such investments could provide to longer term retirement savings. The Panel has not recommended an increase in the current maximum SMSF member limit of four. This is despite many submissions calling for an extension of this limit, albeit potentially restricted to direct family relationships. This means advisers and their clients, for whom SMSFs are appropriate, will still be faced with issues when there are more than 4 members of the family group who would have benefited from being in the same super fund. This has the potential to lead to an increased number of SMSFs being established, with lower account balances, as families try to ensure equality through superannuation estate planning arrangements, and is potentially counter-productive to the optimal outcome for the family and the industry as a whole. The Government s response In releasing the Report, the Government has noted its support for initiatives that will move superannuation to a more efficient environment, particularly through the use of increased technology, as well as any other moves to make super more cost effective and easier to understand. Ultimately the Government is looking at those measures which will assist members to have more saved for their retirement. 5

6 Having said that, at this point in time the Government has not committed to any of the recommendations made by the Cooper Review, nor have they ruled any out. Rather, they have indicated their intention to consult closely with industry and affected parties on the range of recommendations that have been made in order to formulate those recommendations which are to be implemented. It is likely that many of the Panel s recommendations will form part of the current consultations around the FoFA reforms, particularly in the areas of: Banning of commissions (including on insurance), The annual advice renewal proposal on an opt-in basis, The extension of intra-fund advice, The removal of the accountant s exemption for establishing SMSFs, and The education standards applying to the financial services industry. What this means for you and your clients At this stage, all we have are the Panel s recommendations and a statement from the Government that it will undertake further consultation on these recommendations. No changes to client strategies should be made as a result of the release of this Report. It s also important to remember that we do not have a policy statement on these changes as yet from the Government (although it is expected in the near future, and may be delayed by the forthcoming Federal election). As with the FoFA reforms, we fully expect the Government to engage with stakeholders through an extensive consultation process. 6

7 Package 1 - MySuper and the choice architecture Highlights: Commitment to the choice architecture model. MySuper to be introduced, and will be the only type of fund that can be nominated as a default fund by employers or under Australian awards or other industrial instruments. MySuper funds will be required to provide an intra-fund advice facility for their members. Across all types of superannuation funds, and consistent with Future of Financial Advice (FOFA) recommendations, no up-front or trail commissions can be paid from a superannuation fund. However, this has been extended to include commissions on individual and group insurance arrangements through a superannuation fund. Advice fees must be unbundled. Given the anticipated growth within the superannuation system, the review Panel believes that now is the time to position the superannuation system for the challenges of the future 1. Two major concerns acknowledged in the report were: i. the lack of engagement from superannuation members, and ii. product and advice fees being bundled together. The Choice Architecture The Panel has reaffirmed their commitment to the choice architecture model being adopted as the structure for Australia s superannuation industry. The choice architecture model is not too dissimilar to the options available to members currently, although the model is member focused, not product focused. Source: Super System Review: Final Report Part Two: Recommendation packages Chapter 1 p 7 1 Super System Review: Final Report Part Two: Recommendation packages: chapter 1 - p6 7

8 Under the model, members will be categorised on whether they have made a choice about their superannuation and also the nature of the choices made. Those who do not express choice will be placed into the MySuper option (previously referred to as the universal segment). It is now clear from the final report that it will be possible for members to move between categories (or to be in more than one category at the same time). The exact mechanism how members can move between categories (disclosure, forms required etc) was not detailed in the report and is as yet unknown. MySuper The Panel anticipates that the MySuper option will provide members with a simple, cost effective product with a single diversified investment option. The Panel has recommended that the Superannuation Guarantee Act be amended to ensure only a MySuper product be eligible as default fund nominated by an employer, or a default fund under an Australian award or other industrial instruments. In addition to this, trustees of a MySuper product would be required to maintain a facility for providing intra fund advice. This will have a significant impact on the financial planning industry given the volume of advice sought on SG contributions. Financial planners will need to demonstrate the value of their advice and have appropriate advice charging models in place. The report reinforces the Government s stated position in the FoFA reforms to remove conflicted remuneration structures by prohibiting trustees of MySuper products from paying product based up front or trailing commissions or any payments that relate to volume, including on insurance premiums (whether a personal or group policy). Further, the Panel has recommended that any advice fees traditionally associated with an employer fund arrangement must be paid by the employer, rather than recovered as a fee against all members of that employer plan. Employees would retain the ability to opt-in for personal advice. If implemented, this will have a significant impact on the way many corporate superannuation arrangements with financial planners attached are structured. The business model for many planners and their advice proposition may need to adapt. Unless an employer is willing to cover these costs, members may miss out on many of the education opportunities that financial planning firms traditionally provided as part of a corporate plan membership. Interestingly, Intra-fund advice does not need to be offered by the super fund on an opt-in basis. That is, the cost of providing intra-fund advice can be either a user pays system (members who use intra-fund advice pay for this out of their account), or it may be cross-subsided by all members through an increased administration fee within the MySuper fund. If implemented, MySuper trustees will also be required to supply its members with retirement projections. This won t negate the need for financial advice as the projections suggested in the report do not consider any Centrelink entitlements, other than accumulated benefits, and changes in current salary or contribution levels. The Panel supports this measure as they believe standardised retirement projections are the best way to seek to raise members awareness of their likely financial 8

9 position at retirement. 2 This awareness may prompt more people to seek financial advice to discuss their options. Choice funds The report acknowledges that members can actively choose to remain in a MySuper option however they would also have the choice to select a fund other than a MySuper fund. Although the report recommends only a MySuper product should be able to be nominated by an employer as the default fund, choice of fund will still apply. This means that an employee can exercise choice if they choose an alternative fund. Choice funds will offer members more investment options than a MySuper product. Members will be responsible for investment choices however trustees of choice funds will be responsible to undertake due diligence on the investment options offered. Those members who select choice funds will be more likely to seek financial advice. Like MySuper, choice funds should not offer any ability to bundle advice fees, nor pay any commissions (upfront or trailing) on any advice, product or insurance arrangements. Package 2 Trustee Governance Highlight: The Panel believes that improvements to trustee governance may lead to increased confidence by members in the way superannuation funds are run and managed. Many submissions into Phase One- Governance raised the concern that the role of the trustee governance structures has not kept pace or evolved with the industry. A common theme from both the submissions and the preliminary findings from Phase One was that: The one size fits all approach to fund governance is not flexible enough to take into account industry developments, and; The lack of cohesion between the Superannuation Industry (Supervision) Act, the Corporations Act, as well as other regulatory regimes, has led to confusion in duties of trustees and trustee directors. The report makes a number of key recommendations. These include: The creation of a new office of trustee-director with all statutory duties set out in the SIS Act; 2 Super System Review: Final Report Part Two: Recommendation packages: chapter 1 - p27 9

10 Not mandating equal representation and all boards would be required to have some nonassociated trustee directors; Development of a detailed conflicts policy; and Development of a code of trustee governance. These recommendations will have a minimal impact on the financial advice industry. The Panel believes that members may benefit from improved trustee governance as the measures seek to allow only appropriately qualified people to run funds, conflicts to be better managed and improve accountability to members. Package 3 Investment Governance Highlights: The performance of investments should be considered on an after-tax basis Changes are proposed to the issues which trustees must have regard to when formulating and developing an investment strategy. These additional requirements are not intended to apply to SMSFs. The report acknowledged that good investment performance is dependent on a number of key factors, one of which is investment governance. Although sound investment governance will not mandate a fund to deliver good investment performance, the Panel stated that poor investment governance put at risk the achievement of the super funds goals. 3 In this part of the final report, the Panel has sought to address the issues associated with the investment of super fund assets. Specifically it seeks to indentify conflicts of interest between fund managers/asset consultants and super funds/members. The Panel identifies that disparity may exist with remuneration and fee structures for investment managers and results achieved for members. The complexities surrounding fee structures can make it difficult for members to clearly see what fees they are paying and in turn makes it even more difficult to evaluate trustee performance. The Panel has proposed a number of recommendations to achieve sound investment governance. These include: Trustees must have regard for costs, taxation and valuation information when developing their investment strategy, APRA to develop a new performance fee standard to reduce the possibility of trustees agreeing inappropriate performance fees for fund managers, and 3 Super System Review: Final Report Part Two : Recommendation packages Chapter 3 p74 10

11 Investments managed for after tax returns. The Panel believes that improved investment governance has the potential to achieve better returns. The avoidance of inappropriate fees, fee structures and focusing on after tax benefits may also assist to boost retirement benefits for members. The majority of these changes recommended are proposed to be made through amendments to Section 52(2)(f) of the Superannuation Industry (Supervision) Act. This sets out the various covenants that trustees must bear in mind when formulating an investment strategy for their fund. The proposals contemplate amending this section to specifically include requirements for trustees to consider, as part of their investment strategy: The expected costs of the strategy, including those at different levels of any interposed legal structures and under a variety of market conditions, The taxation consequences of the strategy, in light of the circumstances of the fund, and The availability of valuation information that is both timely and independent of the fund manager, product provider or security issuer. In the recommendations, that panel state that these changes should apply to APRA fund trustees. By definition, this would exclude SMSFs, although unless carefully implemented these could ultimately apply in a SMSF context. Package 4 Outcomes transparency Highlights: Super fund fees and costs to be disclosed on a pre-tax basis. Super fund investment performance to be disclosed after accounting for fees and taxes. Greater transparency on costs and performance may lead to increased member understanding and engagement. The final report focuses on the need for transparency in operating an efficient saving system. The report describes Australia s superannuation system as having a lack of transparency, comparability and consequently, accountability. 4 The recommendations focus on improving the transparency of fees, costs and investment returns to ensure more meaningful reporting. The Panel believes that transparency has the potential to improve understanding, awareness and engagement at various levels within the superannuation industry. The report acknowledges that the existing requirement for disclosures to be clear, concise and effective has not worked within superannuation. The Panel believes that the MySuper option may remedy this for its members, however other changes must occur. The Panel has outlined a number of these including: 4 Super System Review: Final Report Part Two: Recommendation Packages chapter 4 p 99 11

12 Prevention of fees and costs being obscured through the use of intermediaries, Disclosure being targeted at industry participants to enhance competition, and Simple, standardised and forward looking information being supplied to members. Under the proposals, trustees must disclose all forms of costs and fees on a pre tax basis. The Panel believes this will enable trustees to provide better transparency of fees and costs outcomes to members. In addition to this, the Panel has recommended APRA in consultation with ASIC develop outcomes reporting standards which will overlay existing accounting standards to facilitate consistent and comparable reporting of investment performance and costs at an investment option level. This measure will require trustees to calculate and disclose fees, costs and performance for MySuper and investment option levels. This measure may equip members to make more informed choices as it should improve comparability of investment performance. In addition, funds will be required to publish a forward looking risk and return matrix and past investment return information must be accompanied with volatility information and stated net of all costs and after tax. The Panel believes this approach would enable members to assess possible future performance outcomes, rather than relying on past performance information. Many of these measures are aimed at improving transparency, comparability and accountability within the Australian Superannuation industry. The Panel believes that improved transparency and comparability may enable members to make more informed decision about their investments. More engaged members are more likely to engage in choices about their super, and as such may be more likely to obtain financial advice. Package 5: Insurance in superannuation Highlights: MySuper funds must provide life and TPD insurance on an opt-out basis. Other funds are not required to offer insurance. Trauma insurance cannot be offered through a superannuation fund. Up-front and trail commissions on all forms of insurance through any superannuation fund to be banned. Binding death benefit nominations to be ruled ineffective in certain situations, but the timeframe for renewal to be extended from three to five years. The Panel has acknowledged that insurance plays a key part in the superannuation system; ensuring dependants are covered following a member s premature death or disability. Accordingly, the Panel has recommended that for MySuper products (the members of which are least likely to give consideration to their insurance needs), life and total and permanent disability (TPD) cover must be 12

13 offered on an opt-out basis. MySuper products may also offer income protection cover, but this will be at the discretion of the trustee. For choice offers (including SMSFs) it will be at the discretion of the trustee whether insurance is offered. Only life, TPD and income protection is to be allowed within superannuation. Other products, such as Trauma cover, will not be allowed and a phase out period for funds to cancel such cover is proposed. Trustees of MySuper products and trustees of large APRA funds (i.e. those other than operating small APRA funds) that offer insurance will be subject to a statutory duty to manage insurance with the sole aim of benefiting members. The Panel has endorsed the Future of Financial Advice (FoFA) recommendation for the banning of up-front and trail commissions from superannuation, but goes further to recommend the banning of insurance commissions through super - whether a personal or group policy. Although commissions on insurance were not banned as part of FoFA reforms, they are being considered by the Government as part of the FoFA consultation process. To provide consistent and comparable insurance information, the Panel has recommended that superannuation funds should standardise the disclosure of insurance features and premiums. This will assist planners making a recommendation to switch from one superfund to another, allowing them to clearly contrast the features and costs of the insurance provided by the exiting fund and the recommended fund. The Panel has recommended that trustees of MySuper offers have an intra-fund advice facility for insurance and that such advice be pro-actively offered. As a result, members (particularly younger members) of MySuper funds will be better informed and perhaps incentivised to seek external advice not just on their insurance needs but all areas of financial planning. This could lead to an increased demand for personal advice In conjunction with the recommendation that trustees should have a statutory duty to manage insurance is the recommendation that trustees should be required to devise and implement an insurance strategy, similar to the requirement for an investment strategy. Finally, the Panel has recommended that the requirement to renew binding death benefit nominations be extended to 5 years, and that such nominations automatically lapse upon the occurrence of certain life events such as divorce. At this time, it is unclear whether these changes will apply to existing nominations or only nominations made after the date of implementation, and how this impacts on SMSFs which can have non-lapsing binding nominations. 13

14 Package 6: Integrity of the Super System Highlights: Super funds to be subject to new (or increased) capital reserve requirements. The Government should not mandate that superannuation fund trustees participate in any particular investment class or vehicle, including infrastructure. The Panel has made a number of recommendations the aim of which is to increase the public s confidence that the superannuation industry is stable and that retirement savings are secure. The recommendations include: New capital reserve requirements (to be phased in) ensuring funds have sufficient capital to cover losses that may arise as a result of operational error. The requirement that administrators be licensed and subject to supervision by APRA Required risk management plans to include a liquidity management component to ensure that trustees identify and manage liquidity risk at both the fund level and the investment option level. The most significant of these recommendations is around capital adequacy. Currently, trustees of public offer funds are required to meet a minimum capital requirement of $5million. There is no link between the level of risk faced by a fund, the amount invested in superannuation through that fund and the amount of capital required. It is proposed that new capital requirements for trustees on a risk weighted basis should be phased in over time, and include: A requirement that all large APRA funds must hold a minimum level of operational risk weighted reserves Legislation should set a minimum dollar figure for these reserves, and a maximum expressed as a percentage of the assets in the fund (i.e. the maximum is not a fixed dollar amount). APRA should have the power to increase the minimum capital requirement for particular funds on a risk assessed basis. With many funds not currently having a significant level of reserves, introducing such a requirement could lead to a contraction of the market, with less funds actually being available for members to choose from. This is not an unintended consequence of this proposal as the Panel have previously commented on the fact that the number of superannuation funds is likely to contract as a result of this process and some funds will become significantly larger as a result. It is also important to note that any changes to these capital requirements are in addition to, and separate from, any capital adequacy requirements under other legislation, such as that required to obtain an Australian Financial Services Licence. 14

15 It is also interesting to note that during the course of its review, the Panel had commented on occasions of the ability of some overseas superannuation schemes to invest into large scale infrastructure projects. Whilst still noting the benefits of such investment opportunities, the Panel does not recommend that the superannuation funds should be required to invest in any particular investment class or vehicle. Package 7: Retirement Highlights: No recommendation for compulsory annuitisation of super in retirement. MySuper offers must include a retirement option for members. A separate investment option must be formulated for those MySuper members in retirement. The Panel noted that whilst the ultimate purpose of superannuation is to provide benefits in retirement, the majority of the industry s attention to date has been paid to the accumulation phase. This is not surprising given that the industry is, relatively speaking, still in its infancy. For example, it is only since 2002 that workers have had the benefit of the 9% SG level. However greater focus needs to be given to the retirement or drawdown phase given our ageing population, baby boomers now entering retirement phase, plus higher life expectancies. With this in mind the Panel has recommended that the MySuper product include one type of income stream product. As to the nature of this product, the Panel has left this decision to the Government but has suggested that it only be made after comprehensive consultation with industry bodies. The Panel notes some of the benefits that Australians experience with no compulsory annuitisation of retirement savings. This is reflective of the inequity that may arise as annuity product features and payments may vary from day to day depending on the prevailing market conditions at that time. The Panel also notes that there appears to be no evidence to suggest a systematic problem of retirees drawing down on super savings too quickly with a view to intentionally double dip into the age pension system. As a result, the panel has made no recommendation for compulsory annuitisation in retirement. This is in contrast to the Government s response to the Henry report on Australia s Future Tax System which leaves this question currently unanswered. From an advice perspective, there is no recommendation to alter the current flexibility that exists with regards the ability to take a super benefit as either a lump sum or pension, or the ability to start a transitional pension. Nor is there any recommendation to change the tax treatment of these options. As such retirement strategies currently recommended by financial planners are not affected. 15

16 The Panel has also recommended that trustees of MySuper products be required to put in place a separate investment strategy for post-retirement members. This should have regard to the existing factors risk, diversification, liquidity and the ability to discharge liabilities, as set out in Section 52(2) (f) of the Superannuation Industry (Supervision) Act; plus two new factors inflation risk and longevity risk. Furthermore it is recommended that the MySuper product provide intra-fund retirement advice on a proactive basis. In this regard the Panel has suggested that members could, for example, first be approached at age 45 and then at five yearly intervals. With this level of education, MySuper members may be prompted to seek external advice from a financial planner on alternative products, plus Centrelink advice. Package 8: Self-managed super solutions Highlights No mandatory training of SMSF trustees, unless there has been a breach of legislation. Supports the Future of Financial Advice recommendation to remove the accountant s current AFSL exemption for establishing SMSFs, but does not support the introduction of any replacement concession or limited AFSL. SMSF advice to be introduced as a specialist area of advice under RG 146, requiring a specific and higher competency requirement on advisers. This is not extended to other service providers to SMSFs. No minimum asset size or trustee structure to be legislated. No further investment by SMSFs in in-house assets or personal use and collectible assets, with a five year transition window for SMSFs to divest themselves of any such existing investments. No increase in the current maximum member limit of four. Whilst acknowledging that the SMSF sector is largely successful and well-functioning, the Panel has highlighted a number of issues that it believes need to be addressed. The Panel does not believe a minimum level of education or accreditation is required before a person can become a member and trustee of a SMSF. However they have recommended that the ATO be given the power to enforce mandatory education for trustees who have contravened SIS legislation. In contrast, the Panel is of the view that the competency standard for advisers dealing with SMSFs needs to be raised. They have recommended that ASIC, in consultation with the industry, amend RG 146 to include a specialist SMSF knowledge requirement that must be obtained before advisers can provide advice in relation to SMSFs. 16

17 The Panel supports the Government s Future of Financial Advice recommendation that the accountants financial services licence exemption for advice on the establishment of an SMSF be removed, but go further to say that a limited AFSL is not the answer either. As a result, the provision of any advice to a SMSF whether it is with regards establishment or investments would, in the Panel s view, require the adviser to hold an AFSL or be the authorised representative of an AFSL holder. This will remove the unlevel playing field that currently exists between accountants and financial planners in relation to the establishment of a SMSF. In contrast to removing the potential inequity that currently exists for establishing SMSFs, the Panel is of that view that the competency standard for advisers dealing with SMSFs needs to be raised. They have recommended that ASIC, in consultation with the industry, amend RG 146 to include a specialist SMSF knowledge requirement that must be obtained before advisers can provide advice in relation to SMSFs. However, the Panel has not specifically recommended an increased education or competency requirement for any other service providers to the SMSF market: For accountants and administrators, the Panel believes the professional accounting bodies are best placed to introduce any required change (although to be effective, accountants and administrators would need to belong to such bodies). For auditors, the Panel has recommended that ASIC establish a registration process and determine the eligibility requirements for registration and develop approved auditor independence standards The Panel does not believe it is necessary to mandate a minimum asset size for SMSFs, despite the availability of statistical data that questions the viability of funds of $200,000 or less, showing them to lack investment diversification, have higher relative costs and underperform larger sized SMSFs. The Panel s view is that with appropriate advice, disclosure and an increase in comparable data, people will be able to make informed choices that are in their interests. This, they believe, will ensure that SMSFs are established for a suitable purpose, resulting in a reduced instance of small sized funds. A similarly approach has been adopted with regards the optimum trustee arrangement. At present the majority of SMSFs have individuals as trustees rather than corporate trustees. This is of concern to the Panel due to a number of additional benefits corporate trustees have over individual trustees. Once again, the Panel believes that by lifting the standard of advice provided to SMSFs, more corporate trustees will eventuate, but they have not gone so far as to mandate a required trustee structure. A number of recommendations have been made regarding SMSF investments: Leverage The Panel has reiterated its concerns regarding the 2007 relaxation of the ability of a superannuation fund to borrow. The Panel believes that the borrowing arrangements introduced in 2007 are inconsistent with Australia s retirement policy. Their fear is that borrowing may become a significant focus of superannuation funds and in particular SMSFs. 17

18 Whilst noting the Government s recent announcements to implement additional safeguards (i.e. have these borrowing arrangements classified as financial products under the Corporations Act, plus the introduction of amending legislation to clarify the restrictions on such borrowings), the Panel has recommended that the Government review these borrowing arrangements in 2 years time to ensure that borrowing has not become a significant focus of superannuation funds. To assist in this review it has also been recommended that legislation should be passed to require credit providers to collect and provide APRA with data that will enable the RBA to publish statistics on the level of finance being provided to superannuation funds. These statistics should be able to distinguish between the level of finance being provided to SMSFs and APRA regulated funds. Related Party Investments The Panel believes that the current 5% in-house asset limit still provides an avenue for potential abuse of the sole purpose test by SMSF members. The Panel has therefore recommended that in relation to SMSFs only, the 5% in-house asset limit be removed with current in-house assets to be sold within a 5 year transition period, or alternatively the SMSF convert to a small APRA regulated fund within that period. This 5 year transition period is half that proposed in the preliminary Phase Three report released by the Panel. From an advice perspective, it is important to remember that the definition of an in-house asset specifically excludes business real property, so such investments (and leases back to related parties) would still be permitted. However, investments into related companies and trusts may be affected if not already excluded under exemptions to the current in-house asset definition. Acquisition and Disposal of Assets from Related Parties The Panel believes that current arrangements allow transaction date and asset value manipulation to illegally benefit the SMSF or the related party. To address this, it is recommended that all acquisitions and disposals from related parties be done on market, where a market exists. If there is no market, then the transaction must be supported by a valuation from a suitably qualified independent valuer. Collectable and Personal use Assets The Panel is of the view that assets such as paintings, jewellery, antiques, stamp collections, cars etc pose particular issues in relation to the application of the sole purpose test. Such assets may lend themselves to personal enjoyment and a range of non-investment factors and therefore may involve significant current day benefits. The Panel has recommended that SMSFs be prohibited from acquiring such assets. Current investments in such assets are to be sold within a 5 year transition period, or alternatively the SMSF could convert to a small APRA regulated fund within that period. 18

19 As recommended elsewhere in the final report, the Panel believes that commission based remuneration for advice to SMSFs should be prohibited. Similarly, commission based remuneration for risk insurance advice to SMSFs should also be prohibited. A number of additional recommendations (or recommendations for no change) have been made. These include: The current four member maximum limit to be retained. The ATO to remain the regulator of SMSFs, with a more flexible penalty regime enabling it to tailor penalties that are commensurate with the contravention. Legislation be passed requiring SMSFs to value their assets at net market value, coupled with guidelines to standardise valuation practices. SMSF members be provided with certain key information annually, beyond the current requirement. Establish an online SMSF resource centre to help SMSF trustees build skills and make better decisions. Amend the Superannuation Industry (Supervision) Act to reduce the need to amend trust deeds each time the law changes. Package 9 SuperStream Highlights: A move to electronic data transmissions between employers and super funds, and between super funds, to assist and speed up consolidation of superannuation savings. TFNs to be used as a unique identifier within the superannuation system. All forms of contributions by employers (with super guarantee, salary sacrifice or post-tax contributions) to be made at least monthly. Trustees may have the ability to automatically consolidate multiple accounts of members In the final report, the Panel acknowledge that manual transactions, lack of data within the industry and existing processing are inefficient and costly for members. The Panel have put forward SuperStream, which they believe will make the system more efficient, quicker and less costly for members. SuperStream has 6 key components. These are: Industry-wide standards to improve the quality of data EFT for all participants Better use of technology E-commerce solutions to replace paper TFNs as identifiers Elimination of redundant processes 19

20 Quality of Data Many submissions into phase two operation and efficiency outlined a concern around employers not always understanding the data that they must supply with employee contributions. Where inaccurate or incomplete information had been supplied, the costs associated with rectifying the situation are considerable. To remedy this, the Panel has recommended that legislation be amended to impose an industry wide standard to improve the quality of data. The recommendation requires employers to provide a super fund its ABN and: On first making the contribution for an employee, the employee s full name, date of birth, current address, address, mobile phone number, TFN, date they commenced employment as well as the contribution amount. Subsequent contributions will require the employee s full name, TFN and the contribution amount. The Panel has suggested that employers should be liable for an administrative financial penalty where they fail to meet their obligations. In addition to this, funds should not be permitted to accept contributions with insufficient data. Where employees fail to supply the employer with the required information, the employer s superannuation guarantee (SG) obligations are satisfied provided they supply the ATO with the information they have and the contribution. The Panel has indicated that the ATO would treat the contribution as unclaimed money. If the employee s TFN is subsequently quoted the ATO would then remit the contribution to the employers default super fund with any additional relevant information they have attached to that TFN. These measures will have significant impacts for the financial planning industry. Firstly, clients that fail to supply the relevant information to employers will need to be educated on what is required and understand that their superannuation will not accrue any interest while being held as unclaimed money. Secondly, this measure may see a sharp decline in lost super. Where applied correctly, employees will benefit from these measures ensuring all their super benefits are accounted for and potentially larger balances dues to the reduction in lost super. This may encourage more people to seek financial advice. Efficient use of Technology and E-Commerce That Panel has stated that there are efficiency gains to be had through the use of electronic transmission of data and money. The Panel has recommended imposing a fee on employers who remit contributions in a non electronic manner and without sufficient details to identify the member. In addition to this, the report stated that all APRA regulated funds should have the capacity to transact with employers, members and other industry participants via EFT. The use of straightthrough processing (STP) was an initiative that the Panel had put forward in their preliminary findings from Phase Two and has supported this measure in their final report as they believe STP has the ability to reduce resource requirement in the back office, reduce manual processing errors and speed up settlement times. 20

21 Tax File Numbers TFNs are a unique number issued by the ATO to identify individuals, companies and others who lodge income tax returns. 5 Many submissions acknowledged that the absence of a key identifier is an obstacle to cost savings within the industry. The report recommended amendments to legislation to enable superannuation trustees to: Use TFNs to link contributions and rollovers with member accounts Seek confirmation from the ATO in relation to accuracy of quoted TFNs Seek confirmation from the ATO where the rollover is to a SMSF member exchange the TFN with other trustees where members have multiple accounts Lost and Inactive Accounts Lost and inactive accounts add considerable cost to the industry and ultimately to the member. The Panel has put forward a number of recommendations to reduce the number of lost or inactive accounts. One recommendation seeks to amend legislation to allow trustees to auto consolidate accounts without prior reference to the member. However, they have stated that they will seek further consultation for this measure. In addition, it is proposed that trustees should have the power to auto consolidate accounts within the one fund where there is no evidence of the member knowingly establishing additional accounts. This could cause issues around advice where separate accounts have been deliberately established, for example to hold non-concessional contributions or insurance only to achieve future estate planning objectives Contributions Currently employers are required to remit SG contributions quarterly and monthly for member after tax contributions. To enhance efficiency and improve the compounding periods, the Panel has recommended that employers should be required to remit salary sacrificed and SG contributions no less frequently than is required to remit members after tax contributions, i.e. monthly. In addition to this, aligning SG payments with employers payroll cycles may also assist to enhance efficiency and improve member superannuation savings. It is evident that many of the recommendation will have considerable impact on the financial planning industry. As the focus is to drive down costs and increase efficiencies, this may lead to an improved confidence in the integrity of the system, which in turn may prompt more people to seek advice. As cost reduction is paramount, members may stand to benefit from improved superannuation savings. 5 Super System Review: Final Report Part Two: Recommendation packages Chapter 9 p