Banking royal commission: Super sector default fund shake-up

Banking royal commission calls for end to industry-linked default fund rules that has created multiple accounts.

The superannuation industry will undergo a radical transformation following the banking royal commission’s findings.

The $2.7 trillion superannuation sector will undergo a radical transformation after the government backed a royal commission recommendation to overhaul the current industrial relations-linked process for creating super accounts, which has resulted in the proliferation of 10 million fee-draining unintended multiple accounts.

The adoption of the recommendation puts the Morrison government on a collision course with Bill Shorten, as the current industrial award process for nominating superannuation accounts for new workers overwhelmingly favours the union-and-employee-backed industry fund sector.

Kenneth Hayne has also put the corporate regulator on notice to better guard over members’ best interests when super funds of any stripe are appointing board directors. It potentially pushed the so-called “equal representation model” — where unions and employer groups nominate officials to govern super funds — into the historical dustbin, as directors will have to be chosen for their skill set, rather than because of their nominating body or the history of the super fund.

Requirements that directors always act in the best interests of members will be beefed up with enforceable civil penalties, after the government backed the proposal to give the legal requirement teeth, the lack of which has hamstrung financial regulators from properly pursuing failures across the industry for decades.

The retail superannuation fund sector, run by major banks and wealth managers, will also have to prepare for a thorough overhaul, as the government endorsed a recommendation to effectively ban dual-regulated entities — wherein a superannuation trustee is also running a managed investment scheme — by prohibiting a trustee from having a stake in the profitable business of investing.

The proposal could have widespread implications for the only major bank that remains committed to its superannuation business: Westpac’s BT Financial Group.

On top of this, separate proposals to clamp down on fee gouging in both the low-fee MySuper sector and in the retail-focused “choice” sector, will crunch profit margins for major wealth managers.

Major vertically integrated businesses will also face legal action if they continue a practice of cross-selling services and kicking back lucrative contracts to their own related parties, instead of putting tenders to market for services that are in the best interests of members.

“It should be concerning to regulators that professional trustees apparently struggle to understand their most fundamental obligation,” Mr Hayne wrote in his final report. “Neither of those principles refers to the interests of those who stood behind the establishment of the fund or those who continue to stand behind it. Neither of those principle permits pursuit of any objective other than the best interests of members.”

Treasurer Josh Frydenberg has already committed the government to ensuring dual-regulated entities are prohibited (a proposal also endorsed by the Australian Securities & Investments Commission), banning the deduction of any advice fees from a low-fee MySuper account and limiting the fees able to be charged from other superannuation products. Companies will also be banned from hawking superannuation products, and superannuation companies will not be able to offer “bundled services” or special deals to employers in order to win “default” status to manage worker savings.

While the proposal to ensure workers are only given one superannuation account has been adopted by the government, there is no such mechanism to do this at the moment. The Productivity Commission has suggested new workers be given a list of 10 top performing funds to choose from, into which they will only be defaulted once. It is likely any move to ensure workers are only defaulted once will break the current “default” system, where funds attain default status through enterprise bargaining agreements.

Mr Hayne said the process of unions and employer groups, or for that matter the bank, appointing board directors to funds left open the risk that appointments would not be made in members’ best interests.

“It is not only the trustees of retail funds that encounter conflicts of interest. So, too, the trustees of industry funds, and ‘profit-for-member’ funds more generally, must also recognise and deal with conflicts between the interests of members and the interests of shareholders or nominating organisations,” he said.

“All directors of the trustee of an RSE owe the same duties, including, to perform their duties and exercise their powers as directors of the trustee in the best interests of the beneficiaries: the members. Whatever the processes for the nomination or selection of directors, all directors must meet the best interests obligation. All directors must give priority to the interests of members over the interests of any other personal (including whatever person or body may have nominated the director to serve in that office).”

“As superannuation funds become larger and more complicated, the greater the need also grows for a skilled and efficient board of directors. The greater the need for board skills, the more pressing it is for nomination and appointment processes to recognise those needs expressively.”