Banking royal commission: super shake-up to end account fee drain

The $2.7 trillion superannuation sector will undergo a radical transformation under the Hayne recommendations.

There is no clear mechanism at the moment to change the process for nominating accounts for new workers.

The $2.7 trillion superannuation sector will undergo a radical transformation under the Hayne recommendations, with new job entrants able to carry one default account with them through their careers, ending the proliferation of fee-draining multiple accounts.

Adoption of the key recommendation on default accounts puts the Morrison government on a collision course with Bill Shorten as the present ­industrial award process for nominating default ­accounts overwhelmingly favours the union and employee-backed industry fund sector.

There is no clear mechanism at the moment to change the process for nominating accounts for new workers, which has resulted in the existence of more than 10 million accounts, many of them so-called “zombie” accounts.

Royal commissioner Kenneth Hayne said only that “machinery should be developed for stapling a person to a single default fund”.

The Productivity Commission, in its landmark review of the super system released in January, recommended new workers be given a list of 10 top performing funds to choose from, into which they will only be defaulted once. Along with ridding the sector of underperforming funds, the proposals would secure more than $300,000 extra in retirement savings for new workers entering the system.

However, Labor has cooled on the proposals to disrupt the default super system as any move to ensure workers are only defaulted once will end a system where many small union and employer-backed funds claw in $1 billion in new money through enterprise bargaining agreements every year.

Industry Super Australia, which represents union and employer-backed funds, yesterday said it supported attempts to reduce multiple accounts and that it preferred “mechanisms such as automatic rollover” to solve the default issue. However, this proposal would fail to “staple” a member to a single default account, as it would see members defaulted into a new fund each time they changed jobs. It would also risk shunting workers into underperforming funds if no action were taken to clean up the sector.

The Productivity Commission also found the automatic rollover mechanism would add $45 million a year in costs to members. It suggested tasking the prudential regulator with cancelling the ­licences of super funds if they failed to meet performance hurdles.

Opposition Treasury spokesman Chris Bowen yesterday said Labor would implement all the recommendations from the ­report.

Mr Hayne has also put the corporate regulator on notice to better guard over super members’ best interests when funds appoint board directors.

Industry funds are usually governed under an “equal representation model”, under which unions and employer groups nominate officials to govern super funds. But Mr Hayne’s proposals could see this end, as directors will have to be chosen for their skill set, rather than because of their nominating body or the shareholder 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 penalties has hamstrung financial regulators from properly pursuing failures across the industry for decades.

Mr Hayne said the process of unions and employer groups, or for that matter a bank, appointing board directors to funds left open the risk that appointments would not be made in members’ best interests, giving the all-clear for ASIC to intervene in cases where funds appoint unskilled directors with ties to unions, employer groups or the parent banking ­organisation.

He said all funds “must also recognise and deal with conflicts between the interests of members and the interests of shareholders or nominating organisations”.

“Whatever the processes for the nomination or selection of ­directors, all directors must meet the best-interests obligation.

“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.”

Josh Frydenberg has 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 super 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.

The government’s 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, could have severe implications for many wealth managers.

On top of this, separate proposals to clamp down on fee gouging in 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 writes in his final report.