Super on alert over investment ‘kill switch’

The superannuation industry remains on alert that changes to the federal government’s proposed Your Future, Your Super legislation still gives Canberra sweeping powers to ban investments.

Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck.

The superannuation industry remains on alert that changes to the Federal Government’s proposed Your Future, Your Super legislation, still gives Canberra sweeping powers to ban investments.

The industry also warned that the amendments outlined in draft regulations released on Wednesday will not put performance pressure on some of the worst performing super funds given its specific focus on low cost MySuper funds.

“The regulatory kill switch, which would allow the Treasurer of the day to ban any super fund investment or expenditure, even if in the best financial interest of members, must be removed from the bill,” said Industry Super Australia, which represents the nation’s industry funds.

The Australian Institute of Superannuation Trustees (AIST) said the proposed regulations still “failed to address concerns” about the proposal to ban super funds from investing in certain assets.

“The regulations are silent on one of the most controversial measures in the bill – the standing power for any government to ban any investment, even if it is in members’ best financial interests,” it said.

“This will create needless uncertainty that could constrain the ability of funds to invest for the long term and put members’ retirement outcomes at risk,” AIST chief executive Eva Scheerlinck said.

The industry pointed out that the proposed changes to the legislation, which were originally announced in last year’s budget, also excluded some of the worst performing funds from the proposed new regime allowing funds to be compared on their performance.

The legislation will also introduce a new law requiring that a super fund is “stapled” to an employee, following them from job to job, unless they specifically opt to join a new super fund.

The new legislation, which is due to come into force on July 1, will introduce a new regime of performance testing for the low cost, MySuper products. From next financial year the investment performance of MySuper products will be ranked against a proscribed list of sector benchmarks.

Products which showed returns of 0.5 per cent below the benchmark would be labelled as underperformers. Funds which are deemed to be underperformers will be required to notify their members of the fact.

Those that are deemed to have underperformed for two years in a row face being banned from accepting new members.

The initial proposed list of sector benchmarks raised concerns that super funds could be deterred from investing in unlisted property and infrastructure assets.

Sally Loane of the Financial Services Council. Picture: Hollie Adams

The super industry on Wednesday welcomed the announcement of a broader list of benchmarks for infrastructure investing.

The industry also welcomed the announcement that administration fees would also be factored into super fund performance comparisons in addition to investment fees.

The Association of Superannuation Funds of Australia said the changes to the proposed performance benchmarks “recognised the important role that investment in unlisted assets and infrastructure plays in superannuation returns”.

ASFA chief executive Martin Fahy said the changes would help to “mitigate investments distortions” which could have occurred with the initial proposals.

He also welcomed the move to include administration fees in the benchmark.

Mr Fahy said this would “help align the benchmark” to the reality of the returns super fund members saw in their returns.

Financial Services Council chief executive Sally Loane welcomed the government’s decision to refine the performance benchmarks in the proposed legislation.

“We are pleased to see that the government used the recent period of consultation with industry to improve the Your Super reforms by segmenting the benchmarks to accurately assess investment performance,” she said.

She said the new regulations were “complex”.

“We urge the government to carefully consider its approach to benchmarking administration fees, to ensure they accurately reflect the member experience,” she said.

Ms Loane warned that the tight time frame for the implementation of the legislation, which has yet to be passed by the Senate could “introduce significant risk into the implementation process”.

Superannuation consultant Michael Rice said the changes meant that new players in the superannuation sector would not be measured until they had five years of performance data.

But it says existing super funds would be measured on the period going back to July 2014.

“It does seem anomalous that a new fund which turns out to be non-performing will not be measured for five years, but existing funds are measured over their past history, which they cannot change.

“The measurement is retrospective legislation, which is normally not applied,” he said.

Industry Super Australia said the new laws appeared to be “moving in the right direction”.

It said it welcomed “the federal government’s moves to strengthen new performance test laws and to ensure super funds are not penalised for investing in vital local infrastructure projects”.

“The government has also taken a positive step to benchmark the performance of unlisted assets to more appropriate indices,” it said.

“Both changes in the proposed regulations released today need to be examined in further detail, but ISA is willing to work with the government on further changes to get the best outcome for members,” it said.

But it warned that the proposed new laws needed to “ensure members are not stapled to dud funds and to expand the testing regime to all APRA-regulated products”.

“Huge swathes of the ‘Choice’ sector are still carved out of the testing regime, so potentially millions of Australians could never be told their fund is inferior,” it said.

“Members are still able to be ‘stapled’ to a product that has not passed a performance test – running the risk they could be stuck in a dud fund for life.”

Linda Elkins, KPMG’s head of Asset & Wealth Management, said the changes to the proposed superannuation performance benchmark were “sensible and have been welcomed by the super industry”.

“The changes rightly recognise the importance of unlisted assets in funds’ performance.

“The decision to include administration fees are also welcome and will ensure all fees are included in the benchmark,” she said.