The four key pillars to super reform

If the Morrison government is ­serious about its Your Future, Your Super reforms, it must ensure that the four key pillars of the new framework unveiled in the 2020-21 budget are credible and drive better outcomes.

Failure from the outset would jeopardise future efforts to maximise a $3 trillion national asset, which all going well will expand to $5 trillion by 2034.

Any temptation to characterise an Industry Super Australia warning about a key aspect of the pillars as partisan and without merit should therefore be avoided.

ISA, on behalf of industry funds with $700bn-plus in member assets, told this column on Tuesday that about half the system could be exempt from testing against key performance benchmarks.

The purpose of the tests is to publicly expose funds as duds if they are serial underperformers, and prevent them from accepting new members if there’s a second consecutive strike.

You can’t argue with the rationale.

The vagaries of the default arrangements has meant that members can fall victim to an “unlucky lottery”, in which they’re placed into underperforming funds, which could result in a member being substantially worse off at ­retirement.

Currently, there are about 3 million accounts in underperforming funds managing more than $100bn in retirement savings.

A member in the worst-performing MySuper product could be up to $98,000 worse off in ­retirement.

The problem identified by ISA is that an estimated $881bn in retirement savings belonging to 8.4 million member accounts, or about 47 per cent of the APRA-regulated system, could be exempt from the performance benchmarks because of the way they’re structured.

Also, there is no time frame for performance tests to be applied to three-quarters of nearly $1.13 trillion in assets that are not in ­MySuper.

Initially, the performance of MySuper and “trustee-directed products” in the choice sector will be tested, excluding hundreds of products and investment options.

While the term trustee-directed products is not defined in legislation, ISA says it would only capture choice products invested in multiple asset classes if the trustee has control of the investment strategy.

It says analysis of the SuperRatings database only identified $254bn in trustee-directed products — 22 per cent of assets in the choice sector despite the Productivity Commission finding that the sector had high fees and poorly performing super products.

Among those excluded were most platform investment options offered by third parties, single-asset investment classes and all pension products.

The industry fund lobby group says the government’s proposal leaves almost 70 per cent — or 6.5 million accounts holding $425bn in assets — of the big bank-dominated retail super fund sector out of scope.

ISA backs the government’s move to tackle underperformance, but argues the new tests should apply to every fund.

Net return should also be used as a performance benchmark rather than net investment return; chronically underperforming funds should be closed, and all funds and products, including the choice sector, should pass the benchmark tests, with no carve-outs.

CBA’s Dutch move

It’s no surprise in the circumstances that the story behind Commonwealth Bank’s choice of Amsterdam as its European base is missing several chapters.

Yes, there’s a Brexit angle to the creation of Commonwealth Bank of Australia (Europe) NV, with the newly licensed Dutch entity also supplementing some of the services provided to institutional customers in London.

This helps to ensure there will be no interruption to normal transmission, even if the Brexit outcome is chaotic.

The missing chapters, however, concern CBA’s dalliance with aggressive tax structuring in the once-blacklisted haven of Malta.

This column revealed in February that the bank had tired of the media, political and Australian Taxation Office scrutiny of its outpost in the Mediterranean, and would relocate to The Netherlands.

“As a result, the group will cease its operations in Malta and continue those operations, together with certain operations currently performed at its UK branch, through the Dutch bank,” the 2019 accounts of CommBank Europe, holder of a Maltese banking license, said.

There were two ways in which the Dutch subsidiary could subsume CommBank Europe — a cross-border merger, or transfer of the existing assets and liabilities.

It seems the latter was chosen, so that CommBank Europe’s contentious life as CBA’s official “springboard” into the European Union has come to an end.

CBA set up its structure in Malta in 2005, when the country was one of 38 blacklisted by the Australian Taxation Office as a tax haven.

CommBank Europe grew rapidly to become one of the country’s largest financial institutions, with its holding company Newport nursing a $5bn balance sheet despite employing only six people, including clerical and executive staff.

In 2014, the structure contributed to CBA’s relatively low effective tax rate of 27.1 per cent.

Malta was established in a different era.

Transparency and simplicity are now the main pillars of banking, with opaque structures in obscure countries only drawing unwanted attention, regardless of the tax benefits.

CBA Europe NV will act as a gateway to Australia and New Zealand for the bank’s wholesale clients in Europe, which are significant contributors to Australia’s foreign direct investment. It will also provide a large investor base for the domestic bond market.

About 10-15 per cent of Australian corporate deals are funded in European markets.

The Dutch subsidiary is expected to be fully operational in the first half of next year.

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