Glenda Korporaal
Super funds to face increasing scrutiny as their ability to provide financial advice is increased
The federal government’s Quality of Advice Review has paved the way for Australia’s superannuation giants to play a greater role in the financial advice area.
But the increasing size and role of super funds in the economy and in the lives of ordinary Australians will also mean the sector will come under increasing scrutiny.
The industry super sector in particular – now worth more than $1.2 trillion – has had a rails run over the past three decades, benefiting from starting with a clean sheet of paper, not having to deal with the same legacy issues as retail funds, having a younger membership and the benefits from having super mandated into awards.
As it argues, a lack of financial pressure to pay out profits to shareholders has also benefited the sector and its members.
The super industry as a whole will continue to benefit from the increase in the superannuation guarantee levy to 12 per cent by July 2025, but the relatively low-cost era which industry super funds have enjoyed – being largely automatic cash deposit accounts – is changing as more members hit retirement age.
As more members retire, they will start demanding more information from their funds, and hand holding from their super fund which will add to operational costs in a sector that has marketed itself on its traditionally low-cost structure.
Servicing issues as the membership ages will become more complex; some recent media attention has focused on people having specific issues such as getting access to super if their partner has died.
The speech this week by Financial Services Minister Stephen Jones highlighted the fact that there are some five million Australians either at or approaching retirement. This now represents a fifth of the total 24 million super accounts in operation.
The greater shift to retirement payouts will mean more pressure on liquidity management, as the increase in contributions and investment earnings starts to be offset more by benefit payouts, forcing funds to take a more short-term approach to investing for their portfolios.
The introduction of the retirement income covenant last year has put super funds under pressure to come up with strategies to help their members in retirement – not just accumulating funds for their retirement.
While it is still early days it means that super funds will become more involved in offering retirement products – whether they be account-based pensions or some form of annuity structure. Annuities involve challenges on the investment side and make trade-offs of returns for guaranteed income streams, which has not made them popular with many Australians to date.
At the moment, each super fund has adopted a different approach to this issue, Some funds are a lot further down the retirement product pathway than others.
But over time, the types of products being offered to retirees and the help and advice they get along the way will result in more consumer scrutiny of funds and more comparisons between funds.
The federal government’s announcements this week will allow super funds more scope in offering advice for their members, particularly at the all important time of their retirement.
But how much of this will come from salaried investment advisers – which some super funds have now and whose services are specifically paid for by members – and how much of this will come from advice allowed to be offered to fund members and charged to the general costs of the fund?
The government’s response this week said it would move to amend restrictions on collective charging to allow super funds to provide more retirement advice and information to their members.
It will also provide super fund trustees with “legal clarity around current practices for payment of adviser service fees”.
So does this mean more financial advice is available to super fund members from their fund for those who are prepared to pay for it, or that the fund will also step up the amount of advice they can give to their members but charge it to general operating costs – or both?
And will super funds’ staffed financial advisers recommend the retirement products offered by their own funds?
In an interview with The Australian this week, UniSuper’s head of financial advice, Andrew Gregory, predicted that advice and the post-retirement sector would become a new area of competitive attraction for funds, along with their traditional pitches of low cost structures and relative investment performance.
The reforms will allow provision of more digital advice and prompt more investment by super funds in the digital technology, which has significant potential with technology becoming smarter.
Over time, the funds which are prepared to step up their investments in more technology to back their advisers and provide direct access to information for members seeking advice, may become the winners. But like all IT investments, there will be wrong and right decisions.
Finally, there is the point about the scrutiny of funds’ investment performance and their levels of disclosure.
The introduction of the Your Future, Your Super performance tests in July 2021 has already put pressure on funds, particularly those who are poor performers, which is putting pressure on super funds for mergers to achieve economies of scale.
The 30 years of compulsory super have spanned some relatively benign investment periods, but the investment world is now getting tougher.
The latest figures produced by the Association of Superannuation Funds of Australia show that super funds have enjoyed average annual returns of 7.3 per cent a year over the past 30 years but only 5.8 per cent in the past five years, and minus 3.3 per cent over the past year.
The recent figures look much worse after inflation, with real returns coming in at 4.7 per cent a year over 30 years, 3.1 per cent a year over the past five years, and minus 8.9 per cent over the past year. In short, the years of easy returns are over.
Super funds, which have traditionally been strong investors in CBD property, are now having to deal with issues such as falling valuations.
APRA is putting more pressure on funds to make sure they write down the valuations of some of their unlisted investments, as quickly as they reported rising valuations during the boom years.
And, as Minister Jones also reminded us this week, legislation to force super funds to report to the Australian Securities and Investments Commission at the same level as listed companies, is now before the parliament.
This has the potential to open up a whole new world of scrutiny for super funds if trained financial analysts start to go through their accounts in the same way analysts currently examine the accounts of listed companies.
In short, the super fund sector is getting bigger and will play a greater role in the lives of ordinary Australians, but it will also have to be ready for a harsher spotlight.