Why big super’s rotten rules demand a specialist regulator

Some of the big super funds have now changed their stance on pension minimums. Picture: iStock

Once in a blue moon, the everyday investor scores a victory over the big end of town.

But it rarely happens so fast as this week’s capitulation from the biggest names in superannuation over a rotten rule that punishes people with low balances.

After The Australian shone a light on the questionable practice last month, industry fund Cbus broke ranks.

On Monday, it surprised the market with an announcement that it would be dropping its pension minimums rule completely. Previously, Cbus members needed $10,000 to qualify for a pension from the fund.

Pension account minimums have been a dirty little secret within the super sector for years. Many big funds effectively punish their least profitable customers, justifying the rule on the basis of administration costs. But the rule is random, the minimums appear arbitrary and clearly they are not necessary if a $100bn fund such as Cbus can scrap it altogether.

“We are removing unnecessary fund rules that may disadvantage those with lower balances,” says Cbus chief executive Kristian Fok.

Within 48 hours, the nation’s biggest super fund, AustralianSuper, and heavyweight Hesta sprung into action, reducing the minimum amount required to open a pension, although they chose not to cut it altogether like Cbus. Instead they reduced the barrier from $50,000 to $10,000.

Super Consumers Australia deputy chief executive Katrina Ellis said it was “great these big funds no longer have excessive barriers but nobody should face such a barrier just because they have a low balance”.

Hopefully, more funds will follow. We already know Australian Retirement Trust, a fund that requires a $30,000 minimum, is reviewing its position.

But the whole affair brings up the broader question of whether these monsters of the market are sufficiently answerable to the millions of Australians who must – by law – contribute to super.

Because in reality, big super funds are answerable to nobody in particular. Sure, all the regulators have some oversight of super, but no single regulator is expressly tasked with policing the $4.2 trillion sector, and the strains are starting to show.

In fact, the pension minimums incident just scratches the surface. Big super is riddled with unanswered questions and rotten little rules that are buried in the fine print.

For example, what exactly is a balanced fund? There is no set definition used by all funds.

Each fund suits itself. How about unlisted assets? It is the secret sauce of above-average performance for industry funds over a decade. What are the rules around valuations here? And that’s just inside the everyday working of big super funds, which are the engine room of the wider system.

At the edges of the system, it gets a lot worse. There is a mini industry that feeds off big super. It’s filled with promoters who entice people to take new risks.

Cbus Super chief executive Kristian Fok broke ranks with other large funds on a how much a saver needs to start a pension with a big fund. Picture: Britta Campion

Operators often lure investors with the promise of greater financial independence. Sometimes this can mean switching funds, sometimes it can require starting a self-managed super fund. The objective might be to access an ‘exclusive property development’ or it can be as mundane as getting super out early to finance dental surgery.

But there is a common thread here. Exploiting investors by leveraging the double trouble of a poorly understood super system combined with regulatory gaps makes it all too easy.

At its very worst, we get situations such as the First Guardian group of related scandals, which is shaping up to be the biggest failing of the super system for many years. In this affair, thousands of retiree investors have been exposed to heavy losses in First Guardian and Shield managed investment schemes. These retirees are now facing ruin.

How can this happen inside what is meant to be one the world’s best super systems?

As my colleague Cliona O’Dowd recently reported in The Australian: “First Guardian’s liquidators have yet to give an estimate of how much money investors may get back but their initial report made for a grim read that suggested substantial savings could be lost. That means AFCA, (the Australian Financial Complaints Authority) and the Compensation Scheme of Last Resort could be the only avenue for First Guardian victims outside of what liquidators recover.”

But AFCA is an authority that steps in after the damage is done. What we need is a regulatory police force that steps in to stop the scandals in the first place.

Here’s the thing. It’s not that we need more regulation; we just need more effective regulation. A regulator does not have to be a giant bureaucracy to be effective, just take a look at Austrac, the money laundering regulator. It’s tiny, but terrifying. Get a call from Austrac and you sit up and pay attention. Just ask CBA or Westpac, which have paid a combined $2bn in Austrac-related fines in recent years.

The regulatory system for super was largely designed in 1995 after the Wallis Inquiry.

The framework, which still stands today, left SMSFs to the tender mercies of the ATO and big super was to be regulated by the competition and consumer regulator ASIC in conjunction with prudential regulator APRA.

Back then, super was just a sidebar at a time when vertically integrated banks ran the show. The age of internet scams was far away and the amount you were legally mandated to put into super was just 5 per cent compared to today’s 12 per cent.

Super has become too big and too important and too full of unanswered questions to be left as it is. It needs a single regulator and it needs one as fast as possible.