Download submission on the safety of superannuation

SUBMISSION ON THE SAFETY OF
SUPERANNUATION ISSUES PAPER FOR THE
TREASURY SUPERANNUATION WORKING
GROUP
FEBRUARY 2002
INDEX
Letter of Transmission
3
Introduction
4
Superannuation is not a Risk Free Investment
5
Superannuation Safety and Regulation
5
Prudential standards making powers
8
Investments
8
Capital
8
Outsourcing
8
Governance and Operational Risk
8
Annual General Meetings
8
Related party transactions
9
Public disclosure of annual returns
9
Financial Assistance for failed superannuation funds
9
Conclusion
10
2
Ms Sue Vroombout
Superannuation Working Group
C/- The Treasury
Langton Crescent
CANBERRA ACT 2600
1 February 2002
Dear Sue
Please find enclosed a submission by AMP to the Superannuation Working Group in
response to the Issues Paper ‘ Options for Improving the Safety of Superannuation’
released in October 2001.
AMP is a leading Australian international financial services company providing
around eight million customers world-wide with wealth creation and asset protection
products and services.
As a major provider of superannuation products and services and as the largest
manager of superannuation savings in Australia, AMP is pleased to be able to make
this submission to the Working Group. The safety of superannuation is a critical
on-going issue and AMP welcomes the Government’s focus on these issues at this
time.
Yours sincerely
Simon Edwards
Manager
Strategic Policy
AMP Government Affairs
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Introduction
Individual savings accumulated through the operation of Australia’s superannuation
system should be accorded the highest possible level of protection commensurate
with the objective of creating a pool of personal wealth sufficient to provide
retirement incomes to individual contributors.
As a result of the mandatory employer contribution requirements operating within
Australia, it is appropriate that the Parliament and the Government establish a
regulatory framework that addresses systemic risk to superannuation savings.
It is appropriate to acknowledge that to date the Australian superannuation system
has evidenced a low level of lost member funds relative to the size of funds invested.
Notwithstanding this encouraging fact, the current size of superannuation savings,
the projected growth in superannuation savings and the significance of
superannuation to individual welfare, necessitates a vigilant approach to
superannuation risk assessment in particular and systemic safety issues in general.
Every individual who is required or who chooses to save for their retirement through
an independently managed superannuation fund is entitled to expect that the level of
systemic management risk attached to their investment is no more than would
pertain if their superannuation were held in any other similarly administered
superannuation fund. This submission does not address the safety of funds
accumulated in self managed superannuation vehicles as it is not part of the Working
Group’s terms of reference. To this end, a reference to a ‘managed superannuation
fund is a reference to a superannuation fund that is not a self managed fund and
therefore to a fund that has at least one contributing non-family member employee.
To ensure that there is an equality of systemic management risk across all managed
superannuation funds, regulation should be based on the level of risk to the
contributor. Regulatory requirements, imposed and supervised by a public regulator,
should seek to deliver the highest degree of transparency of action and decision
making by those responsible for a managed superannuation fund at the lowest
possible cost to the contributor. Such a framework must be capable of measurement,
monitoring and enforcement.
A ‘one size fits all’ approach to superannuation regulation is not appropriate and will
not secure superannuation savings as it ignores the inherent risk profiles of
superannuation funds. Furthermore, a system based on a checklist of rules ignores
the fundamental nature of risk that specifically exists in any organisation or structure.
It is to this inherent risk that regulation should be addressed.
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Superannuation is not a Risk Free Investment
Australia’s compulsory superannuation system and the incentives provided through
taxation concessions for voluntary superannuation contributions require and induce
individuals to commit savings to superannuation funds. These contributions are not
and have never been made without a risk of loss.
Neither the Federal Government nor any trustee of a superannuation fund can
guarantee the absolute safety of funds. The large amounts of money invested in
superannuation and the considerable volume of financial transactions create the
potential for misappropriation, dishonesty, fraud and criminal theft. The risks that
exist for all superannuation savings can be considered as a spectrum of probability
dependant on a multitude of factors among which are:
the size of the fund;
the professional management structures of the funds’ manager;
the financial resources of the trustee/fund manager;
the independence of trustees from employer contributors;
the quality of accounting systems;
the presence and quality of independent auditors; and
the quality and skill of trustees.
In addition, all superannuation savings that are invested in equity markets face the
risk of investment loss. Without such investment risk however the level of
superannuation savings will never be sufficient to provide a basic, let alone a
reasonable, level of retirement income.
Investment risk should therefore be accepted by a regulator as valuable and worthy.
Investment risk can be distinguished from other forms of risk to superannuation
safety in that the risk factor potentially benefits contributors. Nevertheless, as recent
evidence from the collapse of the Enron Corporation in the USA and the effect of that
collapse upon the 401K fund of its employees illustrates, the regulator should
consider investment risk when creating a risk profile for a superannuation fund.
Superannuation Safety and Regulation
Aside from investment risk, those factors which impact upon the relative degree of
safety of a managed superannuation fund can be said to be inherent or systemic to
the structure of the management vehicle used to collect, account for, invest, monitor,
calculate and report on superannuation savings.
The trustee system is an appropriate framework in an environment of mandatory
contributions and no choice or portability. AMP supports the basic trustee framework
and does not agree that the administration system contained in the Managed
Investments Act (MIA) would provide a better model or framework for
superannuation.
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The lack of a capacity for individuals to calculate systemic risk in their
superannuation investment and to move mandatory contributions between
superannuation funds warrants the maintenance of the trustee model.
Regulation of systemic risk (the risk that exists in the way a system operates) is the
key to superannuation safety. As has been long acknowledged, there are various
risk profiles across the range of managed superannuation funds. While academic
and media attention has focused most deliberately upon those funds that are
relatively small (either in numbers of members or funds invested) and which are
most closely linked to an employer contributor, such a focus is really no more than a
conceptualisation of the nature of risk. As such AMP does not agree that the focus of
the Working Party should be on any one particular form of managed superannuation
fund.
To this end AMP agrees that the safety of superannuation would be increased
if all trustees were to be licenced (approved) as part of a broad risk based
assessment of all managed superannuation funds.
Such licencing should focus on the ability of trustees to deliver an acceptable level of
safety for the superannuation savings of any member in their trust. AMP believes
that the present SIS Act already contains an appropriate framework from which such
licensing could be implemented.
APRA has the power under SIS to pre-vet applicants who wish to become approved
trustees, to monitor their behaviour and to impose strict sanctions in the event of non
compliance. These powers should be exercised by APRA to secure a regulated
class of trustees that, in all the circumstances of the superannuation funds they
manage, can hold the confidence of the public.
Through a universal licensing regime conditions could be set within a licence that
would reflect the systemic risk of the managed superannuation fund. Such conditions
would address the risks identified in the Working Group’s papers, for example, by
requiring a trustee to have a risk based compliance plan and/or a detailed
investment plan.
APRA instruments would also appear to have sufficient flexibility to allow them to be
tailored to reflect different types of superannuation funds and changing market or
legislative conditions.
A major factor that APRA should consider in determining conditions for licences
should be the capacity of members of a fund to transfer their benefit out of that fund.
The proportion of members and the proportion of funds that are ‘free’ to be moved at
the direction of a member should impact the requirements imposed on trustees.
If and until "choice" legislation is introduced any differences in the conditions
attaching to trustee instruments and the regulation of superannuation funds generally
should in AMP’s view be based on this distinction and not whether a fund is or is not
operated for profit, its AUM or the size of its membership.
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If all trustees of managed superannuation funds were required to obtain an APRA
approval instrument and that instrument were to be established on the basis of an
overall risk assessment of the fund, then in AMP’s view the public could better
anticipate a safer superannuation system. Moreover, by requiring a consistent
assessment platform for all trustees, focused on risk alone, APRA would be better
positioned to monitor and regulate trustee behaviour.
AMP is of the view that a universal APRA licence would not substantially impact on
current industry participants. The vast majority of managed superannuation funds
already demonstrate the requisite capacities to obtain an approved trustee status.
AMP acknowledges that some smaller funds may view the possible cost of
developing more substantial safety systems or processes as excessive relative to
their funds under management. This should not be a sufficient reason for allowing
such funds to operate outside the licensing requirements as it is an admission that
the safety of some member funds is less than others.
AMP considers the potential of a properly administered licensing regime to be far
more efficacious to superannuation safety than any raft of additional general
prescriptive regulation. Given the ability of the regulator to date to monitor and act on
the significant number of present requirements contained in the SIS Act and its
regulations, AMP believes further prescription will inhibit not assist the regulator.
Indeed AMP considers the marginal return of additional regulations would be
negative for the majority of superannuation members.
Ultimately AMP endorses the view that the success of any reform will be dependent
upon the regulator having adequate resource levels and skills to properly implement
and monitor compliance. However as noted above the cost of safety is borne by
members in the form of lower returns. Consequently additional ‘safety’ requirements
that add marginally little to reducing risk can actually reduce the retirement benefit of
members. This is not desirable nor appropriate.
The following comments address several of the issues raised by the Working Group
in its Consultation Paper. As a general response AMP supports fully those measures
that increase transparency and reduce member risk. AMP does not agree with
proposals that will not achieve the ultimate goal of reducing risk in the
superannuation system but which merely add to the cost of providing superannuation
services.
7
Prudential standards making powers
AMP has no objection to giving APRA additional power if the evidence shows it
requires it to effectively regulate the industry. As with any standards AMP assumes
industry consultation would be incorporated in the approval process to ensure
effective implementation on a cost effective basis.
Investments
AMP judges that in terms of investment, SIS is already adequate in terms of general
obligations imposed on trustees and that adding further prescription is not
necessarily the solution. AMP recommends that consideration be given to adding a
condition to an approved trustee instrument to resolve the current problems
encountered by APRA in regulating investments – see also comment below
concerning related party transactions.
Capital
While some operational risk can be lessened by adequate capital resourcing,
insurance will in many cases provide greater protection for members. Furthermore
the cost of such insurance will reflect a real market based assessment of the risks
involved. Accordingly AMP recommends that where appropriate compulsory
insurance be considered as an approved trustee condition.
Outsourcing
AMP supports application of the current draft outsourcing standard to
superannuation trustees subject to certain comments on that draft which have
already been conveyed to APRA.
Governance and Operational Risk
AMP has noted the considerable comment already made on this proposal by a
number of industry participants and has nothing further to add to the substantive
comments made above.
Annual General Meetings
AMP does not support the proposal to introduce Annual General Meetings for
superannuation funds as an appropriate or cost effective means of giving members
the opportunity to hold trustees to account more directly. AMP supports the proposal
to increase transparency through measures such as the public disclosure of annual
returns and more meaningful disclosure of certain member information, for example
administration costs.
It is important to remember that in making trustees more accountable members of
employer sponsored funds have limited options available to them if they are unhappy
with their fund.
8
Consideration should be given to ensuring members of these funds in particular
receive appropriate education as to what their options are when they have concerns
about the management of their fund (which would usually be outside the jurisdiction
of the SCT).
Related party transactions
AMP strongly supports the abolition of related party investments, subject to the
retention of existing exemptions. There is no clear need for in house assets, loans to
members etc from a members' perspective and AMP believes that all investments
should be at arms length. There are other means available to individuals who wish to
invest in their employer companies or obtain financial assistance and
superannuation funds should not, in AMP’s opinion, be used for this purpose.
Public disclosure of annual returns
AMP supports this proposal as a means of increasing transparency within the
industry. As referred to previously member education is an important adjunct to any
increase in transparency.
Financial assistance for failed superannuation funds
As mentioned above insurance would in AMP’s view be a preferable and more
market oriented alternative to a universal levy for failed superannuation funds. An
industry assistance fund could in the longer term act as a disincentive for prudent
risk management with the cost of failure being borne by prudent trustees and their
members.
Moreover in the absence of a single risk based regulatory structure that effectively
risk rates superannuation funds it is inequitable to require the members of low risk
funds to ultimately subsidise the members of higher risk funds. Given it is in the
province of Government to create and manage a single risk based regulatory
framework, a decision to allow a non-risk based regulatory framework to operate
should place the onus on Government to provide a safety net for lost member funds.
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Conclusion
To date the Australian superannuation system has recorded a low level of lost
member funds relative to the size of funds invested and under management.
The large amount of money accumulating in Australian superannuation funds will
require the superannuation industry to be vigilant in protecting funds so that they do
not fall prey to fraud, dishonesty, theft or negligence.
The ability of superannuation trustees to manage and protect the superannuation
savings of all Australians is a systemic issue that requires a systemic response from
the regulator and the Government.
All regulation of the superannuation industry should be risk based and risk should be
defined, measured and monitored by APRA. All forms of risk, including investment
risk, should be assessed by the regulator.
All trustees of superannuation funds should be licenced by the regulator on the basis
of a risk assessment with the licence if necessary setting out whatever requirements
the regulator considers necessary to establish an acceptable level of risk. Licences
and any conditions therein should be monitored by the regulator and, where
necessary, the regulator should use all powers necessary within the SIS Act to
enforce the licence and maintain the safety of superannuation savings.
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