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8 July 2003
Mr S. Frappell
Acting Committee Secretary
Senate Select Committee on Superannuation
Parliament House
CANBERRA ACT
Dear Stephen
SUPERANNUATION INDUSTRY (SUPERVISION) AMENDMENT
REGULATIONS 2003
The Industry Funds Forum (IFF) represents the interests of the members of 25 large
industry superannuation funds which collectively have over 4 million members and
$30 million in assets.
The IFF is pleased to provide comment on the Exposure Draft of the Superannuation
Industry (Supervision) Amendment Regulations 2003. The IFF made a submission to
the Treasury in November 2002 on the Consultation Paper on “Portability of
Superannuation Benefits”, and is pleased to provide these comments to the Senate
Select Committee on Superannuation to assist in its consideration of the draft
regulations.
Introduction
1
The IFF recognises that there is currently an excessive number of
superannuation accounts in Australia, in relation to the number of people in the
workforce. It would generally be in the interests of members if many of these
accounts could be consolidated into their active account (ie. the account currently
receiving contributions from their current employer).
2
However the IFF believes that inefficiencies and cost increases would occur if
members of superannuation funds were free to move moneys from active
superannuation accounts at any time as appears to be contemplated by the draft
regulations. The effect of the draft regulations would be to create a proliferation of
superannuation accounts, which is precisely the opposite outcome to the stated
objective of ‘…addressing the issue of multiple superannuation accounts.’
3
The IFF supports the principle of portability of superannuation benefits in the
context of improving the opportunity for members to move their existing account
balance(s) into the same fund that is receiving their mandated employer contributions.
Constraints to Account Consolidation
4
The main constraints to account consolidation are:
i)
deliberate delays by (some) superannuation funds in implementing a request
from a member to transfer from their fund to another fund;
ii)
the imposition by (some) superannuation funds of excessive exit fees and
penalties upon transfer which can make it uneconomic for a member to pursue
such a transfer.
iii)
when changing employment, members themselves often do not take the
necessary steps to transfer their superannuation benefit from their fund which
had been receiving contributions from their previous employer to the fund
receiving contributions from their new employer;
iv)
when changing residential addresses members often do not advise their
superannuation fund of their new residential address
5
Points i) and ii) should be addressed in these regulations, whilst points iii) and
iv) by their nature are more appropriately addressed by information campaigns
directed to members.
6
The 90 day requirement in Clause 6.34 of the draft Regulations will address
the issue of deliberate delays (point i) above). The IFF would support a shorter period
such as a requirement to implement a requested transfer within 45 days of all required
information being available, but we recognise the imposition of the 90 day
requirement would represent a significant improvement on the status quo.
7
A mechanism to facilitate the efficient and timely implementation of
members’ requests to transfer between funds would be the development of a standard
industry-wide protocol setting out the data that all superannuation funds need to
implement a transfer request. Currently some funds delay implementing transfer
requests because they claim to require further information that, on occasions, seems
designed to cause a member to abandon their request in frustration. Clauses 6.33 and
6.34 could be used by some funds as a basis to frustrate a member’s request to
transfer because of this issue.
8
The issue of excessive exit fees and penalties (point ii) above) is very real one
and does act as a major obstacle to members seeking to transfer their superannuation
from those funds that impose such excessive fees or penalties. Some examples where
members of industry superannuation funds have been forced to withdraw a request to
transfer superannuation from a non-industry fund to their active industry
superannuation fund account, because of the cost involved include:
Account Balance
$5,939.14
$1,287.80
$11,223.08
$21,694.00
$216,705.36
Exit Fee/Penalty
$5,621.11
$1,195,27
$8,211.53
$6,090.67
$40,595.40
%
95%
93%
73%
28%
19%
9
These examples are reflective of the experience of a substantial number of
people. Many people refuse to incur such costs and retain their money in the existing
fund. Indeed IFF funds frequently advise persons NOT to pursue their desire to
transfer money from commercial funds into the industry fund because it would not be
in the members’ economic interest for such a transfer to occur. Some such people
choose to incur the costs and view it as the closing chapter of a regrettable, albeit
learning, experience. The IFF is concerned to ensure that the Draft Regulations are
directed to the major constraints on portability such as excessive exit fees and
penalties. Accordingly the IFF supports a cap on exit fees and penalties of around
$50 – this represents the upper limit on the processing costs incurred in transferring a
member from one fund to another.
‘Portability’ or ‘Choice’?
10
The draft regulations use the term ‘rollover’ when the context of such use
indicates that ‘transfer’ is the term that should be used. The draft regulations appear
to extend the process of consolidation of accounts into a member’s active account, to
the process of a member being able to transfer money out of their active account to
another account on as regular basis as the member wishes,
11
Hence an employer paying an employee’s Superannuation Guarantee
contributions into Fund A, could see that act negated by the employee transferring the
same Superannuation Guarantee contributions out of Fund A into Fund B. The
employee could make such transfers with the same frequency that the employer
makes the original contributions. Such a process would:
i)
impose significantly increased costs across the system due to the surge in
transactions that could be expected to occur. This would, in particular, impact
on all members of those funds that do not impose an Exit Fee because the
costs would be spread across all members. Alternatively such funds would
need to impose a new fee.
ii)
create significant liquidity and long-term investment difficulties for funds that
could see contributions being paid into the fund and being transferred out
shortly thereafter. This ‘revolving door’ approach would make optimal
investment allocation (and therefore enhanced returns for members) very
problematic. The most likely end result would be a reduction in the retirement
incomes for members of superannuation funds due to the increased level of
costs and implications for investment strategy.
iii)
represent a subversion of the employer’s intentions, and where such
contributions are based on a contractual basis (whether through an Award,
Enterprise Agreement or other industrial instrument) would represent a
subversion of the intent of the terms of the contract.
12
The Draft Regulations would essentially introduce ‘Choice of Fund’ under the
guise of ‘Portability’. The IFF strongly urges that the same regime of member
protections that we argue should be introduced together with any ‘Choice of Fund’
system, would need to be introduced together with these regulations as currently
drafted – see “Member Safeguards” below. As noted this is because these draft
regulations would have a similar effect to the proposed ‘Choice of Fund’ proposals.
Member Safeguards
13
The IFF supports enhanced portability of superannuation benefits on the basis
described in this submission including the provision of enhanced protections for
members. These include:
(i)
a readily understandable disclosure regime that includes all costs and fees;
(ii)
the cost and fee disclosure should be in $ terms as well as in formulaic terms,
and should include a “whole of working life” figure;
(iii) the assumed account balance should reflect the long-term savings nature of
superannuation and should be based on a substantial sum, eg $100,000; and
(iv)
as noted above, the requirement for a cap on exit fees and penalties limited to
around $50.
14
The IFF endorses the comment made in the Government’s Issues Paper of
2002 that ‘Portability would increase the importance of financial advisers in the
selling of superannuation’. In recognition of this fact the IFF believes that it is
essential to link any changes concerning portability as proposed in this Bill with a ban
on commission-based selling of:
(i)
mandated employer superannuation contributions and
(ii)
transfers of superannuation accounts from one fund to another.
15
The IFF would be pleased to provide further information in relation to the
above.
Yours sincerely,
IAN SILK
Convenor