Superannuation industry leaders worried by the direction of Cooper Review

The chairman of the Cooper Review into superannuation, Jeremy Cooper, has adopted an assertive approach in his public comments on the future shape of the industry. However, as Super Review’s latest round table at the ASFA conference revealed, his approach has left a number of industry figures feeling uncomfortable.

Present:

• Mike Taylor — managing editor, Super Review;
• Phil Collins — chief executive, IUS Life;
• Russell Mason — global partner, Mercer;
• John Quessy — trustee, NGS Super;
• Roslyn Ramwell — chief executive, (CSR) Harwood Superannuation Fund; and
• Pauline Vamos — chief executive, ASFA.

Mike Taylor, managing editor, Super Review: Thank you everybody for your attendance today after what has been, from a journalist’s point of view, a content rich conference.

The focus of this round table will be the Cooper Review into super.

We heard a lot from Super System Review chair Jeremy Cooper yesterday, and I’m going to be a little bit controversial here, but I find it extraordinary that in the middle of a government inquiry you have the chairman expounding some fairly solid views about where he thinks it should go.

So I’d just like the panel’s view on that, whether they find it in any way different to other inquiries that we’re having such a broad outline from the chairman.

Phil Collins, chief executive, IUS Life: I’ll open up if you like and repeat what I said before: I also share that concern.

I think the approach that I’ve seen taken so far is one of, if not confrontation, at least putting positions out there in advance of a proper understanding of the issues. I’m quite concerned that Cooper doesn’t understand the issues that flow from the suggestions he put.

If we look at yesterday’s talk about the merging of funds to achieve the critical mass that he appears to believe is necessary, I don’t think it’s necessary to merge funds to gain that; there are other ways of achieving that result and what’s missed by making those sorts of comments in a sense is the huge ramifications right down the line for people, like insurers, who are involved in that sort of thing if we have continual merging of funds. And that will happen automatically anyway — there is a certain degree of that by competition.

But to achieve simply a new size creates an awful lot of disruption to the industry that might not be in the best interest of the members at the end of the day.

And so far, I just cannot get comfort or confidence that the issues are [being] properly understood by Cooper, and that worries me greatly. I think we may end up with more of an issue than we have at the moment.

Russell Mason, global partner, Mercer: In his defence, I wonder whether Cooper is being intentionally provocative so that the industry does react.

I think this is an enormous opportunity for all sectors of the industry to make a contribution to be heard, and this inquiry must be one of the most broad reaching inquiries we’ve ever had for superannuation.

Depending on what comes out of it, it [could have an] enormous impact on the future.

I don’t think Cooper or the Government wants any of the sectors to say, ‘Well, we didn’t really have our say or we didn’t contribute’. So by being provocative, perhaps he’s going to motivate all participants in the industry — service providers and industry association, such as ASFA [Association of Superannuation Funds of Australia] — to get up and make submissions, and from there this covers an enormous range of the inquiry. It’s difficult even to respond to all the areas, so I just wonder if that’s what he’s doing.

John Quessy, trustee, NGS Super: There could be a bit of that because one of the messages I got yesterday, I think there were two when he was speaking, but one of the messages I got was a little bit of, ‘Hey chaps, it’s really not going to be quite as bad as you think’.

But that also presupposed and goes to the second message, which was the one that was, ‘First we’ll have the execution, and if there’s time later we’ll have the trial.

I’ve already made up my mind about a whole range of things.’

Now that just kept underlying the way I was hearing a lot of what was being said. I could be wrong, but anecdotally, when you’re talking to people after the event, it seems to me that there’s a lot of that feeling, that ‘we’ll let people make their submissions, we’ll talk about it a lot, but quite honestly we’ve already sent the report to the printer’.

Roslyn Ramwell, chief executive, (CSR) Harwood Superannuation Fund: I wondered a little bit about that, not when reading it, but just when I hear the detail and saw the minute level of the questions in phase two, they’re very operational.

And if you’re actually reviewing a structure, you don’t need to do that.

Then I ask myself, why are they making their job so hard? Somehow you’ve got to pull that back to a higher level, and I’m wondering if that is to actually make the industry feel like it is participating when in fact they already have views around the outcome. So that does concern me a little bit too.

I obviously support the corporate fund structure, our fund has been providing superannuation for over 100 years, we think it’s a very competitive trust environment, whereas he’s obviously very keen on scale based on his Canadian experience.

Well, we’ve also seen other endowment vehicles in the US having issues as well, and I’m kind of concerned that his message regarding scale is being expressed very consistently. It’s part of the message, it’s not the total message. If you’re that committed to being that size, well you know what he is talking about.

Pauline Vamos, chief executive, Association of Superannuation Funds of Australia (ASFA): What worries me about the debate is it’s all about numbers of funds, which I agree is very superficial. Switzerland has 7 million people and 2,000 pension funds.

They don’t have an issue with scale. It gets down to efficiency, on how you do business, the back-end of the industry.

Look at the number of participants in any part of the financial services sector, they’re joined together by electronic efficiency and standards, but also the efficiency on engaging with the market.

And a lot of the inefficiency in engaging in the market is actually being reduced as well, because of the way even the funds management industry is becoming more electronic; so is our ability to get information and our ability to make assessments.

When we look at particularly the ASIC [Australian Securities and Investments Commission] announcement yesterday in terms of credit rating agencies, forcing them to go to a global standard, we now know we are really being treated as a global investment economy.

And as the investment industry becomes more global, their connectivity will become more efficient and it will reduce the cost of any superannuation fund entering into the investment arena.

Roslyn Ramwell, (CSR) Harwood Superannuation Fund: Isn’t there some conflict?

We heard from [Minister for Financial Services, Superannuation and Corporate Law] Chris Bowen that he wants Australia to be a financial centre and he acknowledged the expertise that’s being built up in basically managing investments here.

You seem to get a very different view from Cooper, that basically funds management is completely screwing us. In the end, it’s a negotiation process and there is actually competition out there.

I was also concerned a bit about his view of performance fees being bad, but there is an alignment of interest in these arrangements and it’s very easy to go and destroy this.

Of course, it depends on what you negotiate, but since when has it been wrong to have an alignment if it’s done in terms of better outcomes, and I do agree it probably should drive down the core fees more, but there’s nothing inherently wrong.

John Quessy, NGS Super: Going in part back to an earlier comment regarding whether Cooper really understands the industry he’s making an inquiry into, I think there’s a lot of evidence that suggests that it’s only a very superficial understanding that he’s got.

Without being glib, people want different things from their superannuation funds, people want different things from their supermarket.

You can shop at a 7-Eleven because it’s convenient, [but] you’re going to pay more — you know that — but you’re only going to be out of the house for 15 minutes. You can go to Aldi where you’ve got no choice and save a lot of money.

You can go somewhere else, which perhaps does mean you’re going a little bit out of the way, but what you’re getting is the convenience of a shopping mall and all of your other things as well, because you’ve decided that you’re prepared to pay that for what you want.

I feel really sorry for insurers.

Actually, I feel really sorry for the general public, because of the insurance options they’re going to miss out on if we create a sausage factory superannuation scheme.

And if we do that we are not going to have — there’ll still be winners and losers — but we’re not going to have the really good deals that we’ve got in group insurance for some sectors of the workforce.

John Quessy, NGS Super: And sorry, insurance is not sexy. My fund has a great insurance plan, if not the best, certainly one of the best.

But when you do a survey of members, we’re the best at stuff that they care least about. But at the board meeting we have a list of death benefits to pay and those beneficiaries are really appreciative of the fact that they’ve got a good deal.

Phil Collins, IUS Life: One of the things that worries me about this whole issue is that it seems to me Cooper is approaching this on the basis that there’s a whole lot of issues that need to be solved.

There is a presumption that the industry is inefficient and that it needs to be restructured dramatically to get those efficiencies, and I actually find that quite offensive.

I don’t believe this industry, at least carte blanche through it all, is inefficient at all. I actually think it’s a fairly efficient industry.

There is no question there can be improvements — we should always be looking for those — and as it grows in size and becomes more sophisticated we’ll automatically do that, and sometimes you need a hurry up or a change of direction. But I’m concerned that we’re looking at someone saying, ‘I’m going to fix this’.

And if we look just at that issue of size, I would have said that over the last 20 years or 10 years or whatever, the concept of outsourcing has actually been the efficiency model that most people gain from.

To suggest that everyone has to administer their own funds, invest their own funds and have the same insurance arrangements is ludicrous.

What we gain by [outsourcing] is funds, either outsourcing to investment managers that handle bigger portfolios themselves or to insurers that are specialists in insurance and know what they’re doing.

This approach has enabled funds to achieve very competitive rates and very competitive fees for their investments.

And as somebody already said, there is always a degree of negotiation depending on your size and structure, but that’s not inefficient, that’s actually efficient. And I don’t see any gain necessarily from trying to get rid of that.

Russell Mason, Mercer: Let’s concentrate on what’s really important, which is governance and the security of members’ money.

I think the efficiency argument regarding having a dozen or 20 funds of mega size will happen or not happen depending on what members decide in the competitive nature of the market.

You’ve now got a market where virtually all of the industry funds are public offer funds, you’ve got a wide range of retail funds and there is healthy and good competition between those funds.

That will drive a lot of the efficiencies, and I don’t know of a fund that I’m involved with or know of that isn’t day-by-day trying to become more efficient, more competitive and providing something better for their members.

I think what this inquiry also has to look at is the governance of those funds, so whichever fund the members choose, it’s a well run fund with their interests being protected.

John Quessy, NGS Super: There’s no doubt about the efficiency aspect. If you want some very clear evidence of super funds and efficiency, have a look at what the increased compliance costs really have been in the last seven years and look at the minor changes in fees, because the efficiencies paid for that compliance.

Pauline Vamos, chief executive, ASFA: That’s a good point. I think when I look at phase one and phase two and I look at other reviews, particularly when we look at parliamentary reviews and the terms of reference documents that they usually produce, this is a surveillance document.

This is not a review; a review is an objective process where no decision is made.

Now one of the reasons why Cooper feels comfortable making the points he has made is [he’s the regulator and he’s putting the industry on notice].

So this has translated from an individual surveillance to an industry-wide surveillance, and that’s because that’s the task they’ve been given.

As I tried to say in my closing speech today, our industry has scale and we’re going to get more scale.

There is a governance risk there, so they’re saying to this review (and that’s why it’s headed by a regulator), [monitor] this industry, let’s make sure that it’s got the right infrastructure and will have the right infrastructure to deliver what it’s supposed to deliver going forward. [I’ve seen documents] like this many times before.

Roslyn Ramwell, (CSR) Harwood Superannuation Fund: The outcome will be that it’s going to be very standardised.

Many people understand super, I’ve never believed the notion that everyone is passive about their super.

I think a lot of members do understand super, certainly they might need to get to a certain account balance to have this engagement, but I think the broad generalisations made about what people think about their super are wrong. It is their money and if they believe they’re going to have to put it into something that they perceive as quasi government or restrictive, they will go to self-managed super funds (SMSFs). So the Government could create a very interesting outcome.

They may not care, I don’t know their policy on that, but more SMSFs could well be the outcome.

John Quessy, NGS Super: I think the Government will care when they look at the UK experience of people basically losing their money and therefore [having to rely] on the UK Government — [being put] back on the pension.

Roslyn Ramwell, (CSR) Harwood Superannuation Fund: We could see tax concession for years.

John Quessy, NGS Super: Part of [former Prime Minister Paul Keating’s] vision and those who advised him was that this is a really smart, long-term view to move a lot of people off pension dependency.

Now you’re not going to do it in 10 years, you’re not going to do it in 20 years, but over a 40-plus year life expectancy you will move a lot of people [off the age pension].

When the age pension was introduced at age 55, the life expectancy of an Australian male was 58. If you think about it, the Government was saying, ‘Listen, if you can beat the odds we’ll give you some money’. Now I read [life expectancy is] close to 82.

Russell Mason, Mercer: Well if you’re talking about [a pension age of 65], the life expectancy for a female is probably 91, 92, whereas for a male it’s 89. So once you make it to the pension age you’ve got 20-plus years on an average life expectancy.

John Quessy, NGS Super: Retirement is good for your life expectancy.

Russell Mason, Mercer: Yes.

Roslyn Ramwell, (CSR) Harwood Superannuation Fund: Every single dollar that someone partly self funds in retirement must be valuable to the Government in the long term because of savings on pension payments. And even if you can’t self fund till you’re 90, there are other ways of funding retirement ...

There are a lot of other things linked to ageing policy and it kind of worries me, because this whole issue is a big picture item and should not be looked at in isolation

John Quessy, NGS Super: And there has to be a variety of things available, because we’ve got a variety of family structures.

Roslyn Ramwell, (CSR) Harwood Superannuation Fund: Absolutely.

John Quessy, NGS Super: And we’ve got a variety of needs. A sausage factory is just a silly idea.

Russell Mason, Mercer: Yeah, I agree. I found what Bowen said very reassuring with regards to SMSFs, he said I don’t care who runs the funds.

I agree with him fully. If you’re going to get the tax concessions and utilise the system then play by the rules.

SMSFs are now roughly a third of our total retirement savings. I was very reassured with his attitude towards self-managed funds.

They should play the game exactly the same as the rest of us, and if they do that good luck to them. Speaking to some of the regulators, they haven’t necessarily had that view all along, so that was reassuring.

Roslyn Ramwell, (CSR) Harwood Superannuation Fund: I thought that was reassuring too.

Russell Mason, Mercer: Well your chance of getting caught running your own SMSF, your chances of being audited, are pretty slim. Your chance of being caught doing the wrong thing is almost zero because you’ve got the ATO [Australian Taxation Office] regulating you without the resources.

Roslyn Ramwell, (CSR) Harwood Superannuation Fund: It was interesting that he thought if there’s only one regulator it can get diverted, but if you had two or more regulators the outcome may be better.

The reality is it’s a very funny industry when you’ve got some SMSFs under APRA [Australian Prudential Regulation Authority] and some under the ATO simply based on the trustee structure, this seems very odd and the Government has some fundamental issues to address regarding this approach.

Pauline Vamos, chief executive, ASFA: But even that, when you actually look at the way APRA and ASIC relate to each other, there’s a lot of limitation on how they exchange information, the enforcement powers aren’t linked up properly, so that’s why you’ve got APRA getting ASIC to enforce some of its issues.

There are some issues there, and while prudential versus conduct are very different approaches to regulation, the bottom line is we just can’t assume it’s all smooth sailing, because things fall between the cracks.