Four distinct winds of change are converging on superannuation compliance. They come from different directions but they herald some major agents of change and reflect the different forces that have converged to alter the superannuation landscape.
Wind 1: The transition from an employment-based concept
Early on, superannuation had its genesis in employer contributions, voluntarily made, as a facet of employment and to obtain valuable tax deductions for the employer.
All these factors have changed significantly over the last 20 years. When superannuation contributions became effectively compulsory, the nature of the employment-based model changed accordingly. When all employers had to contribute a fixed percentage as a result of the award/superannuation guarantee regime, superannuation was well on its way to becoming a commodity. It meant the beginning of the devolution of defined benefit funds, less generous benefits and therefore less potential differentiation between superannuation arrangements. This in turn meant that superannuation had less relevance as an incentivisation tool, as employees could get roughly the same benefits from other employers — a commoditisation, of sorts.
This trend led to, rather than coincided with, a greater legislative push towards prudential control. If contributions become compulsory, then they must be protected by a government regulated system. This led to the OSSA legislation, the SIS legislation and ultimately will lead to the Safety in Superannuation legislation.
The impetus towards commoditisation of superannuation was also assisted in a major way by the concurrent pressure on employers to outsource. If superannuation is not a core activity, cost and competition pressures militate towards outsourcing it.
The change’s impact: It has meant that the law, through court decisions and regulator focus, places higher compliance burdens on the main superannuation protagonists, trustees and employers.
Precisely because superannuation is not a voluntary gift but a legal commitment, the obligations of trustees and employers are much greater. For example, courts are applying a far greater standard on trustees in how they exercise powers and far greater scrutiny and exercise on discretions.
Wind 2: The financial services mould applied to super
If commoditisation can be equated to a westerly wind, the corresponding easterly wind is that of the financial services push — for it follows that if super becomes less of an employment tool and more of a commodity, then it becomes just another type of financial product. So it becomes part of the legislative focus on financial services and has been coalesced into the Corporations Law financial services reform program.
Clearly, the FSR legislation provides some important exceptions for certain types of superannuation, but logically, over time, there will be pressure on those exceptions and pressure for super to conform to the standard FSR mould.
The change’s impact: Regulating superannuation as a financial product invariably leads to a lot of compliance changes — the sheer volume of new law, as well as the harmonisation or standardisation of those legal rules. Most significant, however, is the fact that the pressure for a common standard of compliance is intense.
For example, the SIS legislation deliberately imposes a lesser duty of care on superannuation trustees from professional trustees, part of the rationale being to recognise equal employer/employee representation of corporate and industry funds. In the FSR model, there is a single compliance standard which treats super monies the same as any other investment. Suddenly we are looking at superannuation as an investment receptical and vehicle which is generally subject to the same criteria as a professionally run managed investment scheme.
Wind 3: The regulator and governmental focus
As superannuation gains the attributes of being mandatory (in terms of employer contributions) and a substantial investment (both for individuals and in terms of size of all superannuation savings), then logically the regulatory focus magnifies dramatically. It becomes recognised as a huge vat of money which needs to be protected from misfeasance, both in terms of prudential and market risk. It must be protected from predators, pirates and dilettantes. It can also be prone to an increased taxation burden.
The change’s impact: Increased regulation and regulatory focus. It has a natural turbo-charging effect on compliance pressures, to up the standard of care and burden of compliance.
Wind 4: Consumerism
If regulatory focus is the wind from the north, then consumer change is the wind which buffets from the south. When energies of all these other winds converge, it is not surprising that an inevitable consequence is the increased role of consumers in the equation. The increased volume of legislation as well as the increased importance of superannuation, due in part to the larger size of the industry, leads to increased consumer focus on superannuation savings.
The change’s impact: More awareness on the part of consumers of their rights, more queries, more complaints and in all likelihood, more disputes and litigation. This phenomenon is affected by the increased complexity of superannuation laws and the consequential difficulty in explaining the concept to members. The compliance impact and burden of this aspect of the superannuation landscape is as clear as the other winds of change described above — although, if anything, it is also potentially even more powerful.
— Michael Vrisakis is a partner at Blake Dawson Waldron.
