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Notes for Grattan Institute Panel Session

Wednesday 18 February 2015

Helen Rowell, Executive Member - The Murray Inquiry & Superannuation Grattan Institute Panel Session, Sydney

1. Overview – FSI recommendations

  • Welcome focus on delivery of better outcomes in retirement & how best to achieve.
  • Highlights key areas that need to be addressed by relevant stakeholders – government, regulators and the industry.
  • Challenge is determining appropriate policy or other responses and effectively implementing them.
  • Significant complexities in the system; important to take a long-term perspective.
  • Trade-offs involved, e.g. between freedom of choice and simplicity/efficiency.

2. Objectives of superannuation system

  • Having clear and agreed objectives for the super system is important.
  • As much about clarifying what it is NOT intended for (e.g. to fund housing, leave bequests or pay off HECS debt).
  • Bipartisan agreement needed, supported by other stakeholders (industry, consumers and others).
  • Would provide useful foundation for policy decision making and review
  • Easier said than done?

3. Retirement income design

  • Focus of super should be on provision of adequate retirement income throughout retirement; currently undue focus on accumulation of wealth up to retirement.
  • Available product set currently limited for a range of reasons - largely related to tax/age pension eligibility but also reflects individual choices/preferences.
  • Need to shift thinking i.e. so that default is to take income rather than lump sum BUT need changes to policy settings and more flexible range of products to support/encourage this.
  • Range of products needed to address various risks in retirement (sequencing, longevity); one single product can’t do this; needs change through retirement.
  • Need to be mindful that one-size doesn’t suit all i.e. trustees need to consider what an appropriate default pension option (or set of options) might be for their members and what other retirement income options they may wish to offer.
  • Issue of who provides the pension product is important, particularly where any form of guarantee is involved – life insurer vs trustee/fund; adequacy of capital to back guarantee.
  • Also need to consider appropriate investment strategy to back pension products and cash flow/liquidity implications of meeting regular cash outflows.
  • Systems/capacity to be able to manage provision of pensions also important; also advice model that may be needed – not all trustees will want to/be able to do this.

4. Inefficiencies in superannuation

  • Efficiency of the system is an important objective BUT need to recognise trade-offs (choice vs simplicity; impact on outcomes).
  • Also need to separately consider the default vs choice segments.
  • In assessing efficiency, must focus on overall outcomes achieved not just fees and costs i.e. net of tax return, level of retirement income provided, other benefits and services available etc.
  • That is what APRA expects trustees to do in undertaking annual “scale assessment” i.e. it is not just about size.
  • There is scope to reduce fees and costs in the system (e.g. investment costs) and trustees should seek to do that where appropriate BUT that should not be at the expense of having the systems and processes needed to prudently meet obligations to members.
  • Reducing complexity of arrangements, products etc. would assist. Do we really need over 40,000 investment options?
  • A review in 2020, after all of the current reforms are well bedded down, makes sense; need to carefully consider the scope and approach to making any assessment.
  • APRA’s enhanced data collection will assist in analysis of the issues and provide for evidence-based decision making. That means that a focus on data quality by trustees is important.

5. Governance

  • Improvements to governance needed in a range of areas; range of practices across industry but initial thematic reviews indicate room to move to meet expectations in APRA prudential standards.
  • Investments, insurance, conflicts management, etc.
  • Governance, risk management and risk culture inherently linked.
  • Role of board vs senior management important for all of these areas – management implements sound framework; board provides oversight and robust challenge to ensure framework and its implementation is effective.
  • Requires range of skills and capabilities on boards so need to draw from a broad pool and ensure independence of view and approach.
  • APRA’s experience suggests that is best supported through having at least some independent directors on the board; appointment and selection process and regular performance assessment also key.
  • Hard to make a direct causal link between governance model and enhanced outcomes or performance in any area – need to unravel the wide range of influences that may be a factor.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.