Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Hansard source

The government does not support this amendment. I would firstly make the point that this amendment, if passed, will have significant ramifications for the superannuation system—and I will explain why shortly. What is interesting about this amendment is that, from my knowledge, we have a situation on this issue where the employer organisations and the union movement are in agreement, which is pretty unique in terms of the legislation we are dealing with. Why is that? Because employer organisations who represent small, medium and large business believe that the current default arrangements are best for business—small, medium and large. They do not want a change in the current arrangements, and I might point out that the effect of the amendment is a very significant variation to existing practice and award provisions. The opposition is trying to change the existing provision in state and federal awards, which is what the government are incorporating into this legislation. We are not putting in new provisions; we are maintaining what has been the status quo for 20 years in state and federal awards. And it is not just one industry fund; some awards have two, three or four. So we are not changing the status quo with this legislation.

Another important point to make is that it is not just industry funds that are default funds. Corporate superannuation funds are default funds, and in that case they are incorporated through enterprise agreements generally; there is a default fund. And where that has been incorporated in an enterprise agreement there is no other default fund, usually. So we have a situation where, in the main, the default funds in awards are industry funds and in enterprise agreements they are often corporate funds.

I think it is important to understand that if someone chooses a fund, if Joe Smith decides he wants fund ABC, that right is conferred through the choice of funds legislation, and that does not change. So, for those who want to make an active decision, the provision in the legislation does not change the position for those who want a choice of fund. It raises a very controversial issue. For those individuals who choose a fund outside a default fund, how do they choose? Invariably, they choose through a planner—they are advised to choose. That has raised a whole range of very complex and, I have to say, controversial issues about conflicts of interest. The planner says, ‘I advise fund ABC,’ and the individual who is choosing is advised to choose. That raises a set of issues around commissions, servicing et cetera which are very controversial in the retail sector.

Why is the default fund so important? In a compulsory system, a significant number of members do not choose a fund. You cannot force choice on people. Therefore, in any system there is a default fund arrangement. In other countries it is often the government that provides a default fund. In our case it has been an industry fund, it has been a corporate fund and it has been a public sector fund. Public sector funds are default funds albeit usually by statute not award; corporate and industry funds are underpinned by industrial arrangements. As I said, that has been the position for the last 20 years. If this bill is passed unamended, that position does not change. If the Liberals’ amendment is passed, there will be a significant change in those funds that become default funds.

Let us look at the long-term 10-year average return for each of these sectors. For freestanding corporate superannuation funds, the 10-year average return is 7.7 per cent; for industry funds, it is seven per cent; for public sector funds, it is 7.7 per cent. They are all underpinned by a range of agreements, either awards, industrial agreements or legislation. Let us go to the retail sector. This proposed change, if passed, will primarily benefit the expansion of the retail sector as a default fund, and bear in mind the Liberals are submitting that the default fund should be chosen by the employer, not the member. The employer does a deal—and I will get to the deal in a moment—with a retail fund. That is what will flow if this amendment occurs. What is the average long-term rate of return for a retail fund? It is 5.7 per cent. So we have a situation where, if this amendment is passed, there will be a significant expansion of retail fund activity as a default fund through some sort of agreement between the fund and the employer. Bear in mind the individuals have no say because they default. So the status of default fund becomes very important.

I wish I could give you the long-term rate of return for every superannuation fund in Australia—I think that would be very useful to have. The problem is—though not exclusively—that the retail funds will not allow the publication of individual long-term fund data. They have opposed it. They argue that is because of statistical analysis. I cannot give you a breakdown on how good and bad these funds are in any sector because APRA cannot publish it yet. They are going to publish at some point in time. So the status of a default fund is very important, and we are arguing that there should be no change to the current arrangements.

The other point I would make is: Senator Abetz is right, there are arrangements that exist through the agreement of the employer and the business, and those arrangements do not change. My understanding is that the commission has said that current arrangements reached between a retail fund and an individual enterprise continue—and there is the case of BT that Senator Abetz quoted. So the status quo continues with the current arrangements that a retail fund has with an individual employer. There is no change to the current circumstances.

Why should the employer have the right to choose the default fund? In our system the independent industrial commission determines the default fund. That is a better way of selecting a default fund than the employer choosing the default fund under some sort of tender arrangement with a retail fund.

Let me get to these tender arrangements. The fact is that these are secret. We do not know the outcomes of these tender arrangements. That perhaps is a defect in law—I will acknowledge that. Our system does not have legal criteria for the determination of what a default fund is or what is in the best interest of a member. Our superannuation regulatory system does not have that. It does not have a set of criteria to oversee these tender processes. They do not exist.

We do know about the outcomes. One of the outcomes was featured on the front page of yesterday’s Sydney Morning Herald. What happens—and this is relatively secret, (1) because you cannot get the data, and (2) because the industry have not been too keen to highlight it—is that when a deal or an arrangement is entered into between some retail funds and some employers to provide a default fund, yes, the fees are good fees and the rate of return is a good competitive rate of return. The fee can be anywhere between three-quarters of one per cent and one per cent. But what happens when the employee leaves the employer in these arrangements, in many cases where we have a deal between a retail fund and an employer? Bear in mind there are no criteria and there is no open scrutiny. When that individual leaves the employer, if they are made redundant or retrenched or moved from that employer, in many cases the individual is moved out of that account in the retail fund into another account and their fees double, and sometimes they more than double. Some retail funds provide a good cost-effective fee in the deal with the employer but when the individual employee, who has become involved in these arrangements by default, leaves, without their knowledge—and it is perfectly legal—their fee increases. They are in the same group fund but their fee increases. This is a serious abuse of the system and it is a consequence of the fact that we have no criteria for determining what a default fund is, and I acknowledge that weakness in our system.

I have been proactive on this matter. My policy concern from a superannuation point of view is that, when I look across the superannuation system, to varying degrees there are funds that underperform long term. There are industry funds, retail funds, public sector funds and corporate funds and some of them underperform. Regrettably, we cannot yet release the data but APRA intends to release it. So we will be able to see all the funds’ performance—and there are 600 of them. What is a good fund in terms of a return? Fundamentally, the bottom line is: a rate of return—not the services option, not the 200 investment options. Fundamentally, the bottom line is: what is the rate of return to that member over the long-term 10 years? We do not have that data yet.

There are controversial issues, some of which I have touched on today. There are controversial issues about conflicts of interest, commissions and investment practices, particularly in the current climate. The superannuation system has a range of controversial practices. We have got 6.3 million lost accounts. They just sit there and are eaten up by fees. We have got a range of difficulties with our superannuation system, which I acknowledge. My argument to the industry has been: we do need to examine these issues—I call it ‘renovating the house’. I wrote to the industrial commission and suggested that they look at the long-term performance of these funds. Unfortunately they cannot get the data because it has not been published yet. It will be published in April or May, as I understand it. Therefore the commission, having determined not to examine the issue of long-term default funds—and I understand why; I am not being critical of them—have communicated that to us and I have indicated that we will need to look at what the criteria should be for a default fund. We should look at that. Nothing exists in law at the moment. We should look at the criteria for the contract arrangements that are entered into between funds and an employer, and many of them in my view are to the disadvantage of the default member. Some of the fees are, frankly, a blatant rip-off. But there is no law that stops that at the moment. We should look at some of these investment issues. We should look at the conflicts of interest, and I would suggest that the best place to do that is a comprehensive examination of the way the super system is operating. (Time expired)