Tuesday, 14 August 2012
Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012; In Committee
) ( I move coalition amendment (1) in relation to trustee obligations:
(1) Schedule 1, item 9, page 6 (lines 1 to 20), omit paragraphs 29VN(b) and (c).
The coalition's amendment would remove section 29VN(b) and (c) of the bill, which impose the scale test. With MySuper not due to commence until 1 July 2013, the government has ample time to engage in meaningful consultation with industry if it wants to introduce a more practical test that would not have potential negative consequences for members of affected superannuation funds.
The coalition, as I mentioned in my speech in the second reading debate, has serious concerns about the new scale test provided for in this bill which requires trustees of superannuation funds to 'determine on an annual basis that there is sufficient scale in terms of assets and beneficiaries such as to not disadvantage the financial interests of beneficiaries relative to the financial interests of beneficiaries in MySuper products in other registrable superannuation entities'. Industry experts, such as those of the Financial Services Council, have provided evidence that such external comparison would be impossible to conduct in practice as a trustee will not have sufficient knowledge of other registrable superannuation entities in order to realistically make judgments on this and meet this test.
The scale test is based on a presumption that larger funds invariably provide lower fees and higher returns to members. There is no evidence to indicate that this presumption is correct in all cases. In fact, a number of smaller funds very assertively argue the case—and have the evidence to make this case—that they consistently deliver higher net returns than some of the larger funds. The scale test, if implemented in its proposed form, could be another potential source of advantage to the larger industry superannuation funds because they have existing scale. The scale test would create a significant new barrier to entry for new funds by making it difficult for them to achieve the required scale from the outset, which would lead to a reduction in competition in superannuation—which is of course not in the public interest. A cynical mind would come to the conclusion that this may well be the express intention of the government—that is, to provide yet another competitive advantage to their friends in the union dominated industry super funds movement. It may also lead to further consolidation and mergers of super funds that are driven not by any assessment of the overall best interests of the members but by concerns about meeting this technical and very arbitrary test. Industry groups have submitted that a better alternative would be an internal test based on a finite list of factors rather than the open-ended and poorly defined external test that the government has proposed.
It should be noted—and I drew attention to this in my remarks in the second reading debate—that the Cooper review into Australia's superannuation system, which was commissioned by this government, did recommend that MySuper products should have a scale test; but the scale test recommended by the Cooper review was quite different from the scale test in this legislation, which quite inappropriately seeks to provide yet another advantage to larger industry super funds. I draw the attention of the Senate to the recommendation in the Cooper review which says that trustees should 'actively examine and conclude whether, on an annual basis, its MySuper product has sufficient scale on its own, with respect to both assets and number of members, to continue providing optimal benefits to members.' That is recommendation 1.6 on page 25 of the final report of the Cooper review. This recommendation, with the use of the term 'sufficient scale on its own', clearly implies an internal test rather than the open-ended and poorly defined external test that the government is proposing in this legislation.
The government, and all senators across the chamber, should support this amendment so that this particular provision is deleted from the bill. If the Senate were to support this amendment the coalition would be in a position to support the legislation as a whole. This bill, in the way that it is drafted at present, is yet another example of a minister for superannuation who is deeply conflicted in this policy area. He is invariably focused on pursuing the vested interests of one segment of the financial services market at the expense of others instead of pursuing regulatory reforms that are competitively neutral and in the public interest. With those few words, I commend the amendment to the Senate.
No kidding, Senator Cormann. The government does not believe that this is an appropriate amendment. We reject the suggestion that the scale test that this legislation applies is different from the one recommended by the Cooper review.
We will have to agree to disagree, Senator Cormann, because my understanding—and the information I have been given in respect of this—is that in substance the test—
Based on the information I have been provided by the very competent people who have been dealing with this issue in the lower House and who are now advising me in the Senate. The suggestion in your amendment is that this is an underhand way of trying to push smaller funds out of the market or to stop new funds from coming into the market.
We reject that. This bill, and this particular part of the legislation, is not about 'bigger is always better'. There is no dollar value that creates an impediment to new superannuation funds. The bill does not impose a minimum size on a fund and nor does it force smaller funds into mergers. In fact, in recent times it has almost gone the other way, and some of the big funds have not merged. There is almost a push to maintain the current number of funds. This legislation requires that MySuper trustees on an annual basis specifically focus on whether there is any lack of scale that is disadvantaging their members. They do not have to be a particular size, they do not have to have a particular amount of money, but they just have to pose the question. Having been a trustee of a super fund for 15 years, I do not think that this is an unreasonable requirement. I certainly would not see this as an impediment to the continuation of the fund that I was a trustee of, and I would not see it as an impediment to any new fund entering the field.
It is not intended that trustees will be required to make detailed comparisons of their performance against every other fund in the market, and it is expected that many well-performing funds will also be able to readily determine that their members are not being disadvantaged due to insufficient scale. Contrary to the implication in Senator Cormann's amendment, this legislation clearly allows for small, well-performing funds for which scale is not a barrier to performance to continue serving their members as they have always done. I personally have been a supporter of those small funds—if you like, 'boutique funds'—which provide good superannuation entitlements to their members. I think that is a good way to work. I do not think this legislation does what Senator Cormann says it does, and the government does not support the amendment.
The CHAIRMAN: The question is that the amendment moved by Senator Cormann on sheet 7199 be agreed to.