Cooper plan may be super holy grail
FOR someone who is being criticised for entrenching apathy around superannuation, Jeremy Cooper has done more than most to make it headline news.
That is a commendable effort given there are one or two other hot political stories raging at the moment.
But a long-term boost in the level of super fund member engagement – something of a holy grail for the super industry – may well flow from the fundamental reforms that the Cooper review panel has recommended to the structure of our super system.
By taking things back to basics with the MySuper default option the Cooper reforms have one simple aim in mind – recasting our super industry so that while it facilitates fund member choice it is not built on the basis that a competitive market will be delivered because members exercise choice between funds.
The review panel’s underlying criticism of super is that it is too industry – as opposed to member – oriented. And that is what its reform package is seeking to redress.
To understand what the Cooper review is about you need go no further than read the description of the choice architecture in the final report. It groups super members into four types of members:
1. Those who simply want someone else to take care of it all for them. The MySuper product is designed with these people in mind
2. People who want some choice over their investment strategies
3. Those who want to be fully responsible for their super fund and choose to operate their self-managed super fund (SMSF)
4. Members who have lost contact with their super account(s).
For self-directed investors the good news out of the Cooper review is that SMSFs have largely been given a clean bill of health as a sector that is operating effectively. When the review was kicking off just over a year ago there was considerable speculation that SMSFs were in the crosshairs for some serious overhaul. But the review found that was not necessary, by and large, and that is understandable within the context of the choice architecture model the review is recommending – with investors exercising more choice comes greater individual responsibility.
So for SMSFs, the main proposed changes are around tightening or raising regulatory standards. For example establishing a separate registration body for auditors of SMSFs, tightening up identity checks and naming protocols on funds to help eradicate early release schemes using SMSFs. If the government adopts the recommendations the tax office would also get a sliding scale of penalties for use with SMSFs that do contravene the rules – a sensible step given the inflexibility the ATO has to operate under now.
The decision to setup an SMSF is a fundamental one and the review panel is recommending that accountants can no longer advise on the establishment of funds unless they have a full financial services license. No doubt the accounting bodies will debate the merits of that strongly but the panel has gone one step further which is to recommend that the details of the person who has provided advice on the setting up of a fund be collected and provided to ASIC.
On a practical portfolio level for SMSFs two key recommendations are the banning of collectables or personal use assets – with a transition window of 5 years (down from 10 in interim report) to be applied. That is an emotive issue for people with artworks/cars/collectables in their SMSF. However, it is really at the margin when you look at the size of the assets involved. The art dealer world may be up in arms but Cooper is not saying you cannot invest in art or other forms of collectables, just that the tax concession available courtesy of super will not be available.
Vested interests predicting a collapse in various art markets as SMSFs empty out their collections are conveniently ignoring the passion that people have for the artwork in the first place. Perversely the real impact may be that less money is contributed to the SMSF to provide funds for the personal collectable interest outside of super.
Another detailed recommendation but one that is likely to help with transparency around SMSFs as a sector is the requirement that funds be required by law to value their assets at net market value using consistent valuation practices. That is a practical requirement to provide more transparency into what is now the largest sector of our super system.
The good news out of the Cooper review is the focus on driving down costs and making the system more transparent and ultimately accountable to members.
The reality is that once we get through the initial media focus the implementation effects will have far more impact on trustees, fund administrators and financial advisers in the short-term rather than members directly.
The establishment of a new category of trustee-director is a cornerstone reform that sheets home increased responsibilities to trustees. This is really the way that the Cooper panel believes super can work best for the bulk of those members who are not engaged with their super.
It will certainly simplify super for people in the MySuper structure but trustees will be required to shoulder more responsibility on their behalf.
Over the longer term the simpler MySuper product structure may well deliver the goal of increased engagement. We know from behavioral finance studies that engagement grows along with account balance.
If fund members have greater levels of understanding because their super is in a more transparent product structure which in turn builds trust because it is delivering better returns thanks to a lower cost structure then the Cooper review will have delivered beneficial, long-term reform regardless of the choices people make or don’t make.
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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.