Aussies put pensions to the test (could Britain follow?)

With characteristic bluntness, the Australian Government has decided that if a pension fund is not delivering to its users, it will be starved of new savers until it does.

The Australian Taxation Office (ATO) will develop systems that will enable new employees to select a superannuation product from a table of MySuper products in a YourSuper portal.

The tool will provide a table of MySuper products, ranked by fees and investment returns, and show a member’s current super accounts, with a prompt to consolidate accounts if they have more than one. The intent of the reforms was starkly laid out by the Australian Federal Treasurer Josh Frydenburg.

“Poor performing funds will have nowhere to hide and will be required to notify their members of their underperformance,”

If a fund is deemed to be underperforming, it will need to inform its members of its underperformance by 1 October 2021. At the same time the fund will need to provide their members with information about the YourSuper comparison tool, and the fund will be marked as underperforming in the tool.

This report from the Sydney Morning Herald has been shared by FT global pension correspondent, Jo Cumbo.

Underperforming superannuation funds will be blocked from taking on new members if returns are not improved, forced to publicly disclose poor returns on investments and required to prove they are acting in the best interests of Australians.

The Morrison government will require funds to take an annual performance test from July 2021 and those which fail to produce good returns for members will be publicly listed as an underperforming fund on a new online comparison tool, to be known as “YourSuper”, until they do better.

The report continues,

the difference between the worst MySuper product and the best performing is up to $98,000 … these tests are estimated to help workers accrue an extra $10.7 billion over 10 years

The Aussie Government is also introducing curbs on costs and charges (though not as a charge cap). Instead Super schemes face a new requirement to only charge for what is in the “best financial interest of their members”, ruling out backhanders to unions and other financial institutions where these marketing costs are paid by the members and not by the shareholders.

While the UK pensions industry may object to past performance being used to control future contribution flows, this is closely aligned to a principal espoused by the fund management industry that fees should be aligned to performance.

In practice, the new guidance being consulted on in the DWP’s improving member outcomes might go further, creating a definition of value for money where smaller DC schemes (<£100m) are forced to consolidate assets with larger schemes and then wind up.

The UK definition of “value”, under consideration by the DWP is “net performance” , a complicated and artificial construct that we consider would be better measured by individual rates of return (an organic measure of people’s outcomes. This “outcomes based” approach to value can measure under-performance in “pounds shillings and pence” rather than percentages and is likely to be better understood by lay people.

It would appear that Australian measurement will be on a “dollar” basis, suggesting measurement will focus on individual member outcomes rather  than a more subjective test of value for money.

One commentator is quoted as supporting this focus on member outcomes,

“It is particularly critical that the measures of fund performance focus on net benefit to superannuation members rather than simply on fees.”

The Australian approach to cost and charge control.

Australian Super Funds are governed by their “sole purpose test”, which requires funds to spend members’ money only to directly help their retirement incomes.

Your SMSF (self managed super fund) needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.

Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties.

It’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund).

The sole purpose test which is already in existence appears to be a part of the wider fiduciary duty on Supers to “only charge for what is in the best interests of members”.

It sole purpose test is  good at a high level , but like much principle-based regulation, is open to abuse. The “best interests” variant puts the onus on fiduciaries to disclose the money spent by the fund in its report and accounts, disclosures that occur in the UK but have only recently been picked up through the work of Alan and Gina Miller, the IDWG and in regulation by MIFID II.

Conclusions for the UK

Australians pay a lot of attention to the use and abuse of pension funds, they have good reason to. Super carries the retirement aspirations of a nation in the way that UK workplace pensions has yet to do.

But the UK is on its way towards the kind of tough scrutiny apparent in the Australian focus on measurement by member outcomes. The transparency with which the internal rates of return expose under-performance is likely to be fiercely resisted wherever under-performance leads to a restriction of future trade.

But that is precisely where UK Value For Money regulation is taking us. If we want to understand the importance of VFM assessments as a means of improving member outcomes, we need look no further than the Australian regulations due to be brought in in July 2021.

Could Aussie Style benchmarking happen here?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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