21 November 2002

Manager, Voluntary Savings and General Rules
Superannuation, Retirement and Savings Division
The Treasury
Langton Crescent
PARKES ACT 2600

Dear Sir/Madam

CPA Australia welcomes the opportunity to provide comments to the Department of the Treasury on the Government's 'Portability of Superannuation Benefits' policy. CPA Australia's policy thinking on the related initiative of 'Choice of Superannuation Fund' will also be addressed in this submission. We understand that we will have the opportunity to provide more detailed comments once choice has been enacted and the full details relating to portability are provided to industry.

This submission has been prepared by CPA Australia's Superannuation Centre of Excellence in consultation with our Financial Planning Centre of Excellence and the Small Business Centre of Excellence.

Choice of superannuation fund and portability in Australia

In principle, CPA Australia supports the concepts of choice and portability. We consider that choice and portability, if implemented effectively, should bring about better longer-term outcomes in Australia's superannuation system. Ideally, employees should take a greater interest and ownership over their superannuation by being given the opportunity and flexibility of transferring existing superannuation benefits, and have future superannuation contributions paid, to a fund of their choice.

However, CPA Australia has concerns with how these proposals will work in practice, particularly the associated employer burden, and the outcomes of poor decision making by uneducated superannuation members. Information from our membership to date, indicates that the level of superannuation awareness and understanding amongst their clients falls in the 'extremely poor' to 'poor' category. This is largely attributed to the complexity of Australia's superannuation system and the perception that the associated rules and regulations are subject to continual change. We are also of the view that many employees/superannuation fund members have a fundamental lack of investment market understanding that may lead to erroneous investment decisions.

CPA Australia strongly considers that the choice and portability regime will only be effective if it is supported by a comprehensive government funded education program. Without this, the onus on education will by default, be placed on superannuation providers and employers without the necessary skill and expertise. It is essential that impartial education is provided to employees to ensure sound decisions are made. Recent overseas experience has highlighted the risks of leaving education to the market.

CPA Australia questions the level of government funding allocated to the provision of choice and portability. It is not clear the extent to which the Australian Taxation Office (ATO) will have sufficient funding to satisfactorily meet the education needs of all participants. We note that the choice measure will 'involve expenditure of $28 million over 4 years that will be fully absorbed into the existing resourcing of the ATO'. In respect of portability, the paper does not provide a clear indication of any monies allocated.

The additional responsibilities of choice and to a lesser degree portability will most certainly place a further compliance burden on employers – particular small business employers. This is in addition to other burdens employers currently face, for example, compliance costs associated with the New Tax System and The New Tax Business System. Our membership feedback has shown that on average employers currently spend between ten minutes to a half an hour per month, per employee on superannuation administration. It is envisaged that this will significantly increase in a choice and portability environment as employers will be required to be aware of the changes, make contributions to a greater number of funds than at present, have additional record keeping requirements, keep track of their employees funds and select a default fund.

We note that the choice legislation is currently before Parliament and that legislation is yet to be prepared in respect of the portability proposal. CPA Australia believes however that portability and choice should be considered and dealt with by Government and industry alike in a single legislative package. Although choice could feasibly exist without portability, it is unclear whether portability should exist without choice. If portability was to exist without choice, unintended consequences could result whereby the portability regime could be used as a de-facto choice vehicle.

Proposed portability model

In relation to the proposed portability model CPA Australia has the following comments. A more detailed response will be provided once we have certainty about choice and more detailed information is provided by Government.

Our comments at this stage are as follows:

• The choice proposal allows an employee to have future Superannuation Guarantee (SG) contributions paid to a fund of their choice. The portability proposal allows vested benefits to be transferred to a fund of their choice. The situation could potentially arise where the person is exercising portability in respect of non SG contributions so that they can have past and future contributions accumulating in their fund of choice. This will add to the administration burden for employers and superannuation providers alike as members may exercise portability on a continual basis. This is an anomaly that needs to be addressed and considered in more detail.
  
• In the interests of maintaining a simple system and ensuring that the administrative burden for employers and superannuation providers are contained, only full portability should be mandatory. As a further point, consideration should be given to assessing whether portability should be limited. Possible options that could be considered are linking portability with choice and allowing portability to be exercised on resignation with the current employer. This should limit the incidence of 'churning' where a large number of superannuation balances transfer on an annual basis.
  
• We are concerned with the proposal that the Australian Prudential Regulation Authority (APRA) will be given the power to freeze portability of benefits. More specifically when such a power will be exercised and in what circumstances, whether APRA will be adequately positioned to make these decisions in a timely and effective manner and the larger issue of public confidence in superannuation. We recognise that mechanisms need to be put in place to deal with situations where there is a 'run on the fund' and there are associated liquidity issues. It may be useful to explore the following alternative option: The Trustee has the power to freeze portability subject to APRA guidelines and is required to report it to APRA as a 'significant event'. The 'significant event' timing could be extended in this regard so that APRA is required to be notified within 5 days of this event occurring.
  
• The current disclosure requirements with a number of enhancements were generally seen as reasonable for portability. Before paying or rolling over an Eligible Termination Payment (ETP) the superannuation provider is required to issue an ETP pre-payment statement to the member. To ensure effective disclosure it should be mandatory that all fees and expenses be disclosed to a member in this statement.
  
• In principle and in the absence of further detail, CPA Australia is generally opposed to the regulation of fees and expenses on superannuation. We consider that at this stage the matter of fees and expenses should be left to an informed self-interested membership and let competitive market forces eliminate any unreasonable and unjustifiable high fees/expenses aided by compulsory disclosure of their levels. A government education program focussing on fees and expenses would further ensure the aim of an informed membership is met, resulting in a more competitive superannuation industry. There would be merit in monitoring fees and expenses – particularly exit fees to ensure the choice/portability regime is not subject to abuse. CPA Australia would be happy to work with Government on this particular issue if the need arises.
• Defined benefit funds (both unfunded and funded) should be excluded from portability except in relation to the accumulation interest only. Defined benefit interests should necessarily be viewed as an employer benefit for employees and should remain attached to the employee whilst in employ. The costs associated with providing portability for a defined benefit interest would outweigh the benefits of providing this option to employees. If funded defined benefit funds are to be subject to portability, guidance is required to ensure that the funds actuaries are adequately assisted.

Should you have any queries or require further information please contact CPA Australia's Superannuation Policy Adviser, Ms Jane Barrett on +61 3 9606 9656 or by email: jane.barrett@cpaaustralia.com.au.

Yours sincerely

Kevin Lewis
Director Policy & Research