15 November 2019

Address to the Association of Superannuation Funds of Australia


Good morning, everyone. It’s terrific to join you for the final day of the ASFA Conference.

In a sector that has sometimes let partisanship get in the way of necessary reforms, ASFA is in the unique situation of representing the interests of all elements of the superannuation industry. While being the peak body for an industry with such diverse viewpoints comes with its challenges, it also opens up a wealth of opportunities.

Indeed, ASFA is a highly-respected advocate for the superannuation industry and I welcome its commitment to engage openly and positively with government as well as regulators.

On that note, let me acknowledge APRA Deputy Chair, Helen Rowell, for providing her earlier insights on the regulator’s work to increase transparency around fund performance.


Today, I want to expand on some of Ms Rowell’s comments around underperformance and focus my remarks on superannuation fund mergers. I’d also like to share with you some of the outcomes we’re already seeing from the reforms we passed earlier this year.

I have mentioned many times that our super system is something that Australia should be proud of – its origins, its operations and its outcomes – but it is not perfect.  We can do better – in all elements of the sector, both industry and retail – and if we are genuine about wanting the best outcomes for members, we must do better. 

The Productivity Commission made it abundantly clear there are efficiencies to be gained from eliminating duplicate accounts, reducing fees and unnecessary insurance premiums, and from doing everything possible to prevent hard earned retirement savings idling in that tail of persistently underperforming funds.

If you follow the progress of the government’s reform agenda, you can see that we are systematically chipping away at these inefficiencies, one by one.

The first round of account consolidation by the ATO as part of the Protecting Your Super reforms has been a big success and put a sizeable dent in multiple accounts – and I’ll have more to say on that later. 

We’ve capped fees for small accounts and abolished exit fees.

The Protecting Your Super and the Putting Members Interests First reforms have finally put a stop to the draining of accounts through insurance premiums for cover that members don’t know about, want or need. 

The Government has also endorsed the findings of the Productivity Commission, reiterated by Commissioner Hayne, that a person should have only one default account. 

And today we can see that APRA’s work with the heatmap, along with the legislated Member Outcomes reforms and APRA’s shiny new set of teeth in the form of a directions power, will start to put real pressure on underperforming funds.

Pressure to lift their game, or join a different team, regardless of whether industry, corporate or retail.

You will recall that the Productivity Commission report also made it clear that mergers of funds, particularly mergers of those underperforming funds, would make our super system more efficient and could significantly benefit members.

As Helen mentioned, APRA’s heatmap will be a key tool in drawing attention to areas of underperformance. The first iteration covers all MySuper products across the industry, and in the next phase it will extend to choice products too. Not only will it help focus APRA’s supervisory priorities but it will spur the trustees of funds to reflect on their own performance.  Trustee directors will have no choice but to look each other squarely in the eye and ask – is our current business model really delivering the best outcomes for our members?

And if their fund is not delivering the best outcomes for members, or if it stands at increasing risk of not doing so – it begs the question – should that fund merge? And increasingly regulators may come knocking to ask – why has that fund not yet merged?

The PC also had something to say about potential benefits of economies of scale through mergers.   Administrative efficiencies and investment clout should translate into reduced fees and costs savings for members.

Yes, there are other ways to grow, but mergers provide a more sure‑footed route to economies of scale than other activities which may not have such a clear or readily measurable link to that outcome.  Some of these, such as treating of employers to induce default arrangements, were called out in the Royal Commission and we have already banned outright.  Others, such as sponsorships or advertising by funds are now under much closer scrutiny.

Commissioner Hayne noted in his reportthat he would ‘expect that most trustees would rightly err on the side of caution.  Especially … if regulators properly monitor compliance with the [best interest and sole purpose] obligations’.

I think we can safely say that our regulators are doing just that.    

Unrealised benefits remain

The PC analysis shows while the system has grown significantly, significant unrealised economies of scale still remain to be won.

Many smaller funds — including those with high average expenses — have already exited the system.  This is a good thing.  But there remains a long tail of underperformers and many are subscale.

In fact, the PC found approximately half (or 93) of all APRA-regulated funds had less than $1 billion in assets — many of which consistently underperform.

By way of illustration, the PC estimated that cost savings of more than $1.8 billion a year could be made if the 50 highest-cost funds merged with 10 of the lowest-cost funds. What does this mean for members though? Potentially an extra $22,000 at retirement for the average member.

The pressure to create a higher performing and more consolidated industry is only likely to increase – not least driven by technology.  In recent discussions with the leadership of a fund with tens of billions of assets, they flagged that the investment in the systems required to deliver tailored products to members is spurring even some of the current middle-heavy weight funds like themselves to consider the benefits of merging. 

Some funds have also decided that scale is imperative if they want the option of in-house funds management to drive down investment costs.

Since public offer became the norm, the composition of members within each fund is becoming more and more diverse.  This trend will likely accelerate as funds merge, and as members consolidate their accounts and port a single fund across once-traditional sectoral lines. 

So it’s no surprise we’re seeing consolidation in some of the bigger funds.  But many of them are already performing well.  The pressure will be felt even more acutely by the smaller funds; funds in the sub $1 billion category (and climbing); or funds otherwise feeling the burn of APRA’s heatmap.

For the members of these funds – whose retirement incomes depend on superior performance delivered at lower costs – trustees will be faced with a moment of truth. 

We’re calling on those trustees them to consider dispassionately what is the right thing to do. 

Merger myths

This reality will come as no surprise to anyone in this room.  The writing has been on the wall for some time and there has been endless industry chatter.  Despite this there has been relatively little action, particularly at the smaller end of the super spectrum. 

Wondering why this is so, I have been asking around the industry participants – what are the barriers to mergers?  If the incentives are so obvious, what are the disincentives? 

I’ve heard a lot of different responses.

Some are myth.  Some are attributed to bad behaviour that won’t be tolerated in the post-Hayne era.  Some we have already taken action to address. 

Let’s look at a few of these in turn.

One fund, two cohorts

This one will be familiar.  There is a fund out there whose assets are so tainted, so rubbish, that no self-respecting trustees would ever want to merge with it and absorb its investments.  This fund is the desperate and dateless of the superannuation world.  Horrified that such a fund exists I have asked exactly who it is, but no one ever seems to be able to name this notorious fund. 

In reality, most assets of a fund, like listed stocks and bonds, are readily turned to cash.  And in the case of illiquid assets such as property, private equity or infrastructure, these assets must legally be marked to market regularly anyway.  So if there’s a problem with these assets, the trustees are already under a legal obligation to own up to it.

Moreover, APRA has already shown they’re willing to grant ‘extended public offer’ licenses, which allow trustees to operate a public offer fund, as well as one or more non-public offer funds.  This mechanism could be used to allow for a separate ‘sleeve’ of new members from the incoming fund to remain segregated for a while, as impaired assets are worked out. Effectively, this would enable two funds to merge in stages:  First, combine their back offices to extract administrative cost savings, and then merge the asset pools at a later stage.

One myth busted.

One fund, two products

Then there’s the common refrain of the difficulties in combining two products previously offered by two separate trustees.

But again we’re seeing funds merge right now while operating two products with an ‘extended public offer’ licence granted by APRA.

The funds can retain individual arrangements in areas such as strategy, brand development and member/employer relations.

So that’s myth number two. 


I’ve also heard that the tax implications for members could be a disincentive preventing funds from merging.

I don’t buy it.

Since December 2008, on a temporary basis, tax relief has been available for merging superannuation funds.

We heard your concerns, and an extension to that tax relief to make it permanent was announced in the 2019-20 Budget.  The Government is committed to passing this legislation and this change has bipartisan support.

So tax uncertainties should not be an impediment to fund mergers.

There goes myth number three.

We’re running out of excuses.

Payments to trustee shareholders?

One industry participant ventured to suggest that the shareholders of some smaller industry funds – employer groups and unions – may, in some instances, be hoping for some sort of compensation as the ‘price’ for letting ‘their fund’ go, without which they saw no incentive to merge.

If this were true it would be outrageous and – honestly – having worked with many fine people in this industry, who are worthy of their pride in their professional reputations -  I don’t think that the trustees and CEOs of those high performing and reputable industry funds would tolerate that from their union and employer group brethren for a second.

I recall the understandably wounded tone of Industry Super Funds’ media release of June 2018 – to ‘correct the record’ against claims made by the BCA - which said in no uncertain terms that ‘Industry super funds are run on an all-profits-to-members basis.  No dividends are paid to shareholders.’

I’m on a unity ticket with Industry Super Funds on this.  Marriage dowries for shareholders have no place in mergers among profit‑for‑member funds.  And I suspect the regulators would take a very dim view of this practice too, if an example ever came to light.

The shareholders of a trustee may well have a role to play to smooth the path for mergers.  It is unthinkable that they should stand athwart the road seeking to extract a payment.       

Moreover, the directors of a super fund trustee – with their independence of mind and their best interest obligations – are the ones who must decide if mergers happen.  Not the shareholders who appoint them. 

Wayne Byers wrote in March this year that ‘APRA…expects that trustees will carry out their role and meet their responsibilities free from the influence of sponsoring organisations or any other external parties…Any evidence of trustees potentially giving priority to anything other than members’ interests and the provision of retirement incomes would be of concern.’

It was said in a different context, but it applies equally here.

Board representation

There is a separate but related issue. It has been suggested that resistance to mergers may arise from concerns about the original shareholders’ influence in the new entity.

When funds merge, the status of shareholder organisations may be diluted and the number of representative directors diminished.

Certainly Commissioner Hayne noted that ‘evidence pointed to processes related to board composition of the merged funds as being important to the success or failure of some merger proposals’

The Commission examined two cases of superannuation fund mergers that didn’t proceed due to disputes over who would sit on the board of the merged entity.

In both cases, the trustees of all entities agreed the merger was desirable — and had independent advice confirming this.

The mergers didn’t go ahead because disputes over board composition couldn’t be resolved. How is that in the interest of members?

Commissioner Hayne certainly felt it wasn’t, their conduct fell well below community standards and expectations.

So egregious was this behaviour, he even went so far as to advocate a directions power for APRA and suggested that addressing a stalled merger would be an appropriate use of that power.

Stepping up by stepping aside

Importantly, there are positive examples where directors are taking their obligations seriously and stepping aside to serve the best interest of the merged fund.

One such example is VicSuper and First State Super who announced plans to merge both entities and form one fund and one board by June 2020.

Heralded as ‘an opportunity to lead the way’, the funds committed to an initial board structure reflecting ‘equal member and employer representation with one independent chair and 14 directors.’

And following a transition, by June 2022, they will then reduce the board to an independent chair and 10 directors.

Clearly it can be done.

These trustees are putting members’ interests above their own – as the legislation and their fiduciary obligation requires. Trustees may need to step up by stepping aside.

Merged boards present opportunities for skills

And of course, with increased focus on the need for the right mix of skills, merging a board presents an opportunity as much as it presents a challenge.

Both the Productivity and Royal Commissions have found that best practice governance is characterised by directors with the right knowledge, skills and experience.

Merging a fund allows a trustee to bring together the best elements of two boards, building a strong and skilled team to the new entity.

Retirement payments to directors?

There is one more barrier that I haven’t mentioned, and to be honest I am reluctant to do so because it is anathema to everything that professional trustee directors value – and professional and ethical directors who embed members interests in everything they do are the vast majority. 

But it is a common refrain – even an assumption – that trustee directors are reluctant to merge their funds for fear of losing their own jobs in the process. 

Equally, I have heard that their appointing shareholders, to whom director remuneration is sometimes channelled, and who may be concerned about losing an income stream, might be the cause of a directors’ reluctance to approve a merger.

I find this accusation outrageous.   There is no chance that directors are unaware of their duties and obligations.  And we hear almost daily that super funds themselves are increasingly imposing significant governance demands on the companies in which they invest.    

So they must know that what is good for the goose is good for the gander. 

They know that ASX directors must act in the best interests of the company – above, beyond and before their own.  And, in turn, they know that as trustee directors, they must act in the best interest of superannuation fund members – above, beyond and before their own.   

When listed companies merge, ASX directors may not get reappointed, and ASX Corporate Governance Principles specify that in such cases directors are not entitled to severance pay.  Such principles must equally apply to trustee directors in a merger.  But if you are a professional, ethical, trustee director – as the vast majority I know certainly are – you know this already.   Fear of losing a sinecure is the last thing on your mind when considering what’s in the best interests of members and weighing up a possible merger.

So that too can’t be the reason for funds failing to merge.

So we’re running out of excuses.  We’ve dispelled many of the major myths of barriers to mergers – and addressed a few ugly truths and ungenerous aspersions of behaviours that could stand in the way, but clearly should not.

It’s not the legislative framework, it’s not the tainted assets, it’s not tax, it’s not the regulator, it legally can’t be the shareholder that is the obstacle, and ethically it can’t be the trustee directors.

Which makes the lack of action by trustees something of a mystery.

But perhaps we are on the cusp of a period of significant change.

Greasing the skids for mergers

Between legislated changes, and facilitation by regulators, the Government has done our part in greasing the skids for mergers.

And APRA is always open to assisting trustees in working through potential barriers they face when trying to merge. APRA can provide trustees with insights into how practical aspects of a merger may be achieved in cost effective manner.

Now it’s over to industry, to do your part.

Protecting Your Superannuation – outcomes

I’d like to now turn to the Government’s Protecting Your Super reforms.

As I mentioned earlier, we know from the Productivity Commission’s report that the superannuation system is not without its flaws.

Recent data from the Australian Taxation Office shows approximately six million Australians held two or more superannuation accounts.

In other words, around 4 in every 10 Australians who hold a super account, are paying at least two sets of fees and potentially two or more sets of insurance premiums.

We’ve already taken action.

Under the Protecting Your Superannuation changes, the ATO has begun proactively reuniting people’s lost or low balance and inactive accounts with their active superannuation accounts.

I’m pleased to announce that at the end of October, 2.3 million low balance inactive accounts were transferred to the ATO. Their combined value was over $2.2 billion.

And already, nearly 700,000 accounts and over $1.2 billion have been matched by the ATO with an active account elsewhere in the system.

This is great news.  And I know it wasn’t without considerable effort, but it was the right thing to do.  Thank you to all of you in the room for the hard work you put in to make this happen. 

Some funds – particularly smaller funds – may find the loss of a substantial number of inactive and low balance accounts will substantially increase the pressure to find a merger partner.

It will almost certainly lead to the exit and winding up of a slew of Eligible Rollover Funds.  But they won’t be the only ones.

Recovering Unpaid Super

While I’m here today, I’d just like to also quickly outline some of the important work on the horizon for 2020.

First, we have introduced legislation to give effect to the superannuation guarantee amnesty, announced last year.

The Bill will introduce an amnesty to encourage employers to come forward and pay historical superannuation guarantee debts, in full.

Let me be clear: it does not reduce employees’ entitlements by one cent. Everything that an employer owes to its employees must still be paid, plus substantial interest.

Moreover, the universal application of single touch payroll means that the likelihood of underpayment going undetected in the future is dramatically lower. At the other end, the penalties for deliberate underpayment are dramatically higher. 

The amnesty only provides a one-off waiver of charges which would otherwise be paid to the Government.

It’s the workers who benefit, thousands of them, and the funds who will see higher balances.  Which is why I am very disappointed that there is opposition to this legislation from Labor and the Greens. 

It ignores what is most important here – reuniting people with their own money as soon as possible.    

However, despite this, I believe there are sensible and influential voices in this room and in the Senate chamber who will ensure the passage of this important legislation.

Forward agenda

We’ve also got a heavy legislative load in implementing the Royal Commission recommendations – including the 15 recommendations directly relating to superannuation.

At the same time, the Retirement Income Review will develop an evidence base to improve understanding of the operation of the system and the outcomes it is delivering for Australians.

This is a pivotal time for the superannuation system, and the changes we make now will shape the sector for the coming decades.   There is more to come.

I’m looking forward to working with everyone here to make these changes happen efficiently and effectively and for the benefit of members first.  Ours is a great industry – one of which I am so proud to be a part - and in this room are the bright minds and good hearts that will shape the future and ensure our superannuation system can continue to be world-class for generations to come. 

Closing remarks

So that on note, let me finish by, again, thanking ASFA for the opportunity today.

I wish you well for the remainder of the conference and I can’t wait to hear your ideas that come out of today.

Thank you.