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AYB 240 REPORT...

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AYB 240 SUPERANNUATION REGULATION AND PRACTICE

Introduction The purpose of the report is to compare five different types of superannuation fund to recommend the suitable super fund and option for Abby who is 28 years old line manager at Costmart. Moreover, it will also discuss the latest proposed legislative change in superannuation. Finally, whether these change should be necessary changed.

Comparison of funds and recommendation Figure 1 comparing of superannuation 5 year performance

source: REST, MLC Super Fund PDS, SunSuper for life PDS, Spaceship website, Grow Super PDS) With comparing annual return of super fund performance, MLC Super Fund and Spaceship Super have less than five years of performance experience. The less experience can bring higher uncertain risk. The purpose of superannuation is saving money for comfortable retirement. It is a long-term investment before retirement for Abby. Therefore, she may prefer to more stable return. In addition, SunSuper had higher annual return rate than other four super funds from 2015 to 2017 while it had similar return rate with REST and GROW Super from 2013 to 2014. This was mean that SunSuper had more stable and better super fund performance than other super fund.

Table 1 of comparison of super fund REST

MLC Super

SunSuper

Spaceship

Grow Super

-MySuper

Fund Investment

-Core

-MySuper

22 default

-Spaceship

options

strategy

-Customised

options

GrowthX

-5

investment

structured

options

-

options

- Global

Customised

Index

investment options

Annual

-7

(core

Member-

options+

tailored

tactical Tilt

options

Options)

497.6

678

568

878

665

Default

Default

-Automatic

No provide

-Default

cover

cover-MLC

cover

insurance

cover

(including

Lifestage

(including

(including

death,

insurance

death and

death and

TDP, IP) --

(including

TDP)

TDP)

only

death, TDP,

-IP needs

available

IP)

to apply

-Can

for

-Applying

-

transfer

employee

different level

Personalise

existing

of REST

of insurance

cover

death and

Cost Insurance

employer

TDP

-Apply for

-

insurance

Consolidating

have limit

member

-IP can

balance

insurance

apply

$1000

which from other

cover）

insurance provider

source: REST, MLC Super Fund PDS, SunSuper PDS, Spaceship website, Grow Super PDS, 2017) On the one hand, REST, MLC Super and Grow Super provide more flexible options for investors to customise their own investment. Investors can take higher risk to gain higher return. At the same time, it may require more professional knowledge and research. On the other hand, REST provide more pre-mixed options than other four super fund. These default options can help Abby save time to make investment decision. This is because the simple rule of thumb can help Abby make complex superannuation decision to avoid extremes or negative outcome. REST also provide most pre-mixed options and lowest annual fee. However, Spaceship Super only have two options and it have the most expensive annual fund cost. Therefore, Abby can pay less annual fund expense to gain more options to choose. Spaceship Super is the only super fund which not provide insurance and it will provide less benefit for Abby. Grow Super accept insurance transfer from other super fund. it is easier to keep suitable insurance plan for Abby. Moreover, REST provide default cover includes death, TDP and income protect insurance. It can help Abby easily receive more insurance protection. With considering Abby’s age, superannuation is a long-term investment. Abby can seek more stable and higher return. SunSuper have better annual return performance. Although the Superfund only provide default options, there are more than 20 options which Abby can choose. It also provides flexible insurance plan. Therefore, Sunsuper is more suitable superannuation for Abby. According to SunSuper investment guide (2017), Abby invest superannuation in order to saving more money for retirement and have long timeframe. Abby is suitable for Growth option.

Superannuation Fund Governance With development of industry superannuation market, the current equal representative model cannot provide better government performance for

superannuation market. The government in tend to require registrable superannuation licence to have least one third of independent directors on super fund board and it will force to change current equal representative model in super fund governance (Coorey & Mather, 2015, Jun 26). In the equal representative model, the trustee of super fund should have equal number of employee and member representatives (Robertson, 2015, Apr 27 ). These representatives may not have enough skills and knowledge to manage large amount of super fund. The independent directors can provide additional professional knowledge and skills to help them manage super fund. Moreover, independent directors can help the board make more objective and fair decision. There is an agency relationship between trustee and members. Trustee should represent the all benefit of members. However, according to agency theory, information asymmetry can cause trustee take information advantage to gain more personal interest rather than interest of members. It is important to solve the interest conflict between trustee and members. However, increasing independent directors can also bring some drawbacks for super fund governance. The first drawback could be decrease fund return. The independent directors use their service to gain reward from super fund. The extra governance cost will decrease the annual return for the members. The second drawback is limited evidence shows that independence director can actually improve super fund performance. The research shows that the higher percent of member representatives can bring more positive return for super fund members. The advantage of independent directors is based on assumption which they have enough professional knowledge and can perform correctly. Therefore, the actual practice can be different from assumption. In Australia largest superannuation fraud, although Trio Capital have several independent directors, they still cannot avoid the superannuation fraud (Parliament of Australia). The government also proposes to enhanced powers for the Australian Prudential Regulatory Authority (APRA). The APRA intend to enhance improving and remedying poor performance of RSEs in short term and seek for long term effect of superannuation industry (Australian Prudential Regulatory Authority, 2017). This change can provide more opportunities to prevent and correct wrong RSE licensees action at the early stage. It can help RSEs need to perform based on best interest of members. However, although APRA have more power to prevent risk in the early stage, it also brings cost for current performance (Michelle Levy and Law Graduate

Michal Management, 2017). For example, APRA use of the power for pre-position a regulate super fund and appoint a new statutory manager, but new statutory managers need more time to know about the financial state of the super fund. It may delay to reduce risk. The Treasury Laws Amendment Bill 2017 amends the Superannuation Guarantee Act 1992 to ensure employees under workplace determinations or enterprise agreements have the right to choose their superannuation fund (Australia Tax Office, 2017). This change can help employee to choose which type of superannuation is suitable for themselves. According to APRA, there is a significant annual return gap between different super fund with up to 4% annual return gap (Loane, 2016, Jan 11). If the mandated super fund has poorly performance, it will not provide enough money to have comfortable retirement life. Additionally, if employee changes, their job, the mandated super fund may cause employee have too many different superannuation account and employee cannot have better return. However, employee also needs to spend more time to choose the suitable super fund and required more knowledge about superannuation. They may not have enough skills to choose their own super fund. Therefore, the mandated super fund could be the better choice for this type of employee. To sum up, increasing percentage of independent directors and enhance power of APRA are play a significant role in managing super fund and providing higher quality super fund return for people. At the same time, these two regulation change need to have specific regulation to improve performance of independent directors and APRA. Allowing employees choose choosing their own insurance can provide more flexibility to determine the better return. Therefore, these change are necessary for superannuation governance.

Conclusion In conclusion, Abby has been recommended the SunSuper Growth option as her future super fund investment. It can help her long-term investment gain higher return. The government also proposed to improve superannuation governance by increasing independent directors, enhancing power of APRA and having flexible right to choose insurance. Abby can consider these proposed change to choose her superannuation.

References Australian Prudential Regulatory Authority. (2017) Discussion paper. Retrieved from http://www.apra.gov.au/Super/Documents/Discussion%20Paper%20-%20Strengt hening%20superannuation%20member%20outcomes.pdf Australia Tax Office. (2017) Extending superannuation choice to enterprise agreements and workplace determinations Retrieved from https://www.ato.gov.au/General/New-legislation/In-detail/Super/Extendingsuperannuation-choice-to-enterprise-agreements-and-workplace-determinations/ Coorey, P., & Mather, J. (2015, Jun 26). Shake-up for industry super funds. The Australian Financial Review Retrieved from https://gateway.library.qut.edu.au/login?url=https://search-proquestcom.ezp01.library.qut.edu.au/docview/1747282723?accountid=13380 Grow Super.(2017).Product Disclosure Statement . Retrieved 1, May 2018 from https://www.growsuper.com/PDS-and-important-documents/ Long, S.(2017, Dec 4).Government's superannuation bill 'precisely the wrong model', says expert Retrieved 1, May 2018 from http://www.abc.net.au/news/2017-1204/government-superannuation-industry-government-bill-criticised/9221778

MLC Super fund.(2017).Product Disclosure Statement and forms. Retrieved 1, May 2018 from https://www.mlc.com.au/content/dam/mlc/fb/common/packs/73783_mk_super_a nd_pension_fund_offer_combo.pdf Robertson, A. (2015, Apr 27). Battle over whether superannuation funds should have majority independent trustees hots up; debate hots up over the benefit of a majority of independent trustees on superannuation boards as industry super funds continue to outperform retail funds. ABC Premium News Retrieved from https://gateway.library.qut.edu.au/login?url=https://search-proquestcom.ezp01.library.qut.edu.au/docview/1676097322?accountid=13380

REST. (2017). Product Disclosure Statement and forms. Retrieved 1, May 2018 from https://www.rest.com.au/NEW-Documentlibrary/Guides/PDS/RES0495_Super_PDS_A5_FA_WEBSAFE.pdf?ext= Loane, S. (2016, Jan 11). Workers should have the right to choose their superannuation fund. Retrieved 8, May 2018 from Long, S. (2017, Dec 4). Government's superannuation bill 'precisely the wrong model', says expert Retrieved 1, May 2018 from http://www.abc.net.au/news/2017-12-04/government-superannuation-industrygovernment-bill-criticised/9221778

Parliament of Australia. Executive summary. Retrieved from https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations _and_Financial_Services/Completed_inquiries/2010-13/trio/report/b02

Spaceship (2017). Retrieved from https://www.spaceship.com.au/ SunSuper. (2017). SunSuper investment guide. Retrieved 1, May 2018 from https://www.sunsuper.com.au/pds-guides SunSuper. (2017). SunSuper for life Product Disclosure Statement guide. Retrieved 1, May 2018 from https://www.sunsuper.com.au/pds-guides Michelle Levy and Law Graduate Michal Management. (2017). Unravelled: extraordinary new power proposed for APRA. Retrieved 1, May 2018 from https://www.allens.com.au/pubs/fsr/170912-unravelled-02.htm...