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BFCSA: APRA needs to be held to account on superannuation fund performance

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APRA needs to be held to account on superannuation fund performance

Australian Financial Review Aug 5 2018 11:00 PM

Adele Ferguson

 

A multibillion-dollar Commonwealth superannuation fund whose 137,350 members include public servants, defence personnel, SES officers and some former politicians, has been labelled a rip-off, opaque and not acting in members' best interests.

Former Labor politician Mark Bishop, who chaired a landmark Senate inquiry into Commonwealth Bank that called for a royal commission back in 2014, said the fund makes the banks look like angels.

Since he joined the $12.5 billion Public Sector Superannuation Accumulation Plan(PSSAP) last September he was put into a default insurance scheme he didn't know he was in – and didn't need - which has been deducting a whopping $774 a fortnight in income protection premiums. In July 2018 he checked his account balance (not for the full year) and noted it was $9000 less than it should have been.

Bishop is one of millions of Australians passively funnelled into life insurance policies through their super, worth billions of dollars a year in premiums to the insurers, which provide income protection insurance and lump-sum payouts on death or total and permanent disability (TPD) – through "group" deals struck between insurers and super funds.

They are structured on an "opt-out" basis, which means premiums are automatically deducted unless the member specifically opts out. It has become a trap for a number of members.

According to the Productivity Commission's ground-breaking recent draft report into super, one in four people don't know they are paying life insurance as part of the super. Given the enormous number of multiple super accounts, many are also unknowingly paying multiple insurance premiums, which is eating into their retirement savings.

Bishop's case raises broader questions about the effectiveness of the Australian Prudential Regulation Authority (APRA).

It comes as the royal commission is set to grill APRA on its oversight of the $2.6 trillion superannuation sector.

Another term for legalised theft

When it comes to fund performance, APRA appears to have been missing in action.

The Productivity Commission's superannuation report, spearheaded by Karen Chester, found that one in four funds – retail, industry, corporate and government funds – persistently underperform. The report also shows that quality performance data is unavailable and APRA has allowed this to go on – to the detriment of millions of Australians who are part of the compulsory super system.

What is even more shocking is APRA had an internal research division that had a group of researchers requesting and compiling important data on funds but a decision was made in 2010 to abolish it. There are various theories why the decision was made but whatever the case it allowed entrenched underperformance of funds to continue.

In a submission to the Productivity Commission, wealth consultant Mercer says APRA is responsible for prudential regulation of super funds and for the supervision of trustee (and director) conduct. It says APRA has "significant" tools that allow it to regulate the strategic conduct of super trustees "but … to the best of our knowledge, APRA has rarely used these powers".

The killer quote says "its style of prudential regulation is to closely supervise, engage and work with superannuation trustees and directors and to use its regulatory powers only as a last resort. To the best of our knowledge, APRA has never been called to account as to why it has not used its powers in the case of funds that are clearly underperforming."

This is a damning summation of APRA as a regulator but it explains a lot. For years APRA has managed to sneak under the radar, but not anymore. Now it has to be held to account.

A joint paper submitted to the royal commission on Friday by APRA and ASIC on their roles in regulating super entities is telling. APRA avoids using the word conduct, in sharp contrast to ASIC. It also shies away from taking ownership for the many mergers that should have happened but didn't and the persistent underperformance of a number of funds.

In the case of PSSAP, Bishop didn't know he had been put into AIA's LifePLUS insurance, a default, opt-out income protection insurance. If he had, he would have opted out.

But the documents, viewed by The Australian Financial Review, don't make it clear, despite PSSAP's suggesting they do. Nor is it clear the amount members will be slugged. A convoluted formula on page 17 of a 29-page document that includes number of days in the month/365.25 x monthly benefit/100 x Premium Rate, a table with age and numbers and simplistic examples is anything but clear, nor is a calculator buried on the website.

Bishop says in the real world, these hefty fortnightly deductions would be called legalised theft.

He decided to speak up as a warning to others to check their super statements. "I'm talking about millions of dollars paid to insurance companies every year for a form of insurance most people don't need, don't know about and have not signed up for," he said. "I am not talking about TPD insurance etc. That is entirely different and usually involves a weekly premium of approximately $10."

Exceeding a reasonable cap

John Berrill, a lawyer who specialises in super and life insurance, looked at the documents and concluded that anyone over 55 in the PSSAP fund was being slugged "extremely high" default income protection premiums.

In Bishop's case he was paying $774 or more a fortnight, which represented more than a third of his monthly super contributions.

He questioned whether the default insurance payments unreasonably erode the retirement incomes of PSSAP members over 55, citing the Superannuation Industry Supervision (SIS) Act section 52 (7) (c) that states trustees and directors should "only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries".

The Insurance in Super Code of Practice, which is yet to be introduced, states that a 1 per cent cap on earnings is reasonable for insurance deductions. In Bishop's case, the deductions are far higher than this cap.

PSSAP was sent a list of questions, including whether it believed its trustees had complied with the SIS Act, whether opt out was transparent enough and whether members were given enough information about the cost of default insurance.

The administrator of the fund, Commonwealth Superannuation Corp (CSC), said it believed it was compliant with the act and that opt out was sufficient. It said it was reviewing its insurance products in light of the code.

But it raises questions what the directors were doing in signing off on such a deal and where was APRA and the government.

In the past financial year it has received 299 complaints, of which 185 relate to insurance.

On Friday it emailed Bishop saying it would cancel his insurance and refund the premiums paid.

"The process for refunding premiums is normally applied within an end-of-month run, however with the size of your premium refund there may be an opportunity to have this completed within an out of cycle adjustment. If this is the case we will inform you of that in advance," the email said.

The irony is PSSAP is administered by the Commonwealth.

The Commonwealth Superannuation Corporation administers a number of funds that have as their members' public servants, former defence personnel, SES employees, appointees to government boards and instrumentalities such as the Administrative Appeals Tribunal.

A further irony is Bishop played a critical role in helping set up the super fund system as secretary and chief industrial officer of the SDA in Western Australia in the 1980s.

Back then he argued and won a critical case for industrial super for retail, warehouse and fast food workers. That case established what would become one of the biggest super funds in the country, REST, which he sat on as an alternate director until entering politics in 1996.

"A system I was critical in creating is now a vehicle to pervert the savings intent of potentially thousands of workers around Australia," he said. There is clearly still a lot to do.

 

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