The Murray Inquiry’s Final Report was a mixed bag for the super industry, with some recommendations going some way toward addressing the needs of industry and consumers but with many of the hard decisions left for another day and another review.

Improving efficiency

The Inquiry clearly has reservations about the effectiveness of the Stronger Super reforms to bring down fees.  While recognising that those reforms should be allowed to run their course, the Report recommends that a Parliamentary Committee inquiry should commence as early as next year to test the design features for a new competitive tender process for the super industry.  The successful bidders will be a smaller number of super funds (with no hint as to the number) that will receive the super guarantee contributions of new entrants.  The catch is that those funds must also offer the same fees and other features to their existing members.  This recommendation could result in massive industry consolidation as funds seek to gain the necessary scale in order to compete on fees and brings Australia more in line with compulsory pension regimes overseas.

Retirement phase of super

Tilting the retirement product bias away from account-based pensions towards a soft default retirement income product chosen by trustees will be welcome by the super industry.  However, as many of the submissions pushed for some element of compulsion, it is arguable that the Report does not go far enough.  Rather, it encourages the development of retirement income products with pooled longevity risk protection and the removal of tax and other barriers to the development of such products.  While these recommendations are welcome, it is unclear whether they will change consumer behaviour as consumers will continue to be able to choose to take their super benefits as lump sums, and then fall back on the age pension.

Borrowing prohibition

The proposal to remove the exception to the borrowing prohibition may be welcome from a prudential perspective but it may have the unintended consequence of closing down the market for instalment warrants and other structured products that involve in-built forms of leverage, as well as closing down the residential property asset class for self-managed super funds (SMSFs).

Majority of independent directors

The Inquiry is strongly supportive of a governance model of a majority of independent directors for public offer super funds as well as introducing civil and criminal penalties for director misconduct and recommends that equal representation (the current model) be restricted to defined benefit funds where employers bear the investment risk.  There are clearly political implications of such change that may be resisted by some segments of the super industry.

Product rationalisation

Unfortunately, there was no mention of introducing a more workable product rationalisation pathway for super, which is a missed opportunity, and leaves the industry with the blunt instrument of successor fund transfers.

Taxation of super

Finally, the Report dodges the bullet on tax reform and leaves it to the Tax White Paper (due in 2015) to recommend changes to the taxation of super. In its sights will be the concessional contribution caps and the taxation of earnings in the retirement phase (which are currently tax free) as well as the taxation of high super balances. (Read more about Murray and Taxation)

To find out more, see our related posts or our comprehensive analysis on our website. And see this post for an introduction to the Final Report.