A new report from the Grattan Institute has called for a temporary halt to the expansion of personal financial advice services by superannuation funds, urging that all account-based pension (ABP) products undergo the Australian Prudential Regulation Authority (APRA) performance test before such services are offered. The report, Simpler Super: Taking the Stress Out of Retirement, highlights the need for a regulatory framework that ensures super funds provide quality, impartial advice to members transitioning into retirement.
Joey Moloney, deputy program director for housing and economic security at the Grattan Institute and co-author of the report, emphasized the importance of improving financial advice and guidance for super fund members. He noted that, despite ongoing reforms aimed at making advice more affordable and accessible, the current financial advice regulatory landscape remains flawed. The recently implemented Quality of Advice Review and the government’s Delivering Better Financial Outcomes initiative have made strides in addressing these challenges, but there is still significant room for improvement.
The Challenges of Conflicted Advice
Moloney pointed out that many superannuation members are skeptical of the advice provided by their funds, largely due to concerns about conflicts of interest. He explained that super funds, while obligated to act in their members’ best interests, also have their own financial interests, which can erode trust in the advice they offer. This issue of vertical integration, where super funds also provide financial products, remains a significant concern despite efforts to improve regulatory standards.
“The advice the super fund gives you should be in your best interest, but inevitably, you’ve got an issue where the super fund might have their own interests as well,” Moloney told Professional Planner, emphasizing the need for a regulatory environment that minimizes such conflicts.
Proposing a UK-Inspired Pension Guidance Service
The Grattan report proposes the creation of a government-run service akin to the UK’s Pension Wise, which offers free, impartial guidance to individuals aged 50 and over. Established in 2015, Pension Wise became central to the UK retirement system, assisting over 100,000 people annually, and costing £16 million (AUD $32 million) to run in 2023. The report suggests that Australia could benefit from a similar initiative, called Retire Smart, to bridge the gap between the advice provided by super funds and that offered by professional advisers.
Moloney advocated for consolidating the various government-provided financial advice services, such as the Money Smart website and the Financial Information Service, into a more personalized and effective resource for superannuation members. “There’s a case for the government to step in and provide better guidance and advice here, on top of what funds are doing,” Moloney said. This would address the current shortcomings in the system, making financial advice more accessible and tailored to individual needs.
Extending the APRA Performance Test to ABPs
The Grattan report also calls for a comprehensive overhaul of the retirement income system, recommending that super funds not be allowed to expand their personal advice offerings until all ABP products are subject to APRA’s performance test. It suggests that the Your Future, Your Super (YFYS) performance test should be extended to include ABPs, which are the primary retirement products for many Australians.
The report stresses that the complexity of the retirement income system requires funds to provide more personalized assistance to members, but this must be preceded by a stronger market design to ensure that retirement products meet quality standards. “The government should first create a stronger market design before expanding personal advice services,” the report states.
However, the idea of extending the YFYS performance test to retirement products has faced significant opposition from industry stakeholders. A Treasury consultation held last year received strong pushback, with many in the industry arguing against the proposal.
The Need for Consumer Protection in Superannuation Advice
Moloney highlighted the importance of consumer protections before super funds are allowed to provide conflicted personal advice. While he acknowledged the value of reforms aimed at enabling super funds to offer more affordable advice, he argued that safeguards are necessary to protect members from poor outcomes.
“There’s a really strong case for having good consumer protections in place,” Moloney said, noting that the current “Best Interests Duty” for super funds and advisers is insufficient in preventing potential harm. He emphasized that while best interest duties serve as guiding principles, they lack the teeth needed to guarantee that products and services meet a high standard of quality.
The report advocates for the inclusion of the ABP performance test in ensuring that superannuation products are of sufficient quality before personal advice is expanded. Under the current rules, super funds that fail the performance test twice face the prospect of having their ABP products closed to new members.
Moloney concluded by reiterating the importance of balancing the expansion of financial advice services with strong consumer protections, ensuring that retirees have access to high-quality products and guidance as they navigate their retirement journey.
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