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FSC pushes for $16bn retirement boost through product modernisation framework

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Allowing Australians to be moved from legacy to modern investment products would deliver a $16 billion boost to retirement savings, according to new research.

The Financial Services Council (FSC) is calling on the federal government to remove the barriers which prevent super funds and fund managers from transitioning Australians out of legacy products via the introduction of a product modernisation framework.

A report by EY, prepared for the FSC, found that such a framework would deliver significant benefits to consumers as well as the government, trustees, and regulators.

The FSC explained that a product modernisation regime would allow trustees and managers to “efficiently move customers to modern equivalent investment options when it is in members’ best interests, without triggering the early application of tax obligations”.

According to modelling in the FSC’s Product Modernisation Research Report, this change would result in consumers retiring with cumulatively $16 billion more by 2050.

Furthermore, it would lead to a $22 billion increase in net income during retirement, comprising a $41 billion increase in revenue from higher retirement balances, offset by a $19 billion reduction in reliance on the age pension.

The government’s fiscal position would also be improved to the tune of nearly $1 billion over the next 10 years and a total of $21 billion by 2050.

“A product modernisation regime would support the government’s fiscal position, by lowering government age pension outlays and raising new tax revenue, by almost $1 billion in the next decade, without having to raise new taxes on superannuation consumers,” said FSC chief executive officer Blake Briggs.

The report found that there is currently $132 billion invested in super and investment options that could benefit from modernisation across more than 1.8 million accounts.

“Outside of a successor fund transfer (SFT), whereby a whole superannuation fund is transferred to another and CGT relief applies for all members, there is no existing, viable mechanism that enables trustees of superannuation funds (SFs) and managed investment schemes (MISs) to efficiently rationalise products and investment structures,” EY said.

“This creates an uneven playing field that only promotes efficiencies in a subset of scenarios. Consequently, the proliferation of products that could benefit from ‘modernisation’ is creating system-wide inefficiencies, with our research indicating negative consequences for all stakeholders.”

EY noted that the need for modernisation has emerged for a number of key reasons, including changes in legislation as well as corporate strategy and activity.

Key legislative changes have included the annual super performance test by the Australian Prudential Regulation Authority (APRA), which prevents funds from accepting new members after failing for two consecutive years.

The FSC suggested that product modernisation would be a “natural extension” of the Your Future, Your Super (YFYS) reforms, which came into effect in 2021.

According to the FSC, the YFYS regime has revealed that Australians are often stranded in legacy products which they are unable to be moved out of due to tax and regulatory barriers imposed by the government.

Subsequently, trustees may conclude that transferring a consumer and triggering tax obligations would not satisfy their best financial interest duties.

Mr Briggs said that, while the FSC supports super fund performance testing, flaws in the YFYS framework are having adverse consequences for consumers.

“The FSC encourages the government to act to protect consumers from being trapped in underperforming products that APRA has publicly identified, by implementing a product modernisation framework that allows superannuation trustees to transfer consumers to modern products,” he said.

“Without a product modernisation regime, consumers will receive performance notifications, but personal tax consequences and the need for comprehensive financial advice remains, preventing consumers from taking action.”

The report found that a 40-year-old with a super balance of $80,000 could retire with an extra $198,676 if trustees were able to move members to contemporary products without incurring tax penalties or regulatory barriers when invested in a legacy product.

Among the highlighted benefits for consumers of product modernisation are access to equivalent products with higher net investment returns, driven by both higher expected investment performance and lower fee structures.

The government would benefit from greater tax receipts and savings from lower aged pension payments. Trustees would enjoy operational and administrative efficiencies, while regulators would benefit from a more competitive industry and better consumer outcomes.