Levy criticises funds’ expanding role, says trustees are being asked to do too much

Appearing in a personal capacity before the Senate economics references committee inquiry into improving consumer experiences, choice, and outcomes in Australia’s retirement system on Friday, Michelle Levy said superannuation funds and their trustees are being asked to “do too much and more than they are equipped to do”.

The Quality of Advice Review lead criticised the existing regulation for overburdening trustees with unrealistic obligations, which diverge from their original purpose of managing retirement savings.

“I look at the way the SIS Act and the prudential standards have multiplied the expectations, and not just expectations, but obligations that sit with trustees, and it actually makes almost no sense,” Levy told the committee.

“We have a system that was set up to invest savings for people's retirements, and we are now at a point where we are asking trustees to solve really difficult problems of how people retire and have a safe and secure retirement.”

In her submission to the inquiry earlier this year, Levy argued that super funds, as trusts rather than legal entities, face significant constraints and potential conflicts in providing personal advice, as trustees must navigate separate duties under the Corporations Act and SIS Act.

She raised concerns about the increasing demands on trustees, who may lack the necessary resources and legal clarity, potentially leading to mistakes and liabilities that could impact fund members.

“In providing that advice, the trustee has duties under the Corporations Act to the individual member which are separate from (and sometimes in conflict with) the duties it has to members under the SIS Act,” she said.

“[Financial services royal commissioner] Hayne recommended that a trustee not be able to have a duty to act in the interests of another person, other than a duty that arises in the course of performing the RSE licensee’s duties, or exercising the RSE licensee’s powers, as a trustee of a registrable superannuation entity. The restriction is subject to an exception for providing personal advice.”

This exception, Levy said, suggests that trustees may not act in their trustee capacity when providing personal advice, but noted that this is a legal question yet to be clarified by courts or regulators.

Speaking before the Senate committee, Levy elaborated that super funds’ lack of capacity to provide individualised retirement solutions makes it difficult for them to meet the RIC’s demands.

“They don't have the capacity or the information to do individual things. Funds are funds, they're set up to invest large amounts of money to get returns, and that's what they're good at,” she explained.

“Retirement I think needs individual answers and individual responses and trustees, and again, funds, are not set up to do that. So, I think that's another reason why they really struggle with the Retirement Income Covenant, because no amount of cohorting is actually an answer.”

Looking more closely at the RIC and the criticism funds have faced for displaying a “lack of progress and insufficient urgency” in embracing the RIC, Levy argued that trustees are not doing more because they “are not equipped to be able to do that”.

Namely, under the RIC, super funds are tasked with developing a retirement income strategy, including a product, to improve the long-term outcomes of their members at or approaching retirement.

“The answer isn't with a product. I think it's a much more holistic response, and so that of itself, I think, is a concern, and so I do worry about adding to that burden,” Levy said.

She added that the reason product answers have not been successful is largely that “people don't want them”.

“People don't want them because I think they have personal concerns and issues which are not necessarily the same as the objectives that we see in the Retirement Income Covenant,” Levy explained.

“One of those is leaving a legacy. Now that may be an objective that the government or governments don't want to allow or pursue, but it makes it really hard for a superannuation fund to design a product which then answers the needs of the objectives in the Retirement Income Covenant and the needs and objectives of their members.”

When this issue is coupled with the provision of advice, Levy said, there is a conflict between the RIC and members’ wishes.

“I think giving advice throughout the life of a member of a superannuation fund is vitally important to getting them to a really good place in retirement,” she said.

“But if you're giving that advice, that personal advice, and the person says, ‘actually, what I want more than anything is just to leave money to my children so that they can buy a house’, then the trustee is not in a position to help.

“To say, ‘actually, you should take up this product that I've got here, which will make sure that you have this income drawn down over the balance of your life’, these two things are inconsistent.

“So that, to me, is one of the fundamental problems with trustees and the Retirement Income Covenant is trying to use trustees and covenants to achieve as best I can see, an objective of government which is not shared by members.”