Super Nation is a fortnightly column that examines, explains and analyses key issues in one of Australia's largest, fastest-growing and most important industries: superannuation.
If there is a widespread consensus across the super industry about the Compensation Scheme of Last Resort (CSLR), it is that they cannot agree on who should pay for it, as the cost continues to balloon.
That is clear from the submissions to Treasury about proposals in the Compensation Scheme of Last Resort (CSLR): Reform options to support ongoing sustainability consultation paper.
Few challenge the need for a compensation system for victims of financial misconduct but a key point of contention is how to ensure those who cause investor losses contribute to the pool that funds it.
They show broad agreement among organisations representing super funds and others in the financial services and advice industries that the scheme is under real strain but also highlight sharply diverging views on solutions and funding.
This is a familiar pattern in the A$4.4 trillion (US$3.1 trillion) retirement savings sector where profit-to-member (P2M) funds often have different perspectives on important issues to for-profit retail and self-managed super funds (SMSFs).
Cap blown off
The debate should also be considered in the context of estimates that the cost of the levy that funds the scheme would soar in the next financial year.
The annual impost, which is meant to be capped at $20 million, is expected to be $137.5 million in the 2027 financial year (FY2027), 82% more than the revised FY2026 estimate and representing the filling of a massive shortfall.
This initial forecast excluded the impact of the collapse of the Shield and First Guardian managed investment schemes, which have cost members more than $1 billion.
Not surprisingly, the views of stakeholders reflect the likely impact of the proposals on their constituencies, with members of the Financial Services Council (FSC) and Financial Advice Association Australia (FAAA) arguably worst affected.
The FSC’s full members, including super funds, fund managers and financial advisers, already absorb significant CSLR levies across multiple subsectors.
As financial advisers, FAAA’s members are the most financially pressured cohort because they are directly exposed to rising levies and insolvency-related claims.
Although the per-member impact of potential changes on Super Members Council (SMC) members is not the worst (the aggregate effect could be), the peak body for P2M funds was not reticent in describing the state of the scheme and apportioning blame.
‘Tsunami of harm’
“The scheme is now being flooded by a tsunami of consumer harm arising from this string of recent financial advice and managed investment scheme failures,” SMC wrote in its submission.
SMC, whose P2M members include the giant industry funds like AustralianSuper and Australian Retirement Trust, complained that scheme had drifted from its design as a last-resort mechanism into a default funding pool for misconduct.
“Proposals to spread the rising cost of compensation across the super system would force millions of everyday Australians—many on low and middle incomes—to pay for failures they had nothing to do with,” the peak body said.
The 12.5 million Australians with member (P2M) funds should not be forced to pay a levy to “cross-subsidise failings in unrelated financial advice businesses and high-risk super investment vehicles”.
SMC found an ally in another peak organisation, the Association of Superannuation Funds of Australia (ASFA), although ASFA’s membership goes behind P2M funds to include retail funds and industry service providers.
Like SMC, ASFA opposed plans to require super funds regulated by the Australian Prudential Regulation Authority (APRA) to pay the levy because their members “effectively” received no benefit from the CSLR.
It noted cases of non-payment of determinations and other failures to compensate had been primarily confined to “particular sub-sectors”, which are inferred to be financial planners, managed investment schemes and credit providers.
Although both peak super organisations rejected the idea that SMSFs should pay the levy, they were quick to add that if the $3.1 trillion APRA-regulated sector was pulled into the funding net, then SMSFs should not remain outside it either.
SMSFs slam ‘nonsense’
It came as no shock that the SMSF Association strongly rejected the proposal that its 1.2 million members retain access to the CSLR only if they paid a levy.
Under limited circumstances, SMSFs are eligible for compensation, but they fall outside the levy funding net.
“This proposal is not only nonsensical, but also morally wrong, and in any other environment would likely be labelled victim blaming,” SMSF Association CEO Peter Burgess wrote in its submission.
He urged the Government to add the managed investment scheme (MIS) sector as a sub-sector to fund the primary levy, given it was a “well‑established source of large-scale consumer losses” like those of First Guardian and Shield.
The Association also rejected the proposed three-tier ‘waterfall’ special levy model, which would allocate funding shortfalls across three sub-sectors, depending on their connection to the underlying losses.
This model “would effectively convert the special levy into an ongoing standard levy for the personal finance subsector, increasing the cost of advice”.
This model was equally unpopular with the SMC and the FSC, although ASFA gave it qualified support.
