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Super shake-up is long overdue

Paul Rickard
Thursday, May 31, 2018

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The good news is that the Productivity Commission (PC) has got it largely right with its recommendations for sweeping changes to the super industry. This is an incredibly fat and complacent industry that can do a lot more for the members it seeks to serve. Making it more efficient and competitive will boost retirement savings for millions of Australians.

But because it is such a gravy train – with a fee pool of circa $30 billion per annum to be shared out between the super funds, advisers and consultants – there is going to be an almighty pushback by industry participants. Get ready for the “super culture wars” as vested interests line up to shoot down the PC’s findings and articulate why their way of doing things is in “the members’” interests.

The PC has issued 20 draft recommendations covering matters such as cleaning up lost accounts, default superannuation accounts, super fund governance, encouraging fund mergers, member friendly dashboards and insurance in super.

Many of these recommendations are no brainers. For example, the PC says that one third of all super funds are ‘unintended multiples’ (created when a member changes job or industry and does not close their old account or rollover their existing balance). This costs those members $690m in excess administration fees and $1.9bn in excess insurance fees each year. It recommends that the Government legislate to ensure that accounts are sent to the ATO once they are ‘lost’, empower the ATO to “auto-consolidate” lost accounts into a member’s active account and reduce the ‘lost inactive’ threshold from five years to two years.

But the real bunfight will be over the recommendation for the ‘default account’ and the PC’s idea to have an expert panel determine a “best in show” shortlist of super funds.

A default account is the super account that is opened for a person who starts a job and hasn’t provided their own fund choice. Most employees don’t choose a super fund (because they don’t have a basis to make a choice), and in some cases, the fund is mandated by the industrial award. As a result, people working in the building industry generally end up with their super in CBUS, while retail employees have their super directed to REST. The default arrangements become absolutely critical to the long-term growth aspirations of the super funds.  Catch the employee at the start of their career and you should keep them as a member at least until they retire.

The big bank and privately owned super funds have been lobbying the Government hard to open up the super default arrangements because they largely favour the union backed industry funds. This was one of the major reasons that the Government asked the PC to enquire into the efficiency and competitiveness of the super system.

Rather than suggesting that super funds should compete and “tender” for industry/company default arrangements, the PC has recommended that a single shortlist of up to 10 superannuation products should be presented to all members who are new to the workforce or do not have a superannuation account, from which they can choose a product. Clear and comparable information on the key features of each short-listed product would also be provided. Any member who failed to make a choice within 60 days (from this list or any other fund, including an SMSF) would be defaulted into one of these 10 products via sequential allocation. 

The 10 shortlisted products would be chosen by a Government appointed independent expert panel. The panel would run a competitive process for selecting the products based on a clear set of criteria and which are judged to deliver the best outcomes for members, with a high weighting placed on investment strategy and performance.

The PC envisages that a “Reserve Bank Board” style panel, non-partisan and credible, would be appointed by Government. Members would serve for a fixed term, with only one third of the panel carrying over from one selection period to the next. Panel positions would be advertised, with short listed candidates presented to the relevant Minister, and then appointed by Cabinet.

The PC rejected the idea that the regulator (APRA) should take on this role. It also considered that the Fair Work Commission was ill suited for the role as it doesn’t have expertise in superannuation.

It also rejected the idea that a Government owned entity, perhaps the Future Fund, take on the role of being the default fund provider. It believes that in the event of “poor performance”, there may be significant political pressure for taxpayers to “top up” returns. It also sees risks from political interference in the investment process, potential pressure for a more conservative investment style to minimise the risk of losses and a lessening of industry competition.

Perhaps unsurprisingly, few industry players are happy. The union backed industry super funds have the most to lose over the medium term under the proposed model and will argue that the Fair Work Commissioner should play a role. The bank owned retail super funds would have preferred a tender model, because they could propose a “low fee” fund for new members without impacting on their existing “higher fee” funds. They don’t enjoy the same performance results as the industry funds, so few, if any, will make the first cut of the “top 10”. And for the smaller super funds – the writing is on the wall because once there is a “top 10”, it will be really hard for the plethora of funds who miss out to thrive.

What did the PC miss in its review

The PC didn’t get everything right. It made a start on the great insurance racket, which sees most members being “compulsorily” signed up for the product. It says that for members under 25, this should be on a deliberate “opt-in” basis, that the Government should legislate to cease insurance cover on all accounts where no contributions have been obtained for the past 13 months and that the industry should adopt an insurance code of practice.

But this doesn’t go far enough. Taking insurance through super usually makes sense for people who have dependents, a mortgage or lack secure employment, but if you are young or care free, or perhaps even approaching retirement, it can often make little sense. The “opt in” should be extended to at least age 30, and all members should be advised annually that they can “opt out” at any time.

Another area that the PC didn’t address is how funds should assist members to select the most appropriate investment option. Arguably, selecting the investment option within your fund is much more important than selecting the right super fund.

How will this play out

The PC’s report is draft report, which means that public submissions are being sought (can be lodged up until 13 July) and that they are also going to hold further public hearings. A final report may get to the Government in late 2018.

This places it almost bang in the middle of the electoral cycle. Super is highly politicised, so it is likely that the Government will seek to push ahead with changes that impact the union affiliated industry funds, while the ALP seeks to stall and delay. Bottom line is it might go nowhere quickly.

This all said, I can’t see the “top 10” recommendation surviving as currently proposed. I don’t think the PC has thoroughly thought through the impact on the 198 super funds that don’t make the initial cut. Sure, we need fewer funds and bigger funds for economies of scale, but we don’t want too much lessening of competition. Ten won’t be enough.


Published: Thursday, May 31, 2018

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