The Productivity Commission has started the process of developing alternative ways to allocate super fund members to default funds with the release of an issues paper.
The Government tasked the Commission with developing alternative default superannuation fund systems – with one option being a tender process to set a single default super fund.
“Importantly, the emphasis is on developing alternative models. This inquiry is not a review of MySuper or other current default arrangements. In assessing alternative allocative models, this inquiry will therefore be starting from an objective baseline scenario of no defaults,” says the Productivity Commission Issues Paper Superannuation: Alternative Default Models.
“The concept of defaults (and their presence in workplace instruments) has been integral to the development of Australia’s superannuation system, largely stemming from the decision to make superannuation compulsory and the inherent complexity that individuals face in making decisions about retirement incomes.”
“Many employees appear disengaged from the superannuation system or do not feel qualified to choose a fund, and there is recognition that poor choices of superannuation fund could increase future reliance on the Age Pension. Default funds also potentially reduce the cost and complexity for employers of complying with their Superannuation Guarantee obligations.”
Though the Commission also says that defaults can reduce efficiency and competitiveness – including by not meeting diverse needs, principal–agent issues and creating barriers for entry.
“On the demand side, the use of defaults may diminish active participation by members, making them less responsive to price signals and other elements of fund performance. This could lead to the persistence of high fees, low quality products, and the subsequent erosion of member balances over time.”
“Some of the original rationales for the current default architecture are no longer as relevant today. The system has matured significantly over the past quarter century, with accompanying improvements in transparency and compliance. Australians are much more familiar with the concept of superannuation and its workings. However, retirement decision making remains very complex.”
The Commission proposes five criteria to assess alternative models:
- members’ best interests
- system-wide costs
The Commission will be looking at overseas examples, with the issues paper highlighting four countries with defined contribution models: Chile, New Zealand, Sweden and the UK.
Submissions in response to the issues paper are due by Friday 28 October 2016.
The Productivity Commission is also conducting a study to develop criteria to assess the efficiency and competitiveness of the superannuation system. This study, along with the inquiry into alternative default super models, will feed into an inquiry reviewing the efficiency an competitiveness of the super system after the full implementation of MySuper – that is, after 1 July 2017.