The Financial Services Council has welcomed the “refreshing approach” the Productivity Commission has taken towards competition in setting default superannuation funds.
The Productivity Commission is conducting an inquiry to develop alternative models for determining default super funds.
“Australia has a world leading superannuation system, however it can be improved through reforms to enhance the competitiveness and the efficiency of the system,” says the Financial Services Council (FSC) submission to the inquiry.
“The FSC supports reforms to promote competition in the superannuation system.”
FSC members include AMP Limited, BT Financial Group and CBA Wealth.
“The Productivity Commission’s suggestion of a baseline of no default is the purest form of competition and, with informed and engaged consumers, has the potential to deliver strong results for consumers,” says the FSC.
However industry super funds have criticised the Commission for adopting no defaults as the baseline, arguing that alternatives should be compared to the existing system.
“The FSC supports a competitive market design that moves the industry closer to the baseline option by allowing all consumers to choose their own superannuation fund, and allowing any Australian Prudential Regulation Authority (APRA) approved MySuper product to be nominated as a default fund where an employer decides to offer a default in their workplace,” says the FSC in its submission.
“We therefore welcome the refreshing approach the PC has taken in its deliberations thus far. The FSC supports a ‘market-based competition’ model where employers should not be compelled to offer a default fund. It would be significant enhancement to the current system for employers to expect their employees to nominate their own fund as it would promote consumer engagement and reduce principal-agent issues in the system.”
“The current industrial system was not designed with a view towards competition and market design. The industrial and highly protectionist overlay on the superannuation system acts to limit competition and stifle innovation, and has resulted in the proliferation of subscale and inefficient superannuation funds, as well as discouraging consumer engagement.”
The FSC says an auction model – one of the models being considered – is “not a solution to these market failures”.
“The auction model would take the superannuation system further from the baseline model than is currently the case, with implications for consumers, innovation and financial system stability. The Commission should instead prefer a market-based approach that empowers consumers. Allowing people choice in an open market based competitive system should substantially lift their engagement with super.”
The submission says that the MySuper approval process could be enhanced, with a focus on member outcomes and ongoing assessment, if the Commission is concerned about the strength of the safety net for consumers.