Productivity Commission proposes four ways to revamp default super funds

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It would be possible for a person to have a single default super fund in their lifetime, instead of having multiple default funds as they change employers, under models developed by the Productivity Commission.

The Productivity Commission was tasked by the government with developing alternative models for setting default super funds. The Commission has now released its draft report, containing four default super fund models.

“After 25 years, and notwithstanding a history of reasonable returns as a general rule, structural faults are evident in default superannuation,” said Productivity Commission Chair, Peter Harris.

“These changes are not about the tax or contribution rules for super. They are about how to help the least informed members – those new to system, who fail to make any choice about where their money goes,” he said.

“Unlike twenty-five years ago, today many more employees are part-time, and there is a greater propensity to change jobs, with much less a job-for-life nature to the workforce. The super system should reflect this.”

The four models are:

Model 1: Assisted employee choice

Under this model employees choose their superannuation fund, but with assistance from a “set of policy interventions”, including a non-mandatory shortlist of 4 to 10 “high quality” funds.

Model 2: Assisted employer choice (with employee protections)

In this model employers choose default super funds for employees who do not choose their own fund, from a list of funds which meet mandatory minimum standards.

“These minimum standards are important to protect member interests given the potential for conflicts of interests in the employer choice environment,” says the Commission.

“The model recognises that some (mainly larger) employers are well placed to choose a default product and negotiate favourable arrangements for their employees, while many (mainly small- and medium-size) employers are not and would benefit from some assistance.”

Model 3: Multi-criteria tender

Under this model super funds would compete for the right to be a default fund.

“Funds would submit bids against criteria such as past performance on net returns and member satisfaction, investments strategy, member services, fees, and innovation in unspecified areas. Five to ten of the best product offerings are chosen by a Government appointed selection body, with a best-and-final-offer stage used to encourage convergence where proposals are close. The winning products are then allocated new entrant default members on a sequential basis.”

Model 4: Fee-based auction

In this model super funds would compete to be default funds by bidding on the basis of fees.

“To the extent that investment returns are largely market driven, competition on fees would promote long-term net returns.”

One to five super funds would be the winner of the auction and become default funds, allocated new members on a sequential basis.

“A set of minimum standards would address non-fee product characteristics like investment strategy and member services”

The Productivity Commission says there is a prospect that, whichever model is chosen, it would result in lower fees and better returns. Additionally the benefits from the model would flow through the entire superannuation system, improving super for default and existing super fund members.

Productivity Commission’s Deputy Chair, Karen Chester said: “Around two thirds of members rely on defaults. This isn’t surprising with super being both compulsory and complex to navigate especially for young workers. Our new models can make default super simpler and easier to compare, and offer the prospect of lower fees and better-performing products.”

‘To date, most interest in this Inquiry has come from the funds themselves. So we are asking young Australians and those who might want to think about their interests, such as parents, to also share their ideas about how a future default system could work better for them,” he said.

The final report is due to be given to government by August 2017. This report will feed into the review of the efficiency and competitiveness of the superannuation system the Commission will undertake at some point after 1 July 2017.

The Government acknowledged the release of the report, but left any decisions to the end of the process.

“As the report is only a draft, it would be premature for the Government to make any comments on the merits of any specific proposal at this stage. The Government will consider its response in the context of the final report of Stage Two and further Stage Three work,” said Minister for Revenue and Financial Services, Kelly O’Dwyer.

“I encourage all interested stakeholders, especially young Australians, to continue to engage with the Commission through consultation on the draft report to provide insights into the merits and feasibility of the alternative models proposed.”

Submissions and comments in response to the draft report are due by Friday 28 April 2017. The Commission is also holding public hearings in Sydney and Melbourne.

The draft report is likely to be of considerable interest to the industry and retail sections of the super fund industry. Industry Super Australia tried to get out ahead of the draft report, releasing an ad campaign attacking bank-owned retail funds and saying the Productivity Commission report could lead to a dismantling of the Fair Work Commission process for selecting default super funds.

FSC welcomes draft report, Industry Super Australia and AIST opposed

The draft Productivity Commission report has split the superannuation industry down predictable lines.

The Financial Services Council (FSC) said it supports the Productivity Commission’s view that reform of default superannuation is necessary. A statement released by the FSC after the draft report said the Commission “resoundingly rejected the current industrial system that directs consumers towards union-dominated default funds”.

“After extensive public consultation, the Productivity Commission – a highly credible and independent economic institution – is calling for an end to the status quo, that puts industry self-interest ahead of consumers,” said FSC CEO Sally Loane.

However the draft report has been sharply criticised by Industry Super Australia (ISA) and the Australian Institute of Superannuation Trustees (AIST).

ISA chief executive David Whiteley said: “As requested by the Terms of Reference, the report considers dismantling the most trusted, high performing part of our default system while ignoring the elephant in the room, which is the dismal performance of sales-driven retail funds.”

“Hundreds of billions of dollars in savings for millions of Australians are in underperforming and costly retail and bank-owned funds, yet the Productivity Commission’s prescriptions will do nothing about it,” he said.

“On the contrary the PC’s proposals will shift the balance from a system that safeguards consumers with high quality workplace defaults to one focused more on employee choice which better suits the profit-driven, bank-owned retail funds.”

“The Productivity commission approach focuses heavily on the first super fund a person joins – this will place banks in the box seat when a young person opens their first bank account and they cross sell a super fund at the same time.”

AIST said the Commission failed to provide evidence that changing the system for picking default super funds would benefit members, and that the change have the potential to put millions of Australians at rick of poorer retirement outcomes.

“The Productivity Commission calls for a quality filter to determine default fund status but a quality filter – that provides a high level of consumer protection for members – already exists in legislation through the Fair Work Commission process,” said AIST CEO Eva Scheerlinck.

“To propose complicated new default systems – that include setting up another government body – without even bothering to review the existing system is not only ludicrous, it is also inefficient,” Ms Scheerlinck said.

“AIST supports a system that ensures only the best performing funds are defaults.”

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