Shortlist of super funds should replace current default fund system: Productivity Commission

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The Productivity Commission is likely to recommend the current system for setting default super funds be replaced with a ‘best in show’ shortlist of funds from which employees would pick a single default super fund for their working life.

The Productivity Commission has publicly released its draft report into the efficiency and competitiveness of the superannuation system. It finds that the super system needs to adapt to the needs of a modern workforce and increasing numbers of retirees.

The Commission notes that some super funds consistently have high net returns, while a “significant number of products (including some defaults) underperform markedly”.

“Most (but not all) underperforming products are in the retail segment.”

While the default super segment outperforms the super system on average, the way members are allocated to default funds “leaves some exposed to the costly risk of being defaulted into an underperforming fund” – which can erode more than 36% of their balance by retirement.

The draft report recommends that members only be put into a default fund once, when they join the workforce, instead of when they change jobs. Employees would pick a fund from a shortlist – of not more than 10 funds – selected by an independent panel.

“Members should be empowered to choose their own product, and the shortlist should be designed to make this safe and easy to do.”

“No-one would be forced to pick from the shortlist, and members would retain the ability to join any fund they choose.”

The expert panel would compile the list every four years, and the responsible Minister would not have the power to change a decision of the panel.

“It should particularly consider long-term net returns and fees, as well as each applicant’s investment strategy, intrafund advice, governance and track record on identifying and meeting member needs.”

The Commission says this model would likely drive member engagement, with less than 5% of employees likely to not make a choice according to a survey.

The Commission had raised a number of other options to set default funds in earlier consultation documents, including a fee-based auction and multi-criteria tender, but these were “inferior in crucial ways” – including the risk funds would have low-cost strategies at the expense of net returns.

Superannuation fund competition, governance and regulation “inadequate”

The report find that competition, governance and regulation in the sector is “inadequate”. Competition between default super funds is “superficial”, with “signs of unhealthy competition in the choice segment”.

Regulators, and the regulations, “focus too much on funds rather than members”. The data and disclosures to members and regulators are “subpar”, inhibiting accountability.

In addition to the default fund change, the Productivity Commission calls for a higher threshold to be a MySuper fund, more action to make insurance valuable to members (including an enforceable code of practice), stronger governance rules (particularly around board appointments and mergers), and for regulators to “become member champions”.

“Currently, structural flaws – unintended multiple accounts and entrenched underperformers – harm a significant number of members, and regressively so,” says the Commission.

“Fixing these twin problems could benefit members to the tune of $3.9 billion each year.”

The Commission says about a third of super fund accounts are “unintended multiple accounts”, which erode balances by $2.6 billion a year in unnecessary fees and insurance.

“Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50,000 — by duplicate or unsuitable (even ‘zombie’) policies.”

The draft report is part of the third, and final, stage of the Productivity Commission’s inquiry into superannuation competitiveness and efficiency and how default super funds should be set. The due date for the final report is currently “TBA”, but likely to be sometime in 2019.

Submissions in response to the draft report are due by 13 July 2018.

Government position on default super as yet unclear

The Government’s position on selecting default super funds is unclear, with a senior Minister wanting to wait for the final report.

In a series of media interviews after the release of the report Minister O’Dywer has touted the report as supporting the Government’s recently announced policies around multiple accounts, lost super, insurance and fees.

However Minister O’Dwyer would not say if the Government supported the key recommendation of the draft report – a shortlist of default funds selected by a new body.

“It’s an interim report, and so the Government needs to go through all of the processes we need to go through before I can make a declaration…” said Minister O’Dwyer on ABC Radio National.

“But I’m very happy come back on your program when the Government has the final report and when the Government is in a position to be able to announce what we’re going to do, but I can tell you that we certainly look very favourably at the recommendations that have been made by the Productivity Commission.”

However Minister O’Dwyer was certain that the draft report meant that Labor should support Government policy.

“So I think what is very clear is that the Labor Party needs to back in the changes that we announced in the Budget. They need to be unequivocal in their support.”

“The Productivity Commission today has completely belled the cat on all of the problems that exist. It can’t be ignored and the acid really is now on Labor to support our changes and do it quickly because otherwise it will cost millions of Australians millions of dollars in their retirement savings.”

Labor is also waiting for the final report before taking a position. Asked if there was something wrong with employees selecting a fund from a shortlist instead of having a fund chosen by a union, Shadow Treasurer Chris Bowen answered: “We will wait and see the final report. I am certainly not ruling out supporting the recommendations of the Productivity Commission, because it is a serious report which should be taken seriously by both sides.”

Fair Work Commission should select shortlist of default funds: ISA

Industry Super Australia said it welcomed the “central findings” of the Productivity Commission inquiry, while wanting the Fair Work Commission to remain part of the process.

“The job of Government now is to ensure that workers who do not choose their own super fund have their interests protected and are defaulted into an industry super fund,” said Industry Super Australia. This is despite the Productivity Commission finding that while industry funds generally outperform retail funds there are a number of underperforming industry funds.

Industry Super Australia (ISA) “expressed caution” at the proposal for a new body to create a shortlist of default finds, instead calling for the current Fair Work Commission process to remain in place.

“Industry super funds have long supported a merit based selection process of default funds. This is currently the role of the Fair Work Commission and is in the best interests of members,” said ISA Chief Executive David Whiteley.

“To dismantle the Fair Work Commission process in favour of an unproven new government agency and require young workers to choose their super fund for life is high-risk for younger members.” he said.

The Productivity Commission said the Fair Work Commission has “historically drawn heavily on precedent” when selecting default funds and is not an arbiter of the quality or merit of super funds, leaving the interests of members as a “secondary consideration”.

The Australian Insitute of Superannuation Trustees (AIST) echoed the thoughts of Industry Super Australia.

“While the report acknowledges the superior performance of most default not-for-profit funds it then inexplicably recommends dismantling the very system that has delivered these results,” said AIST CEO Eva Scheerlinck.

Ms Scheerlinck said there was “no justification” for creating an entirely new body to select default super funds, instead calling for enhancements to the Fair Work Commission process.

AIST is also concerned by the “untested concept” of a single default fund for life, as the problem of account proliferation was already being address through other measures.

“Job starters are furthest from retirement, and typically have the least interest and knowledge about superannuation or other financial matters relating to retirement,” said Ms Scheerlinck.

“Young people are vulnerable, once recruited into a fund, to be induced to shift from a quality default fund to a sub-optimal Choice fund.”

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