The Association of Superannuation Funds of Australia (ASFA) says a Chilean-style tender process for selecting default superannuation funds is a solution looking for a problem.
ASFA has released a research paper on the Chilean tender process for pension funds, at a time when the Productivity Commission is considering such a model as one of the alternatives for allocating members to default super funds.
ASFA says the research “shows the adoption of a Chilean-style tender process for default super in Australia would be a solution looking for a problem that doesn’t exist and have adverse effects on member outcomes”.
The ASFA research indicates that the Chilean system is not delivering on its main objectives – it is not increasing competition and successive tender rounds have reduced administration fees, but not resulted in a broader reduction in fees.
“The tender process is based on fees, so AFPs [Administradoras de Fondos de Pensiones – Chilean pension fund administrators] that win the tender have an incentive to reduce the resources they devote to internal investment management, reduce the quality of their administrative functions, and reduce the quality and range of member services,” says the report.
ASFA CEO Dr Fahy said adopting a Chilean-style tender process in Australia would “inevitably” lead to products with lower fees, at the expense of long-term returns and services. He also said that Chile adopted the tender process to fix a particular set of problems that aren’t relevant to Australia.
“In Chile, there were a very small number of pension fund providers in the market and individuals did not have access to low-cost fund options,” he said.
“The Australian superannuation industry is a much more competitive market. There are low levels of market concentration at the fund level and initiatives such as choice of fund and member investment choice have enhanced competition. The Chilean model, with only one recent round applicant, has failed to bolster competition.”
“The Australian system already has low-cost product options. MySuper products are designed for default members who do not make an active decision and a large number of superannuation funds offer a MySuper product. Fees for Australian MySuper products compare favourably with fees in the Chilean system.”
The Productivity Commission report on alternative default models is due to be released in March, with the final report due in August 2017.