The Grattan Institute report, Super sting: how to stop Australians paying too much for superannuation, has caused much consternation in superannuation. Some have looked briefly at it and hoped it would go away, but many of its findings have been taken up by the Financial System Inquiry.

Now, Jim Minifie, productivity growth director of the institute and the author of the report published in April, is developing one of its proposals – a Chilean style model of 4-5 low-fee default funds, to better inform government on the possibilities of further reform for superannuation.   

The following points, taken from an interview with Minifie last week, show how the institute has arrived at its conclusions and reveal its new proposals.

1 The same unsentimental view of superannuation aired by David Murray is shared by the Grattan Institute

The Super Sting report is a major influence on the Financial System Inquiry. “We are glad [the report] is getting the attention in the Financial System Inquiry,” says Minifie.

Murray’s thoughts about competition between funds that does not benefit members in terms of cost are also echoed. “Funds are trapped in a form of very costly non-price competition and we did not see the current reforms shifting it that much,” says Jim Minifie. “In the current system many who do not exercise choice end up in funds that do not perform well.”

He “agrees” there are some good superannuation funds, but this is not a whole hearted endorsement.

“A few funds that have performed consistently over the years make you believe that they have talent,” says Minifie. “But what is the right role for policy makers when not much of the funds under management is in those products?”

2 The Grattan Institute believes MySuper has not, and will not, work fast enough to reduce fees

Minifie says he does not expect MySuper to achieve significant fee reductions for decades, not least because there is no fee hurdle in getting a licence. He describes MySuper as working best for sophisticated investors, but sees the public and employers as reacting too slowly or not at all to a greater comparability of funds.

“While the current set of reforms have some positive attributes, we do not have a lot of confidence that competition in the industry has sufficiently shifted to result in a market acceleration of price decline,” says Minifie.

3 The Grattan Institute is exploring how the Chilean model will work in Australia

The Super Sting report points towards three retirement system default models that could be cheaper alternatives to the current system. These are as follows

a) A government run fund such as NEST in the UK

b) Several large not for profit funds

c) A government run tender for a small group (4-5) of default funds charging low fees – a system used in Chile.

Minifie says the first two models are less relevant for Australia’s choice based system which does not generally differentiate between profit for shareholders and profit for member funds. He sees a Chilean style system as allowing existing superannuation funds to bid to become one of a group of select low cost default funds. Each of these default funds would have to provide a mix of asset classes. Minifie proposes the funds would have 70 per cent of assets passively managed in listed assets classes and 30 per cent in actively managed unlisted assets.

4 The Grattan Institute proposes promoting these new Chilean style defaults on tax returns

The default funds would become the new options for employers and as such all new employees in the workforce would enter one of these funds. The funds would be marketed to existing account holders through their tax returns. Minifie’s proposal is that individuals will be given information of the fees and the returns of the new style default funds on their tax returns, so they can see if their existing funds are providing value or not. They would also be given the option to switch.

There would be limits imposed on how quick these switches were made to preserve the liquidity of existing funds. There would also be no form of compulsion for existing account holders to switch. Minifie says it is important choice is still available in the system.

5 The Grattan Institute is carrying out more research on how a Chilean style model could be adopted locally

Research is being carried out on how low cost funds could be efficiently marketed and how this would put price pressure on existing funds. This acknowledges the relatively low level of switching in Chile from legacy accounts to the new default funds.

“We are doing some additional work that will make the link a little clearer between the fee pressures that could be productively put on the sector and the rest of the reform package that is required to get out of the way of fund consolidation and account duplication reduction,” says Minifie.

Aside from the Chilean proposal, Minifie has sought to clear up some of the misconceptions provoked by the Super Sting report. He is sorry that the industry has taken it as a personal attack. His focus, he stresses, is on criticising government policy.

Minifie also concedes that some of the international comparisons made in the report included systems that are not easily comparable to Australia’s.

However, he believes this does not detract from his arguments.

“Even if you put that aside we are still a long way on the fee basis from those systems which do have the fee characteristics that we talk about in the report.”

Jim Minifie will discuss his proposals for superannuation at the AIST ASI conference in Alice Springs on September 12.