REST Industry Super chief executive Damian Hill has backed a Productivity Commission plan expected to lead to the hundreds of thousands of new workers each year staying in their first default super fund for life.
The controversial plan would be a boon for super funds that cater to industries that create typical first jobs. Hill was supportive of the move, arguing it would benefit members by reducing account duplication.
“If people have only one account, they will see the account balance grow more quickly because they’re paying only one set of fees and I think that will help members engage with their super earlier,” Hill said.
Under the current default super rules, low-income workers are typically signed up to a new default super fund every time they change employers. This has created excess accounts, meaning many vulnerable people lose track of their super and are paying more in fees and insurance across multiple accounts.
In a draft report released for consultation on Wednesday, March 20, 2017, the Productivity Commission recommended that workers automatically stay in their existing default super account whenever they change jobs, unless they make an active choice to pick a new fund.
It is one of many proposals to radically overhaul the almost $500 billion a year default super sector contained in the paper, titled Superannuation: Alternative Default Models Draft Report.
Roughly 400,000 first-time members a year
To overcome the system’s “propensity to create multiple accounts” members who do not exercise choice should be allocated to a default product only once, the Productivity Commission argued.
“This approach would result in a smaller pool of employees being defaulted each year, but it should be sufficient to generate competitive dynamics,” the report stated.
As two-thirds of members do not exercise choice, the first super fund they are allocated would probably keep them for life and receive all of the coveted inflows from the 9.5 per cent of wages deferred under the Superannuation Guarantee throughout their working life.
According to actuarial consulting firm Rice Warner, about 400,000 new members – mostly young workers and recent migrants – are signed up to their first default super fund each year.
The lion’s share of new members are funnelled into funds that cater specifically to the types of occupations that are common first jobs, such as hospitality and retail.
REST Industry Super, a $39 billion industry fund for workers in the retail sector that has default arrangements with employers such as Woolworths, Coles and McDonald’s, is one of the biggest beneficiaries of first-time member inflows. REST is neck-and-neck with $109 billion AustralianSuper for the title of largest super fund in the country by membership, with more than 2 million accounts.
Another major super fund that claims a hefty proportion of new workforce participants as members is hospitality sector-focused industry fund Hostplus, which has roughly $20 billion under management on behalf of about 1 million members.
Four options for a new default model
Meanwhile, super funds aligned to sectors that people typically enter later in their working life could have their inflows plummet under the Productivity Commission’s plan. And under other changes the commission has proposed, more people would probably be signed up to a bank-owned default fund by their first employer.
The Productivity Commission has set out four potential options to shake up the rules by which employers can choose a default fund for their workers. In summary, the four options are: assisted employee choice, assisted employer choice, a multi-criteria tender process, and a fee-based auction process.
The Australian Institute of Superannuation Trustees has criticised the proposed default changes and has accused the Productivity Commission of failing to show evidence that they would benefit members.
“The proposal for a radical shake-up on default fund selection without even bothering to review the existing system is not only ludicrous but also inefficient,” AIST chief executive Eva Scheerlinck said.
Industry Super Australia was also damning in its assessment of the Productivity Commission’s plan. Industry Super Australia chief executive David Whiteley said the proposal would allow banks the opportunity to cross-sell to young people, potentially placing them in “underperforming and costly retail and bank-owned funds”.
“The commission is to be commended for highlighting the need to address the cost of multiple superannuation accounts; however, this can be effectively addressed regardless of default design,” Whiteley said.
Financial Services Council chief executive Sally Loane, who advocates for the retail super fund sector, did not comment on the new recommendation to leave members in their first default fund, but generally backed the push for a more competitive default superannuation market.
“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,” Loane said. “The PC has also resoundingly rejected the current industrial system that directs consumers towards union-dominated default funds. The PC concluded that this 25-year-old industrial model has caused the proliferation of excess accounts and sub-scale industry funds that are draining consumers’ retirement savings.”