Three of the four options the Productivity Commission put forward to improve the quality of the default super selection process have been criticised for increasing the risk of political interference.
In response to the Productivity Commissions’ March 2017 draft report on how best to allocate default members – a market worth $474 billion – to super products, the Association of Superannuation Funds of Australia (ASFA) undertook an assessment of the four alternative models put forward for consultation.
Each of the four models are touted as introducing competitive processes to improve the quality and comparability of information, and to simplify the system by reducing the number of products.
The proposed alternatives are: a fee-based auction model, an assisted employee choice model, an assisted employer choice model, and a multi-criteria tender model.
ASFA stated that each model has risks attached that could easily lead to poor outcomes for fund members. However, three of the models – assisted employee choice, assisted employer choice, and multi-criteria tender – all present risks that stem from the requirement for a government‐appointed body that would oversee the selection of ‘default’ funds, the peak body argued.
“It may prove difficult to find individuals who have the required depth of skill and are free from conflicts of interest,” ASFA’s submission read. “There is also the risk of political influence – in particular, that the membership of the body would be reviewed and altered upon a change of government.”
Other organisations that have voiced similar criticisms include the Australian Council of Trade Unions, Industry Super Australia and AustralianSuper.
The fee-based auction model introduces risks as well, the ASFA stated. The model would pose a threat to members’ long-term outcomes and to the stability of the broader system, ASFA chief executive Dr Martin Fahy said.
“A similar model operates in Chile’s pension system, yet it has failed to bolster competition and instead resulted in only one fund tendering in the most recent round,” Fahy argued. “Over the long term, this type of model risks a ‘race to the bottom’ among funds, where funds focus on lower fees at the expense of long-term returns and member services.
“ASFA’s analysis of the Chilean model found it ‘less than hot’. It’s a solution looking for a problem that doesn’t exist in Australia, and the model [is] failing to deliver the desired results in Chile.”
Submissions in response to the draft report were due on April 28, 2017. The Productivity Commission is now considering the responses. The finalised report is expected to be handed to the Australian Government by August 17, 2017.