Karen Chester, deputy chair of the Productivity Commission
The superannuation industry has roundly slammed the Productivity Commission for standing by its proposal that fund members should be able to choose from a simple list of 10 ‘best in show’ products.
The final report into the efficiency and competitiveness of the superannuation system was three years in the making and was officially released by the federal government on Thursday morning. It revealed the Productivity Commission was sticking to the plan previously unveiled in the landmark draft report from 2018.
“A best in show process would simplify choice for members, stimulate healthier competition (including by presenting role models for other funds), accelerate industry consolidation and provide a discernible point of reference for members, financial advisers and regulators,” the report stated.
Shadow Treasurer Chris Bowen said he had “concerns” about the model at a press conference in Canberra on Thursday.
In December he told Investment Magazine that he was “not a fan of the best in show” plans, adding that he thought the deputy chair of the Productivity Commission might in fact back away from the plan.
“I think it has… perhaps unintended consequences. I don’t think it’s great for competition to have 10 funds and only 10 funds; I think that’s potentially anti-competitive,” Bowen said at the time.
But the PC said the regime’s benefits would be “immediate for all members” and that those not selecting a fund within 60 days would be defaulted into one of the products on the shortlist.
“There should only be one shortlist across the entire workforce – not a separate list of default funds for each industry, as under the current modern award structure,” the report stated.
Industry Super Australia lambasted the PC for not building on this industrial default model, which it said had “produced Australia’s best-performing funds”. ISA added that the PC regime’s consumer safeguards would be inadequate.
“In essence, the Productivity Commission is abandoning the proven, low-cost industrial default system in favour of a choice-first architecture that has been ground zero for consumer harm,” ISA chief executive Bernie Dean said. “A workplace default framework is a necessary counterweight to finance sector sales tactics.”
The Financial Services Council (FSC), on the other hand, welcomed the move to overhaul the current default system, particularly the recommendation of a once-only default. However, chief executive Sally Loane said the body was still worried about the ‘best in show’ plans.
“Taking default superannuation out of the industrial relations system and putting choice into the hands of consumers should be the cornerstone of a modern superannuation system,” she said. “The FSC is very concerned about the potential unintended consequences for the economy of a ‘10 best in show’ model because it could create a monolithic concentration of funds, stifle competition and create huge barriers for innovative new products.
Westpac’s BT was an outlier maintaining its supportive stance toward the “best in show” proposal.
Retail funds underperform
The PC’s draft report had found that, between 2015 and 2016, profit-to-member funds returned 6.8 per cent to their members, where retail funds returned only 4.9 per cent. The final report revealed 77 per cent of 5 million underperforming super accounts were in retail funds.
Worryingly for the sector, a Credit Suisse report this week revealed the major banks and AMP suffered $3.3 billion in net outflows in the September 2018 quarter, due in part to consumers switching to industry funds after retail’s dismal outings at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
While the report the PC officially tabled to the federal government on Thursday acknowledged there are positive aspects to the current system, it also identified many problems that, ultimately, were preventing what could be better long-term outcomes for members.
The final report states that structural flaws, including unintended multiple accounts and entrenched underperformers, are harming millions of Australians. Modelling revealed that super savers could be $3.8 million better off each year, with a new worker having $533,000 more when they retire in 2064.
One sticking point for the super sector was how the best-in-show list would be chosen. In the final report, the PC stated that funds would need to “vigorously compete” for the default market by applying to a government-accountable independent panel.
Association of Superannuation Funds of Australia chief executive Martin Fahy said the approach risked creating an oligopoly in default superannuation and reducing long-term competition.
The PC’s report details the selection criteria for funds hoping to make it into the top 10, stating that those on the panel should be guided by three legislated principles: the likelihood of providing the best outcomes for accumulation members, suitability for all members and those who had defaulted; and ensuring a “competitive dynamic” existed between funds.
High quality funds removed
Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck said the process would deny default status to 90 per cent of funds.
“It will remove many high-quality funds from the default system, which may also disadvantage members in these fund,” Scheerlinck said in a statement.
Scheerlinck said the Fair Work Commission was the most appropriate, independent body to filter out underperforming default funds and that it should be allowed to get on with the job.
“In a compulsory super system, consumers must be confident and be able to trust that there is a robust default fund selection system in place,” Scheerlinck said. “AIST supports an industry-based selection process that recognises the link between superannuation and wages and is appropriately independent.”
Also of concern to industry participants is how the panel would be chosen.
“Whilst the PC has recommended that the Reserve Bank of Australia or potentially another non-government body select the panel in an aim to keep it independent,” KPMG superannuation advisory partner Adam Gee said, “it is not so much the constitution of the panel that concerns us, it is more so the ability of the panel to undertake an appropriate assessment of the best-in-show list, as well as the criteria that will be used to select these funds. I haven’t seen anything that details this process nor the key criteria to be used as yet.”
Under the PC’s recommendation, the federal government would establish the “independent expert panel”, which would be appointed through a “robust and independent selection process”.
The panel would be reconstituted every four years and no individual member would remain on the panel for more than two terms.
There are 198 Australian Prudential Regulation Authority-regulated funds, a number the corporate regulator has made no secret of wanting to see reduced. In August last year, it wrote to the boards of the worst performers, saying they should make changes or they risked being shut down.
“I’m particularly pleased to see the Productivity Commission back our call for Parliament to pass legislation that would give APRA greater powers, including to direct superannuation licensees to take specific actions, such as merging or winding up, should that be in the best interests of members,” APRA deputy chair Helen Rowell said in a statement.