Karen Chester, deputy chair of the Productivity Commission
Karen Chester, deputy chair of the Productivity Commission has raised concerns about CIPRs

Rice Warner has slammed the Productivity Commission’s latest report, calling it “aggressive” and containing “many unsubstantiated claims”.

In a client note, the actuarial firm charged the commission with squandering a real opportunity to advance the superannuation agenda with a cohesive, evidence-based package of recommendations.

In a newsletter that vehemently argued against offering the Future Fund as a superannuation option – on the basis that it would be “detrimental” – the actuary also hit out at the PC’s comment that Australia’s savings system is broken, given that analysis of global pension schemes puts the nation’s system in fourth place.

Far from broken

“This remarkable statement is contrary to much of the evidence available, including analysis by the commission,” the note’s authors wrote. “Further, Australia already has one of the world’s best systems, and it is far from broken.”

Rice Warner stated that what was most disappointing was that the link between the PC’s recommendations and its earlier analysis had become increasingly tenuous as the inquiry progressed.

The note’s authors acknowledged that the PC’s earlier research had identified areas of the Australian savings scheme that should be improved, including problems caused by multiple accounts, unnecessary life insurance for young people, underperforming funds and excessive fees. The big problem, Rice Warner argued, was that the final report focused on replacing, rather than improving, a system that is already world-leading.

“The commission has incorrectly assumed that the current structure is broken and could not be remedied with targeted improvements,” the note’s authors wrote. “This is a fundamental flaw, as it has ended up recommending a system worse than the current one.

“Sadly, the growing disconnect between the PC’s analysis and its recommendations [has resulted in this opportunity to set the agenda being] lost.”

The actuarial firm also stated that the commission ignored many valid concerns about its initial proposals and adopted an “aggressive tone in the final report, with many unsubstantiated assertions”.

In particular, Rice Warner criticised the commission’s call for a list of the nation’s 10 best super funds as default options.

“If 10 funds were picked, there would be severe dislocation, as they would then promote themselves over all other funds,” the note read, arguing selected funds would “seek mergers to get bigger and the list would shrink”.

Rice Warner went on to say the best-in-show structure for new default members would lead to an oligopoly in time, reducing competition and increasing systemic risk.

The note also attacked the commission’s call for a full inquiry into national savings and retirement before boosting the superannuation guarantee to 12 per cent.

“The PC’s three years of work provide no insight into the reasoning for this recommendation, the authors wrote. Rice Warner labelled the recommendation as strange and added that it wandered well outside the commission’s brief.

“Further, it is a random comment made without any relevance to it in all the PC’s reports for this inquiry, and there is no evidence of the PC having considered the impact on retirement outcomes and capital formation if this recommendation were to be accepted.

Not up to scratch

Rice Warner reckons the underlying modelling used for the commission’s benchmarking and analysis was not up to scratch. Neither did the actuary like the conclusion that fees should not exceed cost-recovery levels.

Here, the actuary acknowledged the intent was to address conflicts within retail funds where trustees were charged with generating decent shareholder returns while looking after members’ best interests.

“This is not an easy problem to solve but the proposed solution would ensure that we end up with a system bigger than the banking system yet absent of any capital.”

In the note, Rice Warner also warned that one consequence would be that the retail sector, including those with good products, would stop providing super.

“All profits would be driven through service suppliers, which would provide the capital for the system (and would expect long-term contracts in return),” Rice Warner stated. “Funds would not be able to build reserves on a cost-recovery basis, and it is not clear how reserves could be funded under this proposal.”

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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