While the evidence-based approach the Productivity Commission took in its analysis of superannuation is laudable, its final recommendations are a mixed bag writes chief executive of the Australian Institute of Superannuation Trustees Eva Scheerlinck.
It’s disappointing that the Productivity Commission’s thinking around the default fund selection process didn’t advance from the interim report it released more than 20 months ago, despite widespread criticism.
AIST was pleased with the report’s forensic analysis of the profit-to-member sector and why it outperforms. Using an additional year of data, the final report concluded that, on average, for the 11 years to 2018, profit-to-member funds outperformed retail funds by about 2 per cent a year.
That’s a significant boost to the retirement outcomes of millions of Australian workers in profit-to-member funds – many of whom are on below-average wages.
Many of the report’s recommendations concerning the regulators are equally sound. Few could disagree with the commission’s assessment that the Australian Prudential Regulation Authority and ASIC need to increase their focus on misconduct and take a more proactive, tougher approach.
Another worthy recommendation is for ASIC to have a greater focus on the appropriateness of products. There is plenty of evidence to show that many super products underperform because they weren’t designed with members’ best interests in mind.
The commission’s recommendation to clarify the meaning of best-interests duty is also sensible. In assessing whether trustees have breached their duty to members, the regulators must consider whether the net returns members receive from a certain product are reasonable and appropriate when compared with what most other members are receiving.
But what is arguably the commission’s central recommendation – limiting the number of default funds to a best-in-show list of 10 – is a blunt mechanism that is fraught with complexity.
Such a mechanism would remove many high-quality funds from the default system, disadvantaging millions of members in these funds. Also, picking 10 winners from a list of high-performing funds that could easily stretch to 50 funds instead is a dangerous path. As has been apparent before, it is possible to go from being the number one fund to number 20 or 30 over time.
In some years, there might be little difference in performance between fund number one and fund number 20. Given these issues, how will the best-in-show selection committee undertake an appropriate assessment of the top 10?
Another issue is that best-in-show focuses on funds for new entrants, stopping short of helping those stuck in poor-performing funds. The vast majority of new members of the workforce, in our award-based default model, are already in a high-performing, industry-appropriate fund.
The commission states that, of the 29 underperforming default funds, about half are industry and almost a third are retail. But because the retail funds tend to be larger, they account for 77 per cent of the member accounts in underperforming funds.
AIST agrees with the commission that there is no place for underperforming funds in the default system, whatever type of fund they are. In a compulsory super system, we must do our utmost to protect consumers and provide a default system that is a genuine safety net.
But picking a very short list of winners is not the answer. Empowering the regulators to act on the underperformers, while at the same time re-starting the existing, yet stalled, Fair Work Commission selection process makes a lot more sense.