It appears inevitable that we are on a path toward further consolidation in the superannuation system. This is being driven by several factors, including the expectation of substantial cost savings to the system (conservatively estimated to be $1.8 billion per year by the Productivity Commission should the most expensive 50 APRA regulated funds be absorbed by the 10 least expensive funds).
Frontier Advisors took a deeper look at this, concluding that while it was likely that more consolidation would occur and that chronic underperforming funds should go, in general there was not a strong correlation between fees and returns. Equally, while there are undoubtedly benefits of scale, many smaller funds have and continue to perform well.
As a result, while APRA and the Productivity Commission’s focus is/has been on fees and scale, these were not necessarily good reasons for either voluntary or involuntary consolidation. Rather a more robust approach focussed on quality and good value for members is needed.
As I look back at the awful evidence exposed during our banking royal commission, it appears to me that we are at risk of making some of the same mistakes in superannuation that we have made over the last 25 years in banking and the regulation of banking. Yet again, we are at risk of undervaluing the importance of promoting strong competition along with driving the stability of a system, in order to deliver the best outcomes for members and customers over the long term.
If there is anything for superannuation to learn from the regulators, management and boards of the major banks it is that in an environment where businesses are underwritten by policy, hubris is difficult to overcome over time. It is also clear that the regulator is not going to overcome hubris in advance.
More generally, we are living in the most interesting of times, with significant pressure on liberal democracies and a lack of faith in capitalism’s ability to deliver better outcomes than other systems. Sadly, many of the past and present distortions that are most damaging these pillars of western civilisation can be linked back to a lack of regulatory determination to maximise competition and to regulate anti-competitive models and behaviours out of existence. Bigger is not necessarily better, particularly over time.
We’re all familiar with the enormous challenges created by inappropriate deregulation and then the behaviour of large banks and others that led to the global financial crisis. We all seem to have been fooled that too-big-to fail is okay. It is not. Similarly, it is instructive to follow the drama unfolding as Boeing and the FAA try and deal with their issues with a widely used aeroplane.
This is magnified by the fact that the industry they operate in and regulated now suffers from a chronic lack of competition in terms of large passenger jets. Indeed, we are also beginning to see regulators all over the world finally take action to understand and attempt to restrict the anti-competitive activities at the gigantic technology companies that are dominating and distorting all types of markets today.
As we march forward toward a more progressive and developed superannuation industry, we must ensure that while we will undoubtedly have more consolidation, it is essential to vigorously promote competition for the benefit of members over the long term. An overly zealous focus on scale and fees will lead us down a path that is ultimately likely to result in poorer outcomes and the types of systemic failures that occur when competition is disregarded by regulators and market participants.
Andrew Polson is the chief executive of Frontier Advisors