Changing the default system to open it up to all eligible MySuper funds may not make life any easier for members in circumstances where it is difficult to make comparisons between funds and not all allocations are true to label. This is part one of a roundtable.
Mike Taylor (MT) – managing editor, Super Review
Alex Hutchison (AH) – CEO, EISS Super
Andrew Proebstl (AP) – CEO LegalSuper
Andrew Boal (AB) – leader, Willis Towers Watson
Russell Mason (RM) – superannuation partner, Deloitte
Helen Davis (HD) – chairperson, Superannuation Complaints Tribunal
Glen McCrea (GM) – policy director, Association of Superannuation Funds of Australia
Wayne Sullivan (WS) – director of marketing, Frontier Investment Consulting
MT: Moving on to domestic matters we’ve got the Productivity Commission at the moment looking at alternative default models and there’s been a range of submissions made and I think one of the most interesting was perhaps that from APRA [Australian Prudential Regulation Authority] which suggested that not all MySuper funds have been created equal and some are performing not very well at all. So I’m just wondering what the panel thinks about alternative default models and the point that perhaps not all MySuper funds are capable of being appropriately selected as a default, which is one of the points that’s been raised by the Financial Services Council. And Glenn, I will throw that curly one to you.
GM: Thanks for the nice start on that one. Look, I think the first observation is looking at MySuper and whether that’s been a success or not. It’s still relatively new but I think given the increased transparency you’ve now got a clear safety net for members and there does seem to be, based on the APRA reporting, a real bunching around about $350 to $600 in terms of fees. So I think there’s a tick there.
Now obviously the Productivity Commission have undertaken a study looking at alternative mechanisms for default. They have taken a quite a theoretical approach and one of their fundamental assumptions is there is no default and that, I think, is one of the challenges with that approach and is one of the weaknesses with the conclusions that they come up with.
Clearly MySuper has proven that not everyone is engaged in super and you need some sort of safety net. In looking at the basically the PC report, we looked at the range of the options, really taking a sort of a cost-benefit analysis and I suppose our overall conclusion is we’re most concerned about the auction model as a solution. The Chilean model, and another way to describe it, in many ways is a race to the bottom.
It’s a race to the bottom in terms of quality. It’s all about price but we know that MySuper is more than just purely price and it’s about that safety net and it is about member benefits, making sure members get what they need. So I suppose my overall conclusion is it’s a long way to play, the PC still need to do their efficiency review and then look at what models. But we really caution looking for a magical cure and particularly that auction model stands out to us as one that could have a huge impact on the industry and ultimately for members.
RM: Yeah, I have a fairly cynical view about MySuper. I saw the industry spend hundreds of millions of dollars effectively converting existing default options to MySuper options, not every fund, at huge cost ultimately borne by members for very little gain. We have funds that are APRA licensed and that covers well beyond the MySuper option, it covers the whole operations of the fund. So I look at the funds represented around this table and think do they really need to have a MySuper option? They have a range of options members can select, they can still have a default option.
Perhaps an unpopular view around this table is that I think it is inevitable that the award protection, modern award protection that many industry funds have will go and I think the smart CEOs and executives of funds will prepare for that because sooner or later I think super will either be taken out of modern awards for employers and they will be given the chance to select any fund that is public offer and has got a MySuper option, if that’s the case.
If APRA are disappointed with the performance of some of those MySuper options, or some of those funds then it’s up to APRA to raise the bar and I think some funds seemed to obtain licences very, very easily. I understand perhaps why APRA did that, but now it’s time, if APRA think funds are underperforming, to set the standards and looking at the funds around this table I’m sure they will quite easily rise to the challenge.
MT: Well, there’s a challenge for you, Andrew, what’s your view on that?
AP: I think I agree. I think the fund, whether it’s retail or industry or otherwise, any organisation, in fact, can only really justify continued existence if it’s delivering results and, you know, competitive results.
So I think [with respect to] the whole MySuper thing, you do have a heavy feeling of “gee, why did we go through all of that and how much of what we now have is actually largely what we already had before with a bit of extra disclosure or new words around it?”
But I think in terms of the comparability of performance of funds, one of the issues that we’ve been turning our mind to is how funds classify between growth and defensive assets and if you drill into the underlying assets of some funds, particularly in terms of alternatives, they’re fairly aggressive with pulling out components of alternatives and categorising them as defensive assets when in reality they’re probably more growth assets.
So there are funds out there that are holding out that they’re a certain mix of growth and defensive when really much of the defensive is actually, or could be, characterised as more growth. So there’s higher risk in that product but the labelling doesn’t disclose that and people are going into those products under, effectively, a misunderstanding, perhaps they’re being misled. So that’s, yes, that’s an interesting one because it’s alive. You only have to look at the PDSs of funds, their annual reports in terms of their holdings, and you can get a good sense pretty easily for what’s going on. So I think regulators should be able to similarly get that sense and do something about it.
AH: I agree with what’s been said and particularly what Andrew said in relation to, you know, the journey we’ve been on. At the end of the day you do have this massive range of fees, you do have this range of services, or investment options and some, you know, are very expensive which is essentially an index option as well. So we all do compete in the same marketplace, that’s the truth. I’m not sure if the case has been made out the default system has failed but, you know, I’m a realist, I agree with Russell, it will go and unless you can compete in a recession you don’t deserve to be in the business. But that issue, Andrew pointed out about investment, about is it really defensive or growth, that can really hit home when people are comparing you because people compare you now online, people may not seek advice directly from you and, you know, that’s where you can really lose out on.
AP: Well, more importantly the member will lose out because they’re getting into something and it generates quite a different result because the underlying assets are quite different. So, yes.
HD: Yes, interesting. So I look at it in a slightly different way. I think one of the challenges is we’ve got it’s a compulsory system, it’s mandated, you have to have it and it’s executed through a predominantly private world. So the mechanisms there to default, I think, are necessary to bridge that gap because the idea that choice or competition fills the void I don’t think works because I don’t think we’re talking classic demand and supply. I don’t think competition works in the way that it might in other markets.
I think at an individual level there is a large portion of the community that navigating, that is not something they’re equipped to do. So it’s a very paternalistic system in that sense. So how in that framing [that] do we put people through? I think to the point there needs to be a mechanism for defaulting.
RM: With it regulated, Helen, do we need the mechanism? I mean we don’t have the same with our banks or our health funds because likewise they’re similarly regulated. So I would say as long as the regulators are doing their job in ensuring the fund trustees meet their requirements, diversity in between funds is great because the last thing we want is 100 odd funds that all look exactly the same. And then employers can pick a default and of course the choice of funds, you’re right, can say not happy with that.
HD: And presumably that’s part of the connection in that having it executed through multiple private providers, if you like, gives diversity.
HD: As opposed to one central arrangement which would be an option.
AH: Going to your point, Russell, sorry, really at the end of the day that’s the point. The case hasn’t been made that defaults have failed. That case has not been made.
RM: No, it hasn’t.
AH: But the volume of push to go to essentially opening it up and abandoning the default system, you know, I’m just cynical in saying that’s what you can see is happening. So you recognise that.
HD: That’s the reality.
AH: At the end of the day that’s the reality of it.
HD: So where are the risks in that?
AH: And, you know, once defaults go, you will not get diversity, that’s what I would argue because you will not necessarily have that ability to for smaller funds to go it’s a different argument, to better serve the occupational group.
HD: I think the other interesting point is the history of super, if you like, that it has that nexus with employment.
AH: That’s exactly right.
AP: But one other wrinkle in the current model is employers have to have a default fund but they don’t have any other obligation other than having a default fund. It doesn’t have to be the right fund or the better fund for their members, it just has to be a fund that they’ve picked. So there’s no, in that layer of the determination of default fund, there’s no responsibility to go any deeper or better into preferred option or whatever it be. So it’s not really adding much, I guess, that particular requirement.
But as well, you’ve got the other problem that regrettably some employers take commercial considerations into the decision of who their default fund is and that has another dynamic that’s really pretty unhelpful from the perspective members because personally I don’t think any member’s superannuation and where it ends up should be influenced in any way by the commercial considerations of a business.
It should be the interests of the member that determines where the default fund is. To any extent that the commercial considerations come into play, that’s a bad effect. But that effect is live and we all know there are examples and instances where we come across and it’s hard to pin and identify and measure but it’s a fact, it’s there.
WS: That’s a really interesting and important point, I think, and if we feel as though members are disengaged with super, well employers are even more disengaged with super relative to the outcomes for those members, they will be looking at other variables which we have no connection to what we would be looking for from the member’s perspective so I think that’s quite dangerous, that area.
AB: I think the vast majority of employers do try to look after the best interests of their employees and in fact there is an employer/employee relationship that is intended and the courts have done this from time to time, that you have a higher obligation to your employees. You’re there to look after their best interests. Not the same way as a fiduciary does but there is a relationship there.
HD: It’s interesting, one of the things we get calls about, or complaints about, that’s outside our jurisdiction is my employer’s not paying my SG [superannuation guarantee].
WS: I was going to say, do you think that level of interest employers have in benefits of their staff, this is a genuine question, not a statement, do you think that slides down as you come down the scale of the size of the employer?
AB: Absolutely. So there’s certainly the larger employers that I’ve dealt with over my career [who] are very interested in looking after their and many of them still have their own funds and so that definitely exists. A significant part of the Australian working population work for very small employers and talking with some of those, many of them actually don’t have a default.
So when somebody joins their employment they say to them “You choose a fund” and it’s actually compulsory choice for most small employers. So in a lot of ways the default fund really is for medium to large employers anyway and most of those are engaged and get advice or try to do the right thing.