The Productivity Commission must look at the reality of defaults

After half a dozen reviews into the superannuation industry in as many years, you could be forgiven for thinking policy makers are suffering from a case of collective amnesia. 

The latest, the Productivity Commission (PC) review into the competitiveness of the superannuation system, follows assessments of the superannuation industry by the Cooper Review, the Financial System Inquiry and even the PC itself. 

The PC has generated a great deal of discussion around a convoluted Chilean tender model first proposed by the Grattan Institute, but in comparison to past reviews, the proposed process is relatively narrow. 

The PC will establish criteria for assessing the competitiveness of the system and, if so directed by the Government, undertake a comprehensive assessment of the performance of the superannuation sector by 2020. 

In the meantime the PC will develop alternate models for allocating default members to superannuation funds. In the event the superannuation industry fails its ‘health check’ in 2020, the Government has the option of overhauling the default market in a manner consistent with the PC’s recommendations. 

While the Financial Services Council (FSC) supports the PC review, we do not need another review to tell us what is self-evident; that the default superannuation market is not competitive and has kept inefficient and subscale funds on life support. 

The Financial System Inquiry correctly argued, however, that the MySuper regime remains untested and unmeasured. It is reasonable for the public to expect the industry to be held to performance benchmarks over the medium-term to ensure MySuper is delivering for consumers. 

Public commentary on the default market has unfortunately focused on a proposal of the Grattan Institute for a competitive tender model – one that is deeply flawed and based on poor evidence. 

Chant West demonstrated in 2014 that Grattan’s assessment of potential cost savings from Chile’s competitive auction model was wrong. It compared Chile’s administration fees only with the sum of Australia’s administration and investment fees for MySuper Products. Grattan has never admitted its mistake, and has continued to advocate for the flawed tender model. 

The FSC agrees that competition reform, along with a periodic health check of our compulsory superannuation system, is appropriate. We support the PC review and welcome the suggestion of a “no default” baseline for discussion purposes. 

The review, however, should not delay necessary reforms to enhance consumer protections and promote competition in the superannuation sector. 

Reforms introduced to parliament prior to the 2016 election lapsed when parliament was prorogued, including a requirement for trustees to appoint independent directors and measures to extend the right to choose a superannuation fund to all consumers. 

The Minister for Financial Services, in her first post-election speech at the FSC Leaders’ Summit in July, indicated the reform process in superannuation has not paused as a result of the PC review. 

The Hon Kelly O’Dwyer MP has flagged her commitment to “strengthening the governance, transparency, competition, and efficiency of the superannuation system”, in addition to recently announcing the Government would proceed with critical reforms to regulate commissions in retail life insurance sector. 

The collective impact of these reforms will be to significantly improve outcomes for consumers across the financial services industry, and should be welcomed by all industry participants.

It is appropriate and advantageous to consumers for the Government to action these reforms whilst the PC review is underway. After all, a 2020 “health check” would only be meaningful in an environment where new consumer protections are in place and all Australian Prudential Regulation Authority (APRA) approved MySuper products have been allowed to compete on a level playing field. 

There is also overwhelming evidence to show that the current, Fair Work Commission (FWC) administered default market is broken and should be replaced urgently:

  • There is a four per cent gap in annual performance between the highest and lowest performing super funds in Modern Awards; 
  • Award listing reflects the industrial coverage of the sponsoring unions, rather than the performance of the funds in question; and 
  • Subscale super funds continue to rely on the guaranteed flow of contributions they receive through their default status, stifling industry consolidation. 

Tellingly, of the three “expert panel” members on the FWC, the FWC President stood down two as a result of potential conflicts of interest. 

The Full Federal Court was scathing in its assessment of the current default allocation model. Justice Perram observed that “the qualification provisions are likely to generate problems of the very kind which have arisen. Most of the people who are qualified will also be disqualified.” 

The Court went so far as to observe that “it’s obvious that this legislation has not been thought through in its practical operation. I’m just not sure that it’s the role of this court to try and bend it back into the shape of something which works.” 

The FSC could not agree more; the status quo is simply unworkable.

The FSC envisages a genuinely competitive market where efficient and high performing industry, retail and corporate funds battle for consumers based on their net returns, fees and innovative product design. A new chapter for the superannuation industry, based on the sound principles of informed consumers and competitive markets, underpinned by the safety net of APRA-approved MySuper products, is overdue. 

Opponents of reform continue to argue that competition has no place in the superannuation industry. The Trades Hall model of a superannuation market basically says that consumers can have little say over their own financial affairs. 

Scepticism of the benefits of competition can be defeated with solid evidence. This is why the measures of efficiency and competitiveness being developed by the PC are critical; they will keep the debate honest and provide an evidentiary basis upon which to measure competition reforms. 

An open and competitive default market that is assessed in 2020 will ensure the best outcomes for consumers. Should the market not deliver that result, the Government will have a strong basis to impose one of the alternate default allocation models on the sector. 

 

Blake Briggs is senior policy manager at the Financial Services Council. 


 




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