Employers should be provided with guidance on which funds are appropriate as default funds with the list being produced by the Government or an independent source, according to the Financial Planning Association (FPA).
The FPA has used is submission to the Productivity Commission (PC) inquiry into the Competitiveness and Efficiency of the Superannuation industry to point to the difficulties confronting employers in choosing a default fund.
“In selecting default products on behalf of their employees, employers face administrative costs. Employers may also face the cost of professional advice,” the submission said.
“Existing arrangements could be improved by providing employers with guidance on which funds are appropriate as default funds. The list could be produced by government or an independent commercial provider that is subject to regulatory oversight,” it said.
“The list of funds should be compiled based on relevant performance indicators, such as long-term net returns. There is an argument that a tender process could be used to select funds for the list. We are generally against the notion of excluding consideration of any member benefit outright. This is largely because default members may become engaged in relation to their superannuation.”
The FPA submission said a better approach would be for a low weight to be assigned to some features (such as the ability to invest in direct assets), which current default members might reasonably be expected to rarely (if ever) value.
“If the weight reasonably assigned to a feature were extremely low, we’d be open to excluding consideration of the feature. By contrast, the degree of choice as to how benefits may be accessed (e.g. as a lump sum or selection from a wide variety of types of income stream) from a fund should be given a high weight as default members are likely to become engaged when they can access their superannuation,” it said.
The FPA submission said it might be reasonable to assume that, at retirement, members who had been default members would value having access to a flexible retirement solution (e.g. access to flexible combinations of longevity products and account-based income streams, and a broad range of investment options) more than a narrow range of options to access their benefits.
“While members can generally always move to another fund, there are transaction costs and potentially tax implications. Further, the system may need to be more liquid than it would otherwise need to be. Therefore, we regard an assessment that reduces the need for moving to another fund down the track as preferable.”
