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Risk in fewer, larger funds
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The Cooper Review into superannuation has been warned against pushing too strongly towards an Australian superannuation industry made up of fewer but larger funds, with PriceWaterhouseCoopers (PWC) arguing it could amount to the aggregation of risk, the cost of which would have to be born by Government.
In its latest submission to the review panel, the accounting firm claimed diversity and competition were more important than size.
“We believe that market forces should determine the appropriate number of funds operating in the industry, and we expect that funds of different sizes will flourish,” the PWC submission said. “We believe that market forces will drive appropriate levels of aggregation in innovative ways, and we see this in practice. For example, the Federal Government plans to have all the main Commonwealth Superannuation Schemes, civilian and military, run jointly by a new body of trustees.”
The submission said the Commonwealth funds were not merging but, rather, efficiency was being gained via alignment of the trustees.
“It is our view that the size of a superannuation fund is not an important consideration in assessing the viability of a fund, with many smaller funds able to operate efficiently and effectively to meet the needs of their members (eg, achieving similar member expense ratios),” it said.
The submission claimed that smaller funds had the capacity to outsource functions where a larger operator could provide a service more efficiently via scale.
The PWC submission then dealt with the question of aggregation risk and said that while there had not historically been many instances of fund failure, the company was concerned that if the number of funds in the market were reduced significantly, the impact of a fund failure would potentially increase significantly because far more members would be impacted.
“Each fund will be too big to fail,” it said. “This aggregation of risk will ultimately be borne by the Government as there will be larger numbers of people with insufficient retirement funds available.”
AUTHOR
Mike Taylor
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