The Financial Services Council (FSC) has recommended removing the “default” superannuation option to give employees greater scope to choose their own default funds.
In a joint report with Deloitte Access Economics titled ‘Choice and competition in the Australian default superannuation system’, the FSC has proposed that when employees start in a workplace, they could be required to provide details of a super fund, not dissimilar to how they provide their bank account details.
“When employees start a new job, they are not provided with a default bank account for their salary to be deposited into. They must provide their own bank account details,” the report said.
“Similarly, when employees start in a workplace, they could be required to provide details of a superannuation fund. This removes trading restrictions, allowing employees to choose their fund, removes principal-agent complications and increases competitive rivalry among superannuation funds, allowing a larger number of firms to compete.”
The report concluded the current default super regime for award employees did not sufficiently promote competition at a level that met with community expectations.
It said for employees employed under modern awards, the available default super products were limited to those selected by the Fair Work Commission, and in 13 per cent of such awards the employer had no choice of the default fund it could offer their employees.
FSC chief executive, Sally Loane said: “The evidence is clear. If competition reforms are introduced to allow all funds to compete in an open and transparent market, fees in superannuation will fall dramatically”.
“While we always acknowledge the criticality of value and returns from super funds, fee reductions will greatly improve the ability of Australians to save more for their retirement and consequently improve their standard of living in retirement.”
The report also recommended the current default system should be assessed against an analytical baseline of a “no default” system. Furthermore, if policy makers were to introduce a national auction mechanism, it should adhere to two competition principles outlined in the report.
One principle was that any benefits from the auction such as lower fees through increased scale should offset any costs, such as a limiting of choice, risk of gaming, risk of increase in market competition, and unfavourable outcomes through design of selection criteria.
