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Jan 7, 2009

Industry super funds in AIRC bonanza

Buried amid the Industrial Relations Commission's awards modernisation program was a curious ruling on superannuation, writes Stephen Bartholomeusz.

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Just before Christmas the full bench of the Australian Industrial Relations Commission handed down its first decision under the federal government’s radical “awards modernisation” program. Lost in the discussion of the new “simpler awards” was the potentially dramatic, and dramatically retrograde, impact the decision could have on the superannuation system.

The AIRC created 17 new awards for so-called “priority” industries and occupations with the decisions it announced on December 19. In 14 of them, it made decisions affecting the default arrangements for employers’ compulsory superannuation contributions.

Remarkably, the commission itself has nominated the specific funds that will become the default funds for workers covered by the awards. After being inundated with submissions in response to an exposure draft of the decision, the AIRC decided it would also allow as a default fund any fund to which an employer had been making contributions for the benefit of employees on September 12 last year.

So, from January 2010, when the awards come into effect, there will be an AIRC-nominated default fund or funds and some grandfathered funds providing superannuation services to those industries.

The winners are the industry funds, particularly Australian Super and the Retail Employees Superannuation Trust (REST).

Australian Super is the sole nominated default fund under the textile, clothing, footwear and associated industries award although it shares with Sunsuper coverage of the security services industry and is one of the several default funds for the manufacturing, clerks (private sector) and various racing industry awards.

REST gets the fast food industry, the general retail industry, hair and beauty and the pharmacy industry to itself.

Unisuper has sole coverage for the academic and general staff in higher education and a range of other industry funds have shared roles in other default options.

AMP is the token for-profit provider. It gets a shared slice of the racing industry coverage. Including the dogs, which may or may not be an appropriate little piece of symbolism.

It isn’t clear how the AIRC chose its default funds.

It said last year that it didn’t think it was appropriate that it conduct an independent appraisal of the investment performance of particular funds, that performance varied from time to time and that even long-term historical averages might not be a reliable indicator of future performance. It would be completely inappropriate and beyond its expertise for an industrial tribunal to try and assess the competing merits of individual superannuation funds.

So how can it nominate the default funds without someone with real expertise – or the market – making those assessments?

What is clear is that the commission has favoured a few big industry funds over the rest of the superannuation system, including the big corporate or wholesale master trusts that have been offering lower-cost and more sophisticated platforms than most of the industry funds and have been the option of choice for the larger out-sourcings of corporate-sponsored funds.

While employees on awards represent only about 20 per cent of the workforce, there is little doubt that the default arrangements will flow through to non-award employees as employers seek administrative simplicity and efficiency.

Over time a large proportion of the near-$50 billion a year that flows through the compulsory superannuation system is, with only 10 to 15 per cent of employees exercising their own choice of fund, likely to flow through to the default options and, over time, to the nominated funds. The grandfathered funds will simply represent extra complexity and cost for employers.

In effect, therefore, the AIRC is granting a handful of almost exclusively industry funds either quasi monopolies or a share of an oligopoly – while denying the rest of the sector the ability to compete for that privileged and potentially lucrative position. For some funds, the prospective loss of funds under management and scale could threaten their viability.

The lack of a competitive process means no competitive tension – which could mean higher costs and lesser services than would be available if funds were competing to be nominated by employers and/or employees.

The absence of any obvious screening by the AIRC presumably also means there has been no risk assessments made of the funds or their investment strategies and no benchmarking of their risk-weighted returns and of their services. Giving funds captive memberships creates the prospect of moral hazard.

Why should the chosen few, apparently, be entrenched in such a privileged position? Processes for reviewing their performance or condition during the tenure of the awards are not apparent.

A critical non-investment element of choosing a default fund is normally the cost and quality of insurance coverage. Some industries or jobs have specific risks and require very specialised insurance arrangements. Moving the default arrangements around could by itself, have implications for insurance coverage, as funds discovered when the choice of fund legislation was first introduced.

More broadly, where is the national interest in reducing competition, diversity and innovation in the industry that is regarded as one of the most sophisticated and dynamic in the world and a source of national competitive advantage?

Why would an industrial relations tribunal be given/be allowed to take responsibility for reshaping such an important segment of the financial system?

The minister with responsibility for superannuation, Nick Sherry, has so far shown himself to be thoughtful and diligent. He has said he wants a more competitive superannuation system, one with lower fees and higher returns. This is not the way to achieve it. The government needs to get the AIRC out of superannuation matters and back to the issues where it has some expertise.

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3 comments

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3 thoughts on “Industry super funds in AIRC bonanza

  1. F Humperdinck

    What’s the big deal? This article seems more ideologically than logically based.

    From my experience of superannuation and reading about the sector, the industry funds perform better overall than their private partners and don’t skim off a percentage of investors’ money to pay their shareholders.

    I’d find Mr Bartholemeusz’s argument a bit more convincing if he had backed it up with an analysis of performance, which is the reason he’s criticising the AIRC.

    I have just joined a private sector media company which signed me up (without asking me or giving me an option to remain with my existing super fund … which happens to be an industry one) to their own private fund. I wasn’t happy and have told the HR department to make sure my super goes into my existing fund.

    Bartholemeusz suggests (and draws a long bow while he does it) that the AIRC move will force the collapse of small private super funds. Well hello, he’s been writing long enough about business to realise that companies go to the wall. If a company is that vulnerable it’s probably not a good idea to have your money there.

    You’ve just suggested I subscribe to Crikey. You are going to have to do better than this.

  2. Charlie

    I’m not sure I see the problem – it’s not like they’re mandating employees MUST use these funds.

    Having watched the outrageous fees extracted from many of the ‘for-profit’ funds (regardless of their performance!) the industry funds seem a perfectly logical choice as defaults.

    Given we have SuperChoice, any employee is free to choose if they don’t like default.

  3. Frank Birchall

    I wonder how “the more sophisticated platforms” (read “hedge funds” etc.) have been performing during the last 12 months versus industry funds!

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