Despite its poor track record of trying to go after the industry superannuation sector, the government is looking at another tactic to boost big bank-controlled retail super, via the awards system.
Currently, workers who do not nominate a superannuation fund when joining a new employer — which is most of us — are placed by their employers into a default fund identified in the relevant award. The majority of those default funds tend to be, for legacy reasons, either industry super funds (operated jointly by employer groups and unions) or AMP funds, and generally perform better than retail super funds.
In 2012, following a Productivity Commission inquiry, then-employment minister Bill Shorten legislated a process to expand the range of default funds via an Expert Panel within the Fair Work Commission, which would assess all funds offering a MySuper product that applied for inclusion as a default fund. The only problem was the panel, as appointed by Shorten, was hopelessly conflicted. In 2014, the Federal Court, following an action by the big bank lobbying arm the Financial Services Council (FSC), ruled it was improperly constituted after Fair Work Commission president justice Ian Ross appointed himself to it to form a quorum after the repeated loss of members.
It was a big win for the FSC, which is actively hostile to the entire idea of a process to select default funds — it wants open slather for any MySuper product to be eligible to become a default fund for employers to allocate new employees to. And at the time, it seemed like a win for the Coalition, which, in addition to lamenting that it had to clean up Shorten’s mess (and rightly so — it was a complete stuff-up by Labor), thought it had a good way to stymie the whole process he’d established: simply not appoint anyone to the panel. “The process of identifying and appointing a suitable person is likely to take some time,” then-employment minister Eric Abetz said at the time, rather cutely. No one has been appointed to the panel in the intervening two years.
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But that has left the legacy set of default funds in place, to the advantage of industry super and AMP and the disadvantage of the big banks. Current FSC head Sally Loane gave voice to her frustration over this in a recent, bizarre piece in The Australian, where she managed to almost claim the Anzacs had died for the right of retail super to be deemed default funds:
“We removed agriculture’s protective tariff barriers long ago and now can boast the most competitive, adaptable and efficient farming sector in the world. We’ve bitten the bullet across much of the manufacturing sector, removing tariffs on shoe and textiles industries in the 1980s, then finally cutting the flow of taxpayer subsidies to our uncompetitive car manufacturing industry… our superannuation sector — the fourth largest pool of funds in the world — remains largely untouched by the cleansing light of competition.”
Apart from the unusual physics of cleansing light, Loane’s cri de coeur relies heavily on the idea that competition is automatically good and that the more competition among default funds, the better. The FSC wants the government to replace the current system entirely, removing any requirement beyond having MySuper status. But the longer the government retains the existing system, the longer many bank-owned retail funds are locked out, as a result of their own Federal Court action and the government’s bloody-minded response.
In the wake of the Murray Inquiry into the financial sector, the government asked the Productivity Commission in February to undertake “an inquiry to develop alternative models for a formal competitive process for allocating default fund members to products”. The PC released a discussion paper on how it should develop models and the basis on which they should be assessed in September. But that inquiry isn’t due to report until August 2017, as part of a broader deadline set by the Murray Inquiry of 2020. It’s fair to say the FSC and the banks don’t want to see the status quo remain until 2018 — and certainly not 2020.
Competition is good, of course, until you think through the implications of a poor choice by an employer or employee and what the banks could do to influence choices. Imagine a bank offering a bundle of services including a MySuper product to an employer, which the employer would default new employees into even though it was a poorer performing fund than the current default fund. Imagine how little leverage a business would have if it held large loans from a bank it wanted to drop as its default super fund. Imagine how much money the banks would devote to advertising their funds to employers (and employees) — which would come out of the fees charged to fund members. Imagine employers and employers facing a health fund or mobile plan-like array of choices of funds, all designed to minimise their capacity to compare like with like in terms of performance.
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But on health insurance or a mobile plan the impacts are limited, even if you make a disastrously bad choice. On superannuation, a bad choice made by an employer (or an employee) will lead to significantly lower retirement incomes, lower by tens of thousands of dollars or, for a young person entering the workforce, possibly hundreds of thousands of dollars, by the time they retire. That’s a bad outcome for them and for the government, which must help fund their aged pension.
Some form of assessment process is needed to ensure that employers can default employees into funds that will perform well. There’s no reason why competition and quality can’t be combined in an assessment process that identifies a number of the best performing funds from industry and retail sectors and allows employers to choose between them, confident that even the worst choice will still be a proven performer.
That would seem to be the most sensible approach — unless one sector performs significantly more poorly than the other and you’re part of the dud sector. Which is, unfortunately, the position retail funds, and especially the big bank funds, are in. They object to a process of assessment for default funds because any assessment based on performance will count against them.
When the government brings forward a plan to address this, you won’t hear much about performance — it will be all about competition. But Sally Loane and friends shouldn’t hold their breath: Kelly O’Dwyer is the relevant minister. And if we’re talking about performance, her performance in her portfolio so far has been woeful.