As we discussed back in January, the default super process is the new battlefield in the Coalition ‘s war on industry super. In a draft report released today, however, the Productivity Commission has sought to distance itself from that war, and the big banks won’t be happy as a result.
It’s a complex, almost byzantine, issue, but the guts of it is — every time you move to a new employer, you have to decide where your super contributions will go. But around two-thirds of us don’t decide — we let our employers pay into a default fund. Those default funds are decided by the relevant award covering your job. And the legacy of decades of industrial relations laws is that the bulk of those default funds are industry super funds. AMP also has a proportion of those funds. But retail super funds, run by the big banks, are mostly locked out. Cue outrage from the retail super lobby.
Enter one Bill Shorten, who in 2012 — after a previous Productivity Commission inquiry — set up a process to expand the range of default funds to include, potentially, retail funds. The Fair Work Commission would set up an expert panel to select additional award funds. Sounds good, right? But Shorten stuffed it up — the people appointed to the expert panel had conflicts of interest. The panel process fell apart. In 2014, the retail funds won a significant Federal Court victory ruling that what was left of the expert panel was improperly constituted.
Yay for the retail funds — but it was the kind of victory of which Pyrrhus would have been proud, because the Coalition, which objected to the entire FWC process, didn’t appoint anyone to the panel afterward. The years began ticking by, with no additions to the list of default funds across awards, meaning the retail funds were still locked out. So last year the government asked the PC to do another inquiry. This is a multi-stage one, with a discussion paper last year, a draft report today, and a final report by August.
The retail funds want open slather — they say employers should be able to pick from any super fund as a default, as long as it meets the minimum requirements of a MySuper product. Which sounds great unless you’re a small or medium employer who hasn’t got time to devote to researching super products. Or a fund member who watches millions of dollars that could be going into their retirement income being wasted on advertising. Or members who end up a hundred thousand dollars poorer in retirement because their employer shunted them into a poorly performing fund purely because a bank had taken them to an expensive lunch, or threatened to lift the rate on their loan unless they picked it.
What’s in the PC’s draft? First, it wants to avoid the impression it’s the research arm of the Coalition’s war on industry super.
“it is unwise, as many have to date, to portray this Inquiry as just another ‘industry fund versus retail fund’ debate. This Inquiry is much more than that — it is a wake-up call to the entire industry, which some claim has become complacent with a steady flow of mandated contributions from disengaged members, and as an industry has failed to improve its scale and efficiency and deliver better outcomes for members (despite the MySuper reforms). From this perspective, the Inquiry has managed to unite the superannuation industry against the Inquiry’s potential contemplation of more-than-incremental reform.”
And to what will be considerable chagrin on the part of the banks, the models recommended by the PC for consideration (remember this is a draft report) don’t include the kind of open slather, minimalist process favoured by retail funds. The four models are:
- employees pick their own fund based on advice from other parties and a non-compulsory shortlist of up to ten well-performing funds picked by a government-appointed independent body, with a “last resort” fund, possibly run by the Future Fund, for employees who don’t make a choice. Funds would be required to streamline their performance and options reporting to enable “like with like” comparisons.
- employers pick default funds from either a list of funds meeting minimum standards (including performance) or a list of preferred, high-performing funds determined by an independent body.
- an independent body runs a tender for funds to access default accounts, with assessment based on performance, fees etc.
- a fee-based auction variant of the tender model.
A flaw in all of those models is that a government-appointed body might not be as “independent” as the PC would like — as happened with Shorten’s expert panel and as would likely happen if the Coalition were to establish one — it would be stacked with ideologues who hate “union-run” industry funds (as ministers insist on calling them, despite funds being jointly controlled by employers and unions).
The PC also wants to end the decades-long practice of employers being responsible for making payments directly to super funds on behalf of their employees — a recommendation that would have had the Council of Small Business’s Peter Strong cartwheeling with delight. Instead, they would be paid to the Tax Office and then paid on to funds, reducing the capacity of employers — which includes even the Commonwealth Bank — to not pay or underpay super contributions. The PC also wants to end the process of a new default fund having to be selected every time you change employers — you’d stay in your default fund no matter where you went, although that wouldn’t apply to most public servants and many members of corporate funds that aren’t open to the public.
And, in another blow to retail super, any reforms would only apply to new default selections i.e. for new workforce entrants, which would dramatically reduce the volume of “default money” up for grabs, to less than a billion dollars (although, the PC says, that would grow rapidly as “first timers'” incomes rose).
And most significantly for the long-term shape and performance of the industry, the PC is keen to encourage processes that will not merely increase competition, but drive smaller funds out of the market. Neither the retail not industry fund sectors will draw attention to this, but both would be quite happy for that to occur. Smaller funds are less efficient, and if they’re merged with larger funds, will provide better performance and returns to members. The rationalisation of the super sector will come eventually. The PC is keen for that to happen sooner rather than later.