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With the Liberals’ long record of trying to attack industry super funds only for it to blow up in their faces, what are the chances the government will finally succeed in landing a blow on its bitter enemy?

Accompanying the budget — although it’s not a fiscal measure — is another crack at the old enemy.

The government proposes to legislate: “stapling” workers to their super so that when they change jobs they’ll no longer be defaulted into a new fund unless they actively nominate their existing fund; establishing a MySuper comparison tool to show how funds perform after fees; requiring funds to advise members if they fail an annual performance test, and locking them off from new members if they fail two annual tests.

It will also impose a standard “to ensure they only spend members’ retirement savings on activities that are in their best financial interests”.

The last, and silliest, proposal is based on the campaign by Liberal backbenchers Andrew “Virus Guy” Bragg and Tim Wilson to pretend industry super funds provide a “war chest” of donations to trade unions and the ALP — a campaign which has led only to humiliation first for Bragg, and then for Wilson.

As a number of lawyers pointed out to The Australian Financial Review today, that would in effect be legislating a requirement that is already at the heart of superannuation legislation.

Not that that would stop the government. Indeed, it’s an old Liberal trick to re-legislate something already on the books.

Is the re-legislation of the requirement merely to placate the particularly froth-mouthed culture warriors in the war on industry super? We’ll have to see the bill to find out.

The “stapling” proposal has drawn criticism from some industry sources who suggest it could lead to workers dragging an underperforming fund around with them throughout their career rather than racking up several accounts across funds with differing performance. But that can be addressed by getting rid of underperforming funds — or merging them with bigger, better-performing ones.

That’s the intent of the two-strikes-and-you’re-out annual performance test, which would see serial underperformers frozen. Unable to accept new members, underperforming funds would face strong pressure to merge with larger, better performers. That’s a good outcome for workers, even if fund directors aren’t happy about losing their jobs.

It’s also the latest instalment in the government’s push to get rid of smaller funds with poorer performance by merging them with better performers. The government narrative has been that greedy union-appointed directors of smaller funds are blocking mergers, but the problem of small underperformers is much greater in retail than in super funds.

The Liberals ought to be careful what they wish for on fund mergers. The ultimate logic of pressure for mergers — reinforced by a name-and-shame annual performance test and an easy comparison tool — is industry consolidation in which only the very biggest funds survive.

Bigger means more power: power over investment decisions; power over board appointments; power to shift market sentiment. Imagine AustralianSuper no longer wielding $170 billion in funds, but $400 billion. Or REST with $200 billion to deploy rather than $55 billion.

It’s the same on the retail side. MLC Super could become a $200 billion giant. When funds that big speak, people listen.

If the Liberals are unhappy now with super funds — industry and retail — supporting climate action or abandoning fossil fuels, it’s a strange move to enable a process that will give those funds far greater financial power. Then again, no one ever accused the Liberals of having much vision when they went after industry super. It’s hard to see anything through all that red mist.

But the AFR’s Tony Boyd — normally no friend of industry super — has correctly identified another problem with performance tests and comparison tools. He thinks it will “lead to increased passive management of retirement savings” because the fee assumptions behind the performance tests will favour funds happier to pump money into passive index-based equities investments.

In other words, a giant superannuation version of “teaching to the test”.

The problem there is that super funds — and it’s mainly industry super funds — that have invested in other kinds of assets like infrastructure or start-ups will be incentivised to dump those kinds of investments. They require more work and more resources to identify and evaluate than simply putting money into an index fund.

We already know, courtesy of work done by industry super some years ago, that the spectacular growth of Australia’s super sector has led to a significant deterioration in the efficiency with which capital is formed in Australia — because too much of our savings has taken the lazy route into equities.

More investment in infrastructure, in manufacturing, in start-ups is what we need in the recovery.

Scott Morrison explicitly called on super funds to support his manufacturing plan last week. That’s hard to do when the annual test is skewed towards pumping money into the sharemarket.

Another unintended consequence could be looming from the Liberal war on super.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey

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