Last month the Productivity Commission released its long-awaited report on superannuation.
To be more precise, it was the report for: “Stage two, inquiry to develop alternative models for allocating default superannuation members to products.”
This is a key point; this inquiry was about offering up alternative models and was not, in itself, a review of the existing model. Although it was clearly implied in the report that the current default system is uncompetitive which has resulted in duplicate accounts and excess fees being charged to members.
Too slow on reducing duplicate accounts
The problem of duplicate accounts is front and centre in the report and it is the first key take out. In truth improvements have been made by the industry during the last couple of years, with the number of duplicate accounts reducing from an all-time high of 32 million to between 27 million and 28 million.
But the numbers are clearly significantly out; there are around 12 million working Australians, so there is still a long way to go. Arguments can be made that the industry has moved too slowly in fixing this problem and it’s now going to be fixed for them.
There are many reasons for the proliferation of super accounts, some members even choose to have multiple accounts, but default super is a key driver of the problem. With default super, people don’t choose to join a fund and they don’t choose to leave one. They just pick up a new super fund every time they start a new job.
Any measure that reduces the number of accounts and admin costs is good for members and the super system. However, another key implication of reducing the number of accounts, is that it could force a significant change in the profitability models of industry funds. It could force those industry funds that still charge an account-based administration fee to move more quickly to a funds under management (FUM) based model to maintain profitability. This would further blur the line between industry and retails funds.
With this reduction in the number of super accounts we could also see the transformation of small industry finds into small boutique super funds that are FUM based, similar to boutique fund managers. These boutique funds with smaller numbers of members could still remain profitable and if this were to happen, then mergers between the funds may continue to be a struggle.
Proposed alternative default models
The Report has recommended three alternative models;
- Assisted employee choice
The employee has to make the choice of a super fund from a small group of up to 10 “accredited” products chosen by a government body.
- Assisted employer choice
a) Large companies – The employer chooses a product that meets mandatory minimum standards. The products would be based on a strengthened MySuper authorisation process (with a stronger emphasis on minimum performance standards).b) Small companies – The employer chooses the product from a narrower ‘preferred default’ list of the best performing products.
- Government Choice
There are two proposed models under Government Choice;
a) A fee‑based auction – This model has products competing for default status by out‑bidding each other on member fees.
b) A multi‑criteria tender — Participants compete for rights to a share of the default pool by making proposals against a number of different assessment criteria;
– past performance on net returns and member satisfaction
– investment strategy
– the quality of member services, engagement and intrafund advice
– fee levels and transparency
– innovation in unspecified areas
Choice equals engagement
If the objective of the Productivity Commission’s alternative models is to reduce the number of accounts in the system, there are number of ways to achieve this, outside the models proposed by the commission.
The Australian Taxation Office could automatically consolidate the super of a member to their most recent contributing fund. If, however, they want to encourage engagement with super, then any default model outside of member choice, assisted or unassisted, is not dissimilar to the current default system in terms of engagement.
If no decision is made by the member to join a fund, then it should not be surprising that either the employer or the government default models will continue to be dominated by disengaged members.
Employer inertia drives default super
In the current award system, unions make the choice on behalf of members. It is not surprising that they are not mentioned in any of the new alternative models suggested by the Productivity Commission.
Clearly the unions are potentially big losers in the new alternative models. The smaller funds could also be in trouble if they cannot clearly demonstrate value and broaden their product offering to their existing membership base.
But with all the suggested changes it is important to remember that the greatest force in super is “inertia”. The last thing employers want to do is more work on super. Even if super was taken out of the awards, employers don’t want to change their super. So, any change to default super must also make it as easy as possible for the employer.
Group Insurance in trouble
The other big loser in this brave new world is Group Insurance. There is a sense throughout the report that default insurance is not part of the super system.
It is understandable that questions are being raised about insurance when premiums paid out to insurance at 25% are more than investment management fees. But once again, if it is removed, it could exacerbate the problem of underinsurance in Australia.
It’s not surprising that some super funds are looking at tailored group insurance that doesn’t eat up young members’ super in premiums and only kicks in when they are older and more likely to have dependents or other commitments.
The rise and rise of choice
So, who are the big winners in all this?
It is important to note that this is only part two of the three reports and it is a long way from being policy.
There are many discussions and fights to be had between now and then. The industry funds’ ISA have launched their new “hen house” adverts highlighting their concerns if the banks get more access to people’s super. And you can be assured the hallways at parliament will be busy with lobbyist from both the industry and retail funds for some time to come.
What we do know is that in the new world, it will all be about “member choice”. The banks and the big super funds will increasingly directly target acquisition of young members and more and more funds will build out their brands and direct super offerings.
So is default super dead? No, it’s not.
The commission clearly stated that it sees a role for default, given the compulsory nature of super. But default will play a lesser role and the big winners in this new future of member choice are likely to be the marketing and advertising agencies.