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.
I struggle to see how channeling all SGC payments through the ATO will ensure employers make the payments. How will the ATO know a payment is due? From comparing PAYG payments by the employer? I would have thought it feasible that an entity lodging a tax return could be required to disclose the amount paid for employee wages and the amount paid for SGC payments. If the latter isn’t 9.5.% of the former couldn’t that trigger the ATO’s investigation? But why would the under resourced ATO investigate when if it successfully extracts payments the ATO’s take is 15% by way of the contributions tax on the recovered payments. Probably better targets for the ATO’s compliance section than that.
“Smaller funds are less efficient, and if they’re merged with larger funds, will provide better performance and returns to members.”
An entirely reasonable statement Bernard, and some smaller funds may find themselves with very small returns and financial stability.
But the big end of the finance sector have not been models of efficiency, except in terms of clipping tickets every time someone belches. The least ‘efficient’ must be, by definition, those funds that charge the most in ‘administration etc’, and they have been the retail funds every time.
The industry is a gravy train that people can’t get on to quickly enough, and many of the best and brightest end up there, getting very rich indeed while adding very little to the overall economy in terms of production, and taking multi-millions and billions out of people’s retirement funds.
All of which just goes to prove that we should have had a Pension Fund (like Canada, Singapore etc.), run by the government, in the first place.
I worked in Canada in the early 1970’s for 4 years and contributed to the Canada Pension Plan during that time. This has resulted in a small monthly payment from that fund…no hassles, no problems.
If only I could say the same for this country!
That is such a good idea CML, and then the government could sell off the fund for multi-billions, and then, err.
Even great ideas can be brought undone by the neo-liberal mindset. It is great though, and they could run the fund getting paid a quarter of what the current system pays, no cream for the shareholders, who would be us anyway, either as owners or as taxpayers. Brilliant.
But you know, the private sector does everything more efficiently blah blah blah
What happened to my reply? That is a great idea CML
The PC’s draft sounds good to me. Let the banks have open slather and no one will be safe, also good idea for employer payments to be paid to the tax office and not directly to the super funds. When I was ready to collect my super, I had to wait as there were not enough funds (my super was very little) as my employer (a local government) hadn’t paid for around three months. This wasn’t bad behaviour they told me, they were entitled to do this.
As with collapsed companies who can easily rip-off creditors without sufficiently deep pockets to pursue them through the courts, it would be simple for the ATO to be the final, rather than first payee as at present.
Thus when the defaulter cries poor the ATO can invoke its usual well known & caring response, ‘tough – pay up’.
So it should be with super entitlements, how often are those the first casualty of dodgy companies? Try that with the ATO.