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.
[What exactly is George Christensen’s problem with Turnbull’s super changes?]
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.
[Morrison mugged by reality on superannuation data]
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.
I wish these aholes would leave my super alone!
The poorer performance of retail super funds is mostly owed to their extravagant management fees. And industry super management fess are only slightly less outrageous. These fees are what need to be regulated. Capping management fees at fund sustenance-only levels would then remove any incentive for poor performing super funds to exist. But to what extent any of this will matter much as we continue to boldly march into the gig economy future of independent freelancers (newsflash: with no super payable) is perhaps the more urgent question.
The last great bucket of money that the banks haven’t got their hands all over, and they are drooling at the prospect of doing over so many more uninformed people. The fees are ridiculous and the performance execrable.
Thank Labor that the industry funds were set up in the first place. As it is, this must be the least efficient sector in the economy, and has significant long term implications.
I thought that the banks actually have the biggest super funds, along with AMP.
Hi Jane, yes they have a few very big funds, but the industry funds suck out huge amounts of money that the banks want their hands on. I’m not aware of the figures, but the industry funds must make up a substantial percentage of all super, probably larger than 50%. Worst of all, the industry funds are run for their members, profits go back into the fund (non-profit!). That is probably what the banks and insurance companies, and the LNP, hate most of all. It’s a phenomenal gravy train, and I’m not saying the industry funds couldn’t be more efficiently run, but at least they have the interests of members at their very core. As Lee says below, superannuation should be designated not-f0r-profit, like charities, and should be the case for education, health, lots of things too important to be left to the profit motive.
It is disappointing to see that there continues to be such dissembling about the true nature of the interests that are in conflict over occupational superannuation. From the inception of industrial award provision for compulsory employer contribution to superannuation funds there was a scramble by finance industry players to get a stake in the investment and control of the monies to be paid into funds. Generally, the so-called industry funds, established with employer and union representation on the board of trustees, won out and were given additional support through provisions in awards and industrial instruments for those funds to be also default funds if employees made no election for any of the particular funds allowed by the award. Even so, there were not a few instances where smaller employers managed to hang out and effectively determine a “retail fund” often run by AMP as the fund to which directly or by default, contributions on employee’s behalf would be paid. There is evidence available that a number of such arrangements benefitted the employer at the expense of the employee; kickbacks to employers, dud insurance provisions, slack administrative follow-up on compliance, higher admin costs for the employee; and perhaps, as a commission agent’s sweetener, beneficial access to the finance entity for the employer’s own providential investments.
Over time, despite some exceptions, the industry funds established a fair degree of ascendancy over retail competitors: they had substantial investment portfolios, they operated with lower management fees, their relatively larger fund size enabled greater strategic investment stability than smaller retail funds less able to avoid immediate market volatilities.
It is that positional advantage of the industry funds that the Coalition and its finance industry supporters wish to disrupt by enlarging employer voice in the choice of default funds for employees. In the discussions, I see almost no reference to the damage likely to be done to the existing industry funds if the Coalition and its allies find a way to divert ongoing contributions for new employees into retail funds. One important consideration is that the major industry funds are likely to lose the benefit of the significant cash flow from new and continuing employees; it is a truism of trust governance that the existence and size of that cash flow can be a major factor in ensuring longer term stability in investment dispositions. The lower admin costs of industry funds achieved through the not-for-profit orientation and fund size is another consideration that seems if not ignored, to be understated. And finally, who is it who can assert that there will not be employers and fund providers who resort to conduct of the kind for which banks have made themselves notorious, designed to serve the interests of the employer or the banks’ shareholders rather than that of the beneficiaries of funds administered?
You should smell a rat when the finance sector is so anxious to fix a system that is not broken. For whose advantage is the demand made for more so called competition?
Very good comment, Paul.
Now for the Royal Commission into ALL banking activities, including superannuation!
Suggestion for the banks: instead of rent-seeking (which is all this is), why not try to actually compete? Or get out of the business, just like you should get out of insurance. Banks are essentially the usurers, the Shylocks, who always unfortunately exist. Let them stick to that.
Superannuation funds should be not-for-profit, with ALL earnings (after costs) going to the contributors. This is not an activity for banks. In fact, banks should be excluded by law from operating in the superannuation industry, as should insurance companies.