The Productivity Commission (PC) has released its draft report on alternative models for default super, supporting an overhaul of how members join default super funds. The PC will finalise their report by July 2017 that will feed into its subsequent Review of the efficiency and effectiveness of super.
In the report the PC proposes removing super from the industrial relations system (modern awards and enterprise agreements) and providing an Australia-wide system for selecting default funds for employees. The PC’s key considerations are to promote competition, facilitate member choice, and improve member engagement.
The PC was clear the inquiry was “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 not “just another ‘industry fund versus retail fund’ debate”.
It even joked that it had:
“managed to unite the superannuation industry against the Inquiry’s potential contemplation of more-than-incremental reform. A healthy dose of scepticism would suggest that there must be rents to be recovered for the benefit of members for such unanimity to be valid….”
In the report, the PC proposes that:
1. Employees who do not make a choice of fund will only be allocated to a default fund if they do not have an existing super account. Therefore only new entrants to the work-force would be allocated to default funds (‘first timers’). This would prevent the proliferation of super accounts for employees.
This requires a centralised on-line information service, via the ATO, that employers can access to identify if a new employee does not have a super account and facilitate consolidation of super accounts. The system must allow employees to pre-register their choice of fund and is already under development by the ATO.
The PC supported a NZ style centralised clearing house where employers would send all contributions. This would be considered in the PC’s next review.
2. Existing default members will stay in their current super fund, but if a fund ‘wins’ the right to receive contributions of new default members it must extend the same fees and services to existing default members.
3. Four default allocation models. Each model has been assessed against criteria of member benefits, competition, integrity, system-wide costs. Default products under these models can only be accumulation stage and compete on investment, administration and intra-fund advice. Insurance is not a consideration.
Importantly, the PC was not tasked to form a view on whether alternative models are better or worse than the current default arrangements, nor on the merits of the current arrangements.
The models are:
i. Assisted employee choice:
Employees are required to choose a super product themselves from a non-mandatory list. The short-list of between four and ten options would be selected by a government body with the products having to be accredited (akin to an enhanced MySuper authority). If the employee makes no choice there would be a ‘last resort’ fund available for contributions (Eligible Rollover Fund or possibly the Future Fund).
ii. Assisted employer choice
Employers choose a default product from one of two lists. The first list would be a ‘light filter list’ (with mandatory minimum standards to protect member interests). The second list for employers that do not have the size to elect default products would be a ‘heavy filter’ list of preferred products with stricter criteria relating to investment performance and features.
This has integrity risk in the appointment of the selection panel for determining the default product lists. There was some concern about costs of marketing to employers.
iii. Multi criteria tender
Funds compete for rights to share in the default member pool though a tender process. The tender process would be run by a selection panel appointed by the Government and would select up to 10 products. The selection would be (initially) every 4 years and a new selection panel would be appointed each time.
This has integrity risk based on the potential for subjective judgements to be made by panel members.
iv. Fee based auction
Products would bid for default status on the basis of fees. Losing bidders would be given the opportunity to match the winning bid.
Unassisted member choice – where there are no default arrangements – was used as the base comparison but is not considered as an option for the future.
The PC draft report is available here.
Cut+PasteApril 3, 201711.36am
