Top Ten Default Super: Solution or Nonsense?
The Final Report from the Productivity Commission Inquiry into Superannuation: Assessing Efficiency and Competition (PC Report) was released in December 2018 and remains the subject of considerable industry debate. In the context of the release of the Final Report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (RC Report), the pending implementation of APRA’s Superannuation Prudential Standard 515 Strategic Planning and Member Outcomes (SPS 515), a raft of other policy and legislative developments, and a pending Federal Election, the ensuing debate is nothing short of complex and multi-faceted.
Default Fund Arrangements
Three of the key recommendations put forward in the PC Report that could have a fundamental impact on the architecture of the superannuation industry in Australia are:
- Recommendation 1: Default superannuation accounts should only be created for members who are new to the workforce or do not already have a superannuation account (and who do not nominate a fund of their own).
- Recommendation 2: A single ‘best in show’ shortlist of up to 10 superannuation products should be presented to all members who are new to the workforce (or do not have a superannuation account), from which they can choose a product.
- Recommendation 3: The Australian Government should establish an independent expert panel to run a competitive process to develop the ‘best in show’ shortlist. This panel should select from products submitted by funds that meet a clear set of criteria (established and published beforehand by the panel) and that are judged as likely to deliver the best outcomes for members over the long term, with a high weight placed on investment strategy and performance.
The implementation of Recommendation 1 would draw a halt to the ongoing proliferation of multiple superannuation accounts held by individuals and reduce total fees paid by unengaged members who may otherwise continue collecting additional fund accounts on changes of employment. This would, however, make the appropriateness of the process for selection and appointment of default fund providers all the more important.
‘Best in Show’ Shortlist
The intent of Recommendations 2 and 3 is to:
- Implant an entirely new approach to default fund selection and appointment, replacing the current award arrangements for some and the employer selection process for all others. The latter of which can be rife with conflicts between employer and employee interests (e.g. corporate entertainment for employer staff involved in default fund selection and review, discounts on corporate banking fee structures, etc.); and
- Drive further competition amongst superannuation funds to deliver the best possible outcomes to members, in an effort to retain, obtain or regain their position in the ‘best in show’ shortlist.
Conversely, there are a multitude of issues with this type of approach, which include:
- Some industries and occupations have inherently higher risk profiles and member insurance requirements, such that associated member cohorts may be better served by a superannuation fund that does not make the cut for ‘best in show’ shortlist, but is nonetheless a high-quality fund in terms of reasonable investment performance relative to its asset allocation and offers specialised insurance arrangements;
- The creation of incentives for funds to take actions to position themselves favourably over the short-term against the criteria of the independent panel in order to retain, regain or obtain a position in the ‘best in show’ shortlist, which may create inappropriate risk exposures and have adverse impacts for members over the long-term;
- The direction of all default monies into a limited number of funds, resulting in mergers or wind-ups of funds that cannot maintain sufficient scale without the contributions that flow under the awards system. This could potentially reduce competition across a reduced number of funds with less variety in product offerings to meet member needs; and
- The difficulty in identifying individuals with the necessary level of skill, capability and experience to sit on the independent panel that are free of conflicts and historical associations that may sway their perspectives in the annual process for selection of the ‘best in show’ shortlist.
Member Outcomes Requirements and New APRA Powers
Given that APRA has now in April 2019 been granted additional powers to weed out and shut down underperforming funds that are not delivering adequate outcomes to members, including those operating in both the default and choice segments of the market, the need for any complete overhaul of the selection and appointment of default funds in the manner of the ‘best in show’ shortlist is questionable.
What may be more appropriate than the introduction of a Top 10 ‘best in show’ shortlist is the repeal of the awards system as it applies to superannuation in favour of employer choice, and the implementation of an obligation for employers to select default funds on the basis of employee interests only.
The final legislation underpinning the member outcomes requirements includes provisions for the prescription of benchmarks and comparative products that must be used under enforceable regulations by superannuation trustees in completing the required annual outcomes test. This is viewed positively as a driver of consistency for the analysis undertaken and conclusions to be drawn from the outcomes tests which are to be completed, submitted to APRA for consideration and published on fund websites for member information. This consistency and transparency will support the effective implementation of the new requirements by APRA.
The PC Report also contemplated the necessary changes to better facilitate mergers of superannuation funds to achieve the necessary level of scale to deliver better outcomes to fund members. These considerations are integral to improving member outcomes at a system level, further to the passing of the new APRA powers to remove funds identified as underperforming from the sector.
The recommendations made in the PC Report in this respect include:
- Mandatory notifications to APRA of any potential mergers under formal evaluation (Recommendation 20), to allow for more effective regulatory oversight of merger processes and implementation of any mergers which should proceed in the interests of members but may not otherwise as a result of other interests of decision makers; and
- Permanent tax relief for merging superannuation funds (Recommendation 21), which the Federal Government has included in its 2019/20 Budget, as announced in April 2019.
In the context of all of the legislative and regulatory changes that are already afoot in respect of superannuation and the myriad of other effective options available to policy makers, the implementation of any ‘best in show’ shortlist seems to be more nonsense than a practical solution for taking Australia’s already world class superannuation (pension) system to the next level. Indeed, there are not many in the market who believe that a ‘best in show’ shortlist would be an effective solution.