The Productivity Commission is proposing a major shakeup to the nation’s superannuation industry, recommending fundamental changes to employees’ default funds.
Superannuation: Alternative Default Models (draft version) is the Australian Government’s independent research and advisory body’s follow up to How to Assess the Competitiveness and Efficiency of the Superannuation System released in November 2016 which has proposed sweeping changes to the superannuation system such as how default funds are selected for new employees.
Under the current regulations, new employees at a workplace are given the option to select their own super fund. Those who do not make any selection have their contributions paid to a default or employer-nominated fund. Default (otherwise known as MySuper) products currently make up $474 billion in funds under management, or roughly 20% of total super assets as shown in figure 2 at the bottom of this article.
The main recommendation of the report revolves around Australians having more power to easily select a preferred superannuation fund for life, regardless of employer or industry changes, or trade union enterprise agreements. The report provides four alternatives addressing how the default funds should be selected. These are detailed below.
Figure 1: Alternative models in brief
|1. Assisted employee choice||This model leverages the competition benefits that arise when members exercise choice, but with information and nudges to assist members to make informed choices.|
|2. Assisted employer choice (with employee protections)||This model injects competition by giving employers choice in selecting a default product for their employees, as long as the default product meets some minimum standards, while also simplifying choices for small and medium sized businesses.|
|3. A fee-based auction, and
4. A multi-criteria tender
|These models incorporate a market-based mechanism into the selection of default products, with sequential allocation of members among winning products.|
The intended goals of the reforms are clear: they aim to empower Australians when it comes to selecting which superannuation fund they enter, and they aim to circumvent what is currently taking place: people have multiple super funds, often with small balances being eroded by fees. Currently more than 40% of MySuper members hold more than one account. The costs associated with maintaining multiple accounts in multiple funds totals approximately $150 million for every 500,000 to 600,000 duplicated accounts.
The superannuation issue is politically sensitive. A high profile media war between industry and bank-backed retail super funds is currently underway, with Industry Super, the lobby group for industry funds, rolling out a highly visible advertising campaign in March 2017 attacking the banks’ lobbying efforts in Canberra.
This makes any changes outlined in the report controversial for a range of reasons, not least because they have the potential to reduce the market share of union-backed industry funds via a transition away from trade union enterprise agreements.
As the report states, the superannuation system has evolved a great deal since compulsory superannuation was first introduced 25 years ago, but so has the Australian workforce. It is important that any changes to the current system take into account the fact that employees entering the workforce now will have, on average, 17 different employers and five separate careers in their lifetime, very different statistic to a quarter of a decade ago. The rise of the part-time, contract and freelance workforce must also be considered.
To access a copy of this second stage of the report, click here. If you would like us to provide you with an update once the Productivity Commission finalises its review of the “efficiency and competitiveness of the super system” (begins post July 2017), click here.
Figure 2: Size of the superannuation market as of June 2016
Source: Superannuation: Alternative Default Models – Australian Government Productivity Commission