Best-in-show a super idea

The Productivity Commission has done its best to shine a light on the nation’s superannuation trustees.

The Productivity Commission has done its best to shine a light on the nation’s superannuation trustees, assisted by the revelations at the royal commission.

“What happens when we leave these trustees alone in the dark with our money?” was the rhetorical question asked by counsel assisting the royal commission, Michael Hodge QC, in August.

“Can they be trusted to do the right thing? If they can, does that mean that the current regulatory system is adequate? If they can’t, what must be done to protect Australians’ retirement savings?”

The Productivity Commission has done its best to shine a light on the nation’s superannuation trustees, assisted by the revelations at the royal commission.

But it is now up to government, and indeed the Labor Party if it wins office, as to whether they will keep consumers in the dark by ignoring the Productivity Commission’s proposals.

The $2.7 trillion superannuation system is beset by consumer apathy and disengagement. While some funds work tirelessly to put members’ interests first, others are at best complacent.

Public policy can be the first line of defence for consumers in these funds.

About two-thirds of workers starting a new job make no choice of super fund when signing over 10 per cent of their wages. Rather, they allow savings to be managed by a “default” provider, often chosen by their employer or agreed to through enterprise bargaining agreements.

As everything is taken care of, the majority of Australians are tuned out of protecting their savings. Many aren’t even able to name their super fund, let alone keep an eye on developments in financial markets.

Funds enjoy rich streams of cash with little to no pressure to be the best performing fund manager. Meanwhile, outcomes for Australia’s retirement savers have fallen by the wayside.

The regulators APRA and ASIC have been missing in action, allowing funds to operate on the margins of the law. The Productivity Commission’s central recommendation — that prospective employees should be provided with a list of the 10 top-performing super funds for them to choose from — is a vital proposal to force funds to operate in members’ best interests.

On its face, it seems like an entirely uncontroversial idea. Simple, useful information provided to consumers that would have the effect of kicking super funds into gear. The PC reckons it will deliver a $165,000 boost to retirement balances. Underperforming funds will also be policed under the so-called “elevated outcomes test” to ensure laggards are punished, further helping savers.

Consumers wouldn’t even be forced into one of these top 10 funds. Savers could ignore the “Best In Show” list and opt to go into one of the worst-performing funds, generally managed by AMP, one of the big four banks or second-tier wealth management groups. These funds have been found to siphon as much fee revenue out of dealings with their own related parties as possible, eroding nest eggs in the process.

With millions of Australians left languishing in a quarter of the 200 funds in the system that have underperformed their own benchmarks for more than a decade, it seems strange that telling savers about 10 funds that are likely to be the best performing over the long-term, based on a range of metrics, is a controversial idea. But it is.

Both the Coalition government and the Labor Party have voiced their concerns with the proposals.

Despite the fact a best-in-show list would likely be dominated by union-and-employer-backed industry funds, Labor is wary of the idea. There are more than 100 sub-scale funds in the system, where funds are too small to keep fees low. Many of these are small industry funds, chaired by union representatives and with boards half-constituted by union appointees. Should the best-in-show list put pressure on these small funds to merge, many of union appointees would lose their postings, limiting their ability to direct where capital is invested and influence how big companies behave.

For the Liberals, a small list is seen as contrary to free markets and competitive capitalism. The Financial Services Council, the lobby group for the big banks and wealth managers, is demanding complete open slather, arguing for a junking of the default system in favour of one where a worker was forced to choose their own fund. In many cases, young workers would probably opt to keep their super with the same company that ran their bank account.

It’s telling that Westpac, the only big four bank to remain committed to its superannuation business (BT Financial Group), has thrown its weight behind the best in show proposal.

BT chief executive Brad Cooper said strong funds should embrace the competition such a list would enable.

Concerns that a best-performers list might disrupt smaller funds are unfounded.

The Australian Prudential Regulation Authority has modelled the impact of savers moving out of bad funds and into good ones and is not concerned. If small funds are pressured to merge with bigger, better funds, it’s seen as a good outcome.

It is also unlikely the 200 funds will consolidate to just 10. New entrants only account for $1 billion in super inflows each year, a tiny speck in the $2.7 trillion savings pool.

Even if we were left with a system dominated by 10 big funds, that’s still more than double the competition in the banking sector.

Indeed, without pressure to compete on performance, bank-owned retail funds have raced to build unnecessary bells and whistles. Smart phone apps, more financial advice and a proliferation of lousy investment options is the last thing needed.

The royal commission showed that when National Australia Bank’s own investment managers demanded more money to better compete with industry funds, the bank denied them access to more funds that would have allowed them to buy assets with better returns.

When AMP’s investment managers were concerned about missing already meagre investment targets, the fund responded by lowering its goals.

The Productivity Commission and the royal commission have focused the disinfecting power of sunlight on to the entrenched underperformers and fee-gougers in the super sector.

Perhaps it’s time government helped bring consumers out of the dark.