- 31 recommendations and 46 findings in comprehensive lengthy report
- Overall analysis – super system is doing ok but could do significantly better
- Govt’s response likely to be delayed until fin services Royal Commission report delivered & digested
The Productivity Commission (PC) tends to produce long and comprehensive reports and their recently released report into the competitiveness and efficiency of the superannuation sector doesn't disappoint in this respect.
The final report runs to 625 pages plus numerous appendices.
Overall dim view of the super sector
One industry body submitted to the PC that the super system was "not broken, and is in fact a world-class private pension system". To this positive view the PC coldly said, "the evidence suggests otherwise".
The truth is probably the mid-point between these two very different views. There is a lot that the super industry has done right but equally there is a lot that could be done significantly better.
It is also true that in some cases the super industry has to be dragged kicking and screaming to implement reforms. A good example is collection and transferring of account balances. Despite the obvious cost savings the super industry proved itself, over many years, incapable of solving this problem itself and the government prescribed a solution.
What is compulsory employer super?
This is a fundamental point.
Chartered Accountants ANZ believes that compulsory super is foregone wages.
If we are right – or even arguably garnisheed wages (that is, "a third party who is instructed by way of legal notice to surrender money to settle a debt or claim") – then it is difficult not to accept that those receiving this money owe a very high duty of care and should adhere to very high ethical standards.
I have every expectation that this aspect of compulsory super will be an ongoing argument in the years ahead as some will be reluctant to accept this point in order to reduce their legal and ethical obligations.
Compulsory super needs to be reviewed
For many years segments of the super industry and others have lobbied for the removal of the $450 per month ordinary time earnings threshold before an employer needs to make Super Guarantee contributions for an employee.
Chartered Accountants ANZ does not agree with view. We have argued that the threshold should be substantially increased.
The PC notes that it was not asked to look at "the broader role of super in funding retirement incomes or the impact of super on national savings, public finances or intergenerational equity" including the need to increase the SG rate beyond 9.5%. The PC believes all these aspects, including the $450 per month threshold, should be reviewed given that the last time all these issues were considered was in 1993 by Vince Fitzgerald.
It is hard to argue against this in principle, especially as it is over 25 years since the last official review was conducted. However what would be achieved unless the review is conducted by a scrupulously independent organisation? Public policy debates about compulsory super are nearly always partisan and come down along political leanings which means whatever review is conducted will be dismissed by whichever side doesn't agree with the inquiry's findings and conclusions.
The PC report (p. 3) says, "the super system's performance … matters for the wealth and wellbeing of Australians – and its role in intergenerational wealth means it will play a growing role in wealth inequality (my emphasis). It is only reading further into the report that it is stated that in the PC's analysis our super system does help to reduce inequality. It reached this conclusion in another review it conducted in 2018 about inequality in the Australian economy.
PC recommends radical shakeup of fees
In the Productivity Commission's view APRA regulated funds should only charge fees on a cost-recovery basis – that is, cross-subsidisation via percentage fees and other mechanisms would be outlawed.
In the PC's view administration fees charged beyond cost-recovery are not in members' best interests (which is now a SIS Act trustee covenant - see Sec 52. As the PC explains these particular costs between members would not vary much between members and hence percentage fees are inappropriate.
The PC also suggests that trailing commissions should be outlawed as soon as practicable because the transition period for these fees outlawed for some arrangements as part of the Future of Financial Advice reforms. It would not be much of a surprise if the Royal Commission into misconduct in the banking, superannuation and financial services industry had something to say about these issues.
Overall industry data lacking to provide full system analysis
In its draft report the Productivity Commission stated that its analysis of the super sector was hampered by incomplete data. The regulators, principally APRA, private investment performance researchers or the PC have not been able to collect sufficient information.
Nevertheless the PC did claim that it had sufficient data across all super sectors to reach reasonable conclusions about the sector.
We can expect that in time if the argument that compulsory employer super is deferred salary then the government and/or regulators will demand APRA super funds provide more data more frequently which will be published transparently.
Fund return analysis performed only using total returns
There has been a lot of media coverage about the Productivity Commission's findings about many super funds providing poor performance compared to PC created benchmarks.
This is good useful analysis however its limitation is that it looks at total net returns. The problem with this approach is that because of the volatility of most financial markets it often makes it hard to see the important underlying value of the income earned from investments. It is also true that short term market volatility which can captivate some market commentators and participants can often be ignored as it washes through all markets over time.
In our submission to the PC about its initial analysis in its draft report we expressed our concerns however regrettably the PC has stuck with its original process.
Fund disclosure requirements
The PC is a strong advocate for a one stop shop where consumers can go to find standard disclosure material about each fund and every investment option offered by a fund.
A similar recommendation was made by Darren McShane in his excellent review for ASIC of RG97 published last year.
It suggests that this website should be administered by ASIC. However in its response to McShane's work, ASIC said it would not be implementing this excellent policy idea.
Perhaps the government will have more to say about this recommendation when it formally responds to the PC report with an allocation for funding – probably charged back to funds.
The top 10 default funds idea
This concept has been discussed widely and is well known. The PC's arguments for suggesting this approach is that at present a job and its super fund are connected but it argues that funds should be attached to individuals who should be defaulted once only with the freedom to move anywhere if desired. Under this system defaults would be selected from a list of top 10 super funds. Every four years a panel would select which funds appeared on this top 10 list.
The key question is – is this a good idea? There is no doubt that many employees don't make a choice of super fund and there are too many default accounts. Anyone who has four different types of jobs between their mid-teens and age 25 could easily have four or more different super funds.
However at this point the list of top ten funds might not be necessary. There are several other reforms that could be applied before a decision is made that a top 10 default list is required.
The government's idea of forcing most dormant accounts with under $6,000 to be declared lost and transferred to the ATO, which must then work hard to send that money to a non-dormant account, will remove many multiple accounts from the super system. We believe this threshold should be increased to $10,000 in the first instance to trap more dormant balances. Each year this process will soak up a new batch of dormant smaller balance accounts.
We would also like to see joint spousal accounts. This will further reduce the number of accounts in the super system and have the additional benefit of providing a couple with greater knowledge about their total super assets.
And finally as noted above we would like to see an increase in the $450 per month threshold before SG payments have to be made. The main reason small balance accounts exist is that contributions as low as $42.75 that is 9.5% of $450 – or $36.33 after 15% tax on contributions – are being made. This is $436 total net contributions over a 12 month period.
Enforced super fund mergers
In the PC's opinion poorly performing funds should be forced to merge with those deemed to be more successful. There is good reason to be concerned about this particular policy – this year's best performer is often not 'top of the pops' for long and as we all know big is not necessarily better and sometimes local factors which would often be dismissed in larger organisations can be factored into the running of smaller confined organisations.
Life insurance inside super is a mess
There is no doubt that life insurance within super needs urgent reform. To date the industry has taken some tentative steps to address the myriad of problems but progress has been slow and voluntary. It would be no surprise if in time the government and regulators stepped in and enforced significant adjustments.