Date posted: 31/05/2018 5 min read

Productivity Commission blasts super industry

No segment of the super industry has been spared criticism in the PC draft report

In brief

  • Be careful relying on media reporting of the draft report
  • Initial reactions of some super industry segments have been predictable. How they respond longer term will be interesting
  • PC conducting further analysis into related areas

Every segment of the superannuation industry has been criticised by the Productivity Commission’s draft report into the efficiency and competitiveness of the sector.

The draft report is almost 500 pages long together with a number of significant appendices.

Much of the initial media commentary, and press releases issued by industry participants, to date about the report appear to have been based on a quick read of the report’s 42 page overview and draft findings and recommendations.  (This is fair enough given the tight timeframes to generate material.)

But before any views can be really formed about the report, it is essential to read the whole document.  At this point, in time, like most people we suspect, we have yet to complete this task.

No sector to the super industry escapes denunciation

The report is replete with examples of an overall poor assessment of the super industry.  Take the following examples:

  • “Data held by regulators contain many gaps and inconsistencies, especially in relation to funds’ investment expenses and related-party relationships.”
  • “Analysing fees is bedevilled by significant gaps and inconsistencies in how funds report data on fees and costs, despite regulator endeavour to fix this. This lack of fee transparency harms members by making fee comparability difficult at best, and thus renders cost-based competition largely elusive.”
  • “…we attempted to collect information from Australian funds on the costs they incur at an asset-class level to inform comparisons with other countries. Again we were hamstrung by poor responses to our funds survey. For example, only 17 per cent of the funds that responded provided any information on investment management costs for Australian listed equities — an asset class that virtually all super funds have exposure to.”
  • “About 12 million Australians have insurance (life, total and permanent disability and/or income protection cover) through their super. In 2016-17, they paid a total of $9 billion in premiums (up 35 per cent in three years). But about a quarter of members do not know if they have (and are paying for) a policy. (our emphasis)
  • “Close to 60 per cent of members do not understand their fees and charges, and around 40 per cent lack an understanding of basic investment options (such as growth, balanced and conservative). And about 30 per cent of Australians have rather low levels of financial literacy.”

We could go on but the flavour of these comments provide enough material to understand that the Commission thinks there is much room for improvement in the sector.

How will the industry respond?

Some responses thus far have been predictable.  Many people have gone straight to hyperbole seeking to justify their business models and market position.  Given the stridency of the Productivity Commission’s draft findings it would beggar belief for it to issue a final draft disabusing vast swathes of this draft report.  In other words the arguments appear to have been lost.  Some will continue the fight no doubt.

Productivity Commission to release further related research

The draft report says that it will soon publish further important research in the following areas:

  • Econometric analysis of the economies of scale to estimate the cost savings from scale improvements to date, what remains unrealised and the degree to which scale benefits have been realised
  • Modelling the fiscal effects of insurance in super including the impacts of insurance payouts on social security payments and the impact of balance erosion caused by insurance premiums on age pension liabilities

We now have context around some recent Federal Budget measures

In the recent budget the government announced measures to limit the amount of insurance in low balance funds and those under age 25, the transfer of inactive accounts to the ATO that must work harder to connect lost accounts and so on

These were all Productivity Commission draft recommendations in this report.

SG increases maybe under threat

The current legislated plan is to increase the Super Guarantee to 12% by July 2022.  However the Productivity Commission says that before there are any increases actually occur there should be an inquiry into the “adequacy of retirement incomes or the impact of super on national savings and thus overall community wellbeing.”  It would be hard not to argue that this research should not be conducted.

Where to from here?

The Productivity Commission needs to finalise this report in the near future – we do not know the likely publication date.  While this report is being finalised, the Royal Commission in banking, superannuation and financial services will also continue to run.  At this point in time it has yet to look into superannuation in any specific detail.

It would seem logical that the recommendations of both the Royal Commission and Productivity Commission work will be then taken up by government.  We will almost certainly have regulatory change.  It is impossible to predict what these might be but it would appear that they will be quite far reaching.

Further reading

It’s behind a paywall but we would encourage you to read Paul Kelly’s article in The Australian on 30 May. Given Kelly has written for The Australian for more than 30 years it’s tempting to see him as not particularly friendly to the left side of politics. This is often not a view shared by those who know him.

Read article

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