Financial Services Minister Kelly O’Dwyer was out of the blocks early before Tuesday’s Productivity Commission superannuation report release.
The front-page lead of Monday’s Australian Financial Review faithfully repeats as fact her latest anti-industry fund conspiracy theory.
According to the AFR and Ms O’Dwyer, industry funds are running “below-the-radar”, “guerrilla campaigns” attempting to undermine the government’s latest superannuation reforms while claiming to support them. Memo Journalism 101 students: what it really means is that the government is being lobbied about details of a new policy – that, like the sun rising in the east, is not news.
There was real news on the back page of the same newspaper, where Adele Ferguson reports about industry fund-sponsored investigations by a former head of research at APRA. That research by Dr Wilson Sy shows Ms O’Dwyer’s good friends in retail superannuation funds cost members $15.5 billion a year by not having the same management system as the industry funds.
More importantly, Dr Sy points to the super industry overall having performed poorly over the past two decades, that “erroneous” research and lax regulation resulted in fee structures that were complex, opaque and allowed many billions to be plundered for profit.
It’s the bigger picture that will be the expected focus of the Productivity Commission report, especially the inefficiencies and loss of contributions from individuals having multiple and small accounts, along with the underperformance of small, inefficient superannuation funds.
Meanwhile the likely reason for Ms O’Dwyer having an early crack at super funds might be found in another Fairfax report.
“The report, to be released on Tuesday, will dash the hopes of the major banks in their quest to break open the existing system where unions and employers choose the default funds for workers,” it reported.
“The Productivity Commission will outline a new way to select the default funds, but it stops far short of the open competition sought by the banks and allies such as AMP in the retail fund sector.”
With the PC failing to give Ms O’Dwyer what the Liberal Party desperately wants, it looks like she needed to come up with a rather lame yarn to save face.
So here we go again with yet another report on an industry everyone has long known to be an extremely rich gravy train. It seems the PC will recommend improvements and, given the heat of the royal commission, the government is feeling compelled to act on them.
The problem is that, time and again, super changes only go half way, focusing on ameliorating a problem instead of preventing it.
For example, the government’s budget proposal for the ATO to hoover up inactive small accounts of less than $6000 and consolidate them is a definite improvement on the way small accounts are eaten up by fees. This is the reform the Financial Services Minister claims industry funds are resisting.
(Memo to AFR and Ms O’Dwyer: that’s fees charged by both retail and industry funds on small accounts – maybe it would be worth publishing which fees are highest.)
But the change is only half-smart. It ignores the fact that small active accountants also suffer from outrageous fees as a percentage of their value. Especially for people on a low or part-time wage, it’s a battle for their super account to reach a viable size where the earnings comfortably justify the fees.
Rather than merely grabbing the small inactive accounts, a vast improvement in member outcomes would be achieved by the ATO holding superannuation contributions compounding at the government bond rate until the account is big enough to justify paying someone to invest it.
I’ll leave it to the accountants to work out the size of viability – $20,000? $50,000? It would provide an incentive for superannuation fund managers to get their costs down to get their hands on such accounts as soon as possible.
Government bonds aren’t paying much interest, but it’s better than going backwards.
A much more radical idea I’ve been fruitlessly pushing is for the ATO to have the job of collecting all super guarantee contributions in tandem with income tax – a process more reliable than leaving it up to employers to forward contributions when they get around to it and one that would capture millions of self-employed.
Under such a system, once the amount is viable, the taxpayer gets to nominate on their annual tax return who is to manage their super – industry, retail or SMSF.
And then there’s the issue of superannuation funds being of sufficient size and professionalism to be competitive. APRA has been making noises about pushing smaller under-performing funds to merge and get out of their members’ way – but push is yet to come to the necessary shove.
This is not a straight-forward matter of dividing up the duds among the bigger, better funds. It costs money to merge – a good, big fund would be likely to lose some of its existing members’ funds by taking over tiddlers. The small fry are likely to be better off merging among themselves and with a medium-sized fund.
The ego of people involved on boards should not be underestimated. Change is already resisted. Directors of small funds, often good people with good motives, sometimes can’t see beyond their own titles and board fees. And tribalism is a powerful force.
The writing – and underperformance – has been on the wall for long enough for egos and tribalism to be sacrificed.
That’s an area where the PC could find greater government interest – many of the small funds are industry funds.
It seems there’s nothing Ms O’Dwyer would like more than to be able to say she was taking them out.