To understand what’s driving the Productivity Commission’s latest suggestions for reforming ‘default’ super funds in Australia, context is everything.
Australia’s super system is the envy of most of the world – only two nations outrank Australia in the internationally respected Mercer Global Pension Index.
The Index ranks nations on three broad categories: ‘Adequacy’, or whether enough is being saved and how those savings interact with the tax system; ‘Sustainability’, or whether the system can cope with a changing economy and demographic profile; and ‘Integrity’, or how efficiently the system is regulated and governed.
You might think that to improve the system you’d want to look at the two nations that outrank Australia – Denmark and the Netherlands.
In fact, the terms of reference set for the Commission called for comparisons with Sweden and Chile, both of which are well behind Australia in terms of adequacy (see chart below), and New Zealand which is not yet part of the Mercer report.
Neither Sweden nor Chile can match Australia on the measure of ‘Integrity’, which is strange because the way default funds are allocated certainly comes under Mercer’s integrity sub-categories of ‘governance’ and ‘regulation’.
The Commission’s review came out of the 2015 Financial System Inquiry which noted that: “Fees have not fallen by as much as would be expected given the substantial increase in the scale of the superannuation system, a major reason for this being the absence of consumer driven competition, particularly in the default fund market.”
The default funds are dominated by industry super funds, because historically they were written into enterprise bargaining agreements. As their members are also their shareholders, they can also afford to charge lower fees.
Increasing ‘competition’ in that space might seem like a good idea until you look at the performance of the group of funds keen to take more of the default market: the bank-owned retail funds.
Data from the Australian Prudential Regulatory Authority shows 10-year annualised returns for the super funds managed in-house by corporations, or by the industry super funds, of 5.1 and 5.4 per cent respectively.
Public servants have also done well, with their government-managed funds returning 5.4 per cent.
But way below all of them are the bank-owned retail funds, which have returned just 3.6 per cent in the past 10 years.
These are important figures, because of those four groups only the retail funds stand to benefit significantly from what the commission calls “consumer-driven competition”.
Competition or confusion?
Competition in highly regulated markets can produce perverse results, such as have been seen in the privatised electricity market where clever marketing by energy retailers has extracted profit margins roughly double what the regulator thinks reasonable.
The same fears exist in the super sector, where consumers often don’t understand what they’re being offered.
So before looking at the Productivity Commission’s four plans to boost competition, you really have to ask why the third-best retirement income system in the world needs to learn from those who don’t do it as well.
And why does a new marketing opportunity need to be opened up for Australia’s already-huge banks, when the net result if they are successful will be smaller returns for the nation’s super savings?
David Whiteley, CEO of Industry Super Australia, argues that giving banks the chance to cross-sell other products, such as credit cards or personal loans, could convince future super savers to switch between complex super products – only to find they retire with less money.
He told me on Wednesday: “Superannuation is an economic policy, not just a personal finance industry.”
Well that’s true, because super savers who retire with less money have to draw more income as a pension via the government’s balance sheet.
That’s why weighing up which of the PC’s four plans is best is a bit of a smoke screen.
The bigger political question is whether the super system should be changed to increase returns to bank shareholders, or maintained in something like its present form to take as much burden off taxpayers as possible – through the simple, historically proven higher returns that the non-retail funds have generated.