By Steve Blizard 10 June 2018
Over the past month there have been an unusually large number of articles about superannuation.
So what is going on?
On the 29 May, the Productivity Commission released a report that documents various flaws in the current $2.6 trillion compulsory superannuation system.
Since 1991, the design of default based employer compulsory super has created systemic problems — poorly performing funds (including some low return Industry funds), unaccountable boards, ineffective regulatory oversight and unavailable data in a system that fails to prioritise member interest.
The commission concludes that millions of workers are being financially damaged by sub-par returns at serious cost to their income and retirement wellbeing.
However, the real story is the major showdown between Industry funds and their competitors.
In a recent article in the Australian Financial Review, Melinda Howes, general manager of superannuation at BT Financial said: “Union super and professional retail funds agree on one thing: legislation currently stifles competition in the default superannuation market.”
“It has been rare for union funds to acknowledge this fact, but credit must go to Australian Super for owning up to the reality of this design flaw.
“Union funds understand that they benefit from about $10 billion in guaranteed default contributions that flow through modern awards each year, along with enterprise agreements that earn them an “illiquidity premium” that other funds cannot access” Ms Howes said.
The Productivity Commission Report throws into question sweeping claims made by the union super sector that are not supported by firm data.
Concern has been raised that the growth of Industry funds like Australian Super is built out of a government-guaranteed distribution model, administered by the Fair Work Commission, which allocates employees’ retirement savings based on union affiliation, rather than competitive forces.
The performance of a few large funds hides the chronic underperformance of a multitude of sub-scale Industry funds –which explains why every “compare the pair” union fund campaign uses selective averages which may not compare apples with apples.
Analysis prepared for the Productivity Commission demonstrated as many as 1.7 million consumer accounts are marooned in 33 sub-scale union super funds.
There are also a million-odd workers who are covered by enterprise agreements that nominate just one superannuation fund in which all the workers must be enrolled.
Enacting competition policy would put end to these monopoly arrangements.
Super fund fee disclosures remain opaque
The Productivity Commission’s draft report into super found “yawning gaps” in the data in the super system, inhibiting accountability to members and regulators.
“The result is poor transparency, which leaves members in the dark as to what they are really paying for and makes it harder for engaged members to compare products and identify the best performing funds,” the report says.
Questions have also been raised about why a business such as IFM, set up for the benefit of not-for-profit Industry super fund members, would charge internal performance fees?
Confusing Default with Choice Funds
BT’s Melinda Howes acknowledges that not all professional default retail funds are strong performers, but to suggest that no reforms are needed within union super funds defies recent evidence to the contrary.
Industry funds are also well represented among the 26 worst performing default funds, accounting for 10 over the past decade, compared to the for-profit sector’s 12.
In order to protect their privileged status, Industry Fund lobbyists and friendly journalists regularly attack financial advisers, who are simply doing their job.
However the fact remains that if you don’t want an adviser, you don’t have to have one.
This confusion surrounding fund options is further exacerbated by the Government itself.
The problem that arises when comparing super options is the lack of clarity provided between “default” super and “choice” super funds.
It is interesting to note that the Australian Prudential Regulatory Authority (APRA) and the Productivity Commission’s remit, is to investigate both Health Insurance as well as Superannuation.
Default MySuper, with no advice provision, is the equivalent of Medicare, where you get what you are given.
This can include default super fund exposure to high levels of illiquid infrastructure funds and private equity investments that can be highly volatile and tendency to blow up during GFC events.
Whereas Choice of Fund Super, which provides access to many high performing investment managers (that choose to remain outside of the default system), with the added cost of an advice service, is the equivalent of Private Health Insurance.
You pay more and it’s likely that your fund may earn more, after fees.
In the choice environment where you have a SMSF, or invest in the range of new low-fee super platforms, it is possible to find over 10 investment funds that have systematically beaten the returns of Industry Funds over the past decade.
Unfortunately the media and government focus on the poor performing default funds, and totally ignore the high performing choice funds, conveniently lumping them all into the same basket.
No clear path forward
The solution recommended by the Productivity Commission is for young workers to enrol in a top-ranking fund when they first apply for a tax file number.
Then, under the Superstream system, they would then be able to stay the course with this fund unless they make a deliberate choice to switch.
A flexible “set-and-forget” strategy.
Will all of this get off the ground given dynamics in the Senate?
Not likely, so the default super disaster will continue.