‘Best in show’ proposal for super industry stirs controversy

By Stephanie Aikins

January 11 2019
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Some stakeholders in the super industry have taken aim at the Productivity Commission’s suggestion of implementing a 10 “Best in Show” model for default funds, with industry representatives labelling the move “needlessly disruptive” and a “major flaw”.

australian parliament house at sunset best in show proposal super industry controversy

Following the release of the Productivity Commission’s findings into the superannuation industry on Thursday (10 January), a number of key figures in the superannuation industry have vocalised their disapproval at the suggested measure of synthesising default fund options into a list of 10 best-performing options that is presented to new workers.

According to Eva Scheelinck, CEO of Australian Institute of Superannuation Trustees, the proposal of a top 10 list will significantly impact competition in the default segment as many well-performing funds will be excluded as a result, ultimately to the detriment of many Australians.

“We agree with the commission that there is no place for underperforming funds in the default system; however, their proposal for a top 10 default list is a blunt mechanism that will be needlessly disruptive and fails to address the more serious problem of underperformance in the wider super system,” she said.

“According to the commission, a quarter of default funds underperform, but this proposal would deny 90 per cent of funds default status – it will remove many high-quality funds from the default system, which may also disadvantage members in these funds.”

Her words were largely echoed by Industry Super Australia chief executive Bernie Dean, who raised concerns that a consumer choice model could see Australians left vulnerable to sales pitches from those in the sector.

“In essence, the Productivity Commission is abandoning the proven, low-cost industrial default system in favour of a choice-first architecture that has been ground zero for consumer harm,” he said.

“A workplace default framework is a necessary counterweight to finance sector sales tactics.”

“It needs to be strengthened, not abandoned.”

Fat Cat Funds’ Chris Brycki agreed, saying the changes would only serve to promote the existing lack of competition in the segment and may cause funds to act unethically in order to be included within the top 10.

“This recommendation will likely embed existing high costs, create incentives to ‘game’ the system and lead to lobbying to be selected as one of the 10 shortlisted funds,” Mr Brycki said.

“We need to reduce costs and improve transparency across all funds, rather than promote existing practices and costs, which have resulted from an oligopoly immune from price competition.”

He cited fears that low-fee funds would dominate the default list at the detriment of funds that offer consumers diversified assets fundamental for growth but also incur associated costs.

“The report doesn’t go far enough to address the clear fact that low-fee funds perform better and past performance is not as relevant as a fund’s asset mix and costs,” he said.

“Our annual Fat Cat Funds report shows that 96 per cent of balanced super funds failed to outperform an equivalent low-fee index fund after fees and taxes due to having too high fees. A simple, low-cost indexing strategy achieved top quartile returns in each risk category over five and 10 years.

“Rather than cherry-pick the best of a bad bunch, the government should focus on removing conflicts of interest and rent-seeking behaviour and simply reduce costs for all members,” Mr Brycki said.

Both the AIST and Industry Super Australia advised that the filtering out of poor-performing default funds remains in the hands of the Fair Work Commission, in order to ensure independence from the superannuation sector.

Currently, the Fair Work Commission is responsible for removing low-performing products based on fees, costs, net returns, governance and insurance offerings.

The AIST said it was concerned that taking away default superannuation from the Fair Work Commissions portfolio would impact employees’ ability to protect their super through accessing court-ordered remedies in cases such as a loss of insurance benefits.

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