In its draft report released this week, the Productivity Commission suggested new workforce entrants select from a top 10 list of funds, but according to Grattan Institute Fellow Brendan Coates, in an ideal world there wouldn’t be many more than 10 funds to begin with.
Speaking to Nest Egg, Mr Coates said the report highlighted the poor competition in the super sector and that superannuation was a “bad deal for many people”.
The report found uncompetitive funds could see workers' savings stagnate or erode with fees. For the millions of Australians with more than one superannuation account, these impacts are exacerbated.
Mr Coates said there are currently too many poorly performing and smaller funds and applauded the recommendation that new entrants to the workforce select a super fund from a top 10 list curated by an independent government agency.
Under the Productivity Commission’s recommendation, uncompetitive funds will likely be required to merge to stay alive.
“That would undoubtedly be a good thing for that to happen because there are far too many funds in Australia's super sector compared to what there really should be if competition was actually working,” Mr Coates said.
“If competition was actually working, we'd probably see 10 funds account for the majority of superannuation and that'd be it.”
He said super reform is the lowest hanging policy reform in Australia, but has the potential to improve the overall efficiency of the economy and financial systems.
Even so, the selection of the top 10 funds would likely prove to be contentious, helped along by out-dated assumptions that industry funds are tied with Labor and retail with the Coalition.
Arguing that Australians have to move away from those assumptions, Mr Coates said the recommendation would see all funds as “fair game”, with savers ultimately the victors.
“If the reforms the Productivity Commission recommends were enacted, then that would certainly put a lot more pressure on both industry and super funds to perform,” he said.
“It'll be fair game, not just one or the other.”
A sector split
The Financial Services Council echoed Mr Coates views, with CEO Sally Loane noting that having default funds tied to employers and industries has worked for funds, not consumers.
She said, “Poorly performing funds must lift their game and put the interests of consumers first. The best funds, whether retail, industry or corporate, have nothing to fear from competition.”
Industry Super Australia (ISA), the Australian Institute of Superannuation Trustees and the Association of Superannuation Funds of Australia (ASFA) all disagree, citing the need for a diversity of funds, the past performance of the default fund system and the fact that the government agency is “unproven”.
These three groups represent the $2.6 trillion industry, which the Productivity Commission estimates garners $2.6 billion every year through excess fees charged on multiple accounts and unwanted life insurance.
To Mr Coates, the sector’s resistance isn’t surprising. After all, “there’s a lot at stake”.
“More than $20 billion in total fees every year, is more than 1 per cent of GDP, and so super funds aren't going to want to see their fee and income fall,” he said.
Changes to the super guarantee?
The Grattan Institute fellow’s suggestion that reduced fees could also mitigate the need to increase the rate of super paid to 12 per cent from 9.5 per cent would likely meet the same resistance.
“We [at Grattan] have seen very little rationale for increasing the super guarantee to 12 per cent. Mind you if [these Productivity Commission recommendations] improve the efficiency of the super sector as well, so that fees are lower and returns are better, then that reduces the need to move toward 12 per cent super guarantee, even further,” Mr Coates said.
However, Mr Coates noted that the scope of the Productivity Commission’s report did not include the increase to the super guarantee.
“Governments will be very good at making sure they ask the questions they want to have answered and not ask the questions they don't want to have answered,” he said.