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‘Best-in-show’ fund list proposed for Australia super fund default offerings

A draft report by a commission tasked with assessing the performance of Australia's superannuation industry said making a list of preferred super funds a cornerstone of the system's default option offerings could be one key to ensuring the system's benefits are enjoyed more broadly.

The draft report, titled "Superannuation: Assessing Efficiency and Competitiveness," noted that roughly two-thirds of the 14.6 million accounts in the commission's dataset of providers offering default, low-fee MySuper products were in 47 funds that performed above their benchmarks between 2005 and 2016.

Most of the remaining third were in 20 funds that trailed their benchmarks by 25 basis points or more.

Those results suggest Australia's A$2.6 trillion ($2 trillion) super system "has become an unlucky lottery" for too many Australians, said Karen Chester, the Productivity Commission's deputy chairwoman, in a news release about the draft report's conclusions.

The commission is proposing that members new to the workforce "should get to choose from a 'best-in-show' list of high-performing funds … identified by an independent and expert panel," the news release said, adding "existing members should be able to readily switch to these funds."

The report went on to say that the list of preferred funds "should be short — with no more than 10 products." That structure would ensure that funds have to "vigorously compete for the default market."

A spokesman for the commission couldn't be reached immediately for further comment. Interested parties can now make written submissions regarding the commission's findings and recommendations through July 13.

Martin Fahy, CEO of the Australia Superannuation Fund Association, said in an interview the move could further accelerate consolidation in the superannuation fund industry — not a bad thing at a time when scale could come in handy for fast-growing funds under pressure to boost allocations to public and private markets overseas.

Still, "anointing" 10 favored funds to pressure the bottom quartile and "hope that some magic happens" could lead to significant unintended consequences, he warned.

For the 20 top funds that already have roughly 80% of the industry's funds under management, "if you're not on that list, you're toast," he said.

In addition to "entrenched underperformance," the report cited "unintended multiple accounts," resulting from members switching jobs and being defaulted to their new employer's balanced fund without closing out their previous fund, as another big drag on member balances.

"With default funds being tied to the employer and not the employee, many members end up with another account every time they change (jobs)," said Ms. Chester. The news release said excess fees and insurance premiums paid by members on 10 million such accounts cost them A$2.6 billion every year.