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Retirement Plans

Australia’s ‘best in show’ gambit facing tough sell

Zachary May thinks political considerations are ignoring the fact that the superannuation system seems to be working well already.

Australia's latest efforts to make its fast-growing A$2.7 trillion ($2.1 trillion) superannuation industry work better for plan members are moving ahead over tricky political terrain as national elections loom in May.

Following the recent release of a Productivity Commission report on the country's superannuation default mechanism and a Royal Commission opus on financial sector misconduct, some consensus has formed on the way forward in areas such as culling underperforming super funds from the ranks of the system's default options.

But with the opposition Labor Party's ties to the union-backed industry super fund segment and the ruling Liberal Party's ties to the bank-dominated retail fund sector, the choice of how to get from "A" to "B" can quickly take on political overtones.

A case in point is the Productivity Commission's call for a makeover of the superannuation system's default mechanism, which would eliminate the central role unions have played since the 1992 launch of Australia's "superannuation guarantee."

In place of employers and unions selecting the default super funds for employees who don't make their own choices, the Productivity Commission called for a new "Best in Show" list of top-performing super funds to be the centerpiece of a new default mechanism.

Members who don't make their own choices currently account for about a quarter of the system's assets and half of the member accounts in funds regulated by the Australian Prudential Regulation Authority. They would be encouraged to pick a fund from that shortlist. Those who don't would be assigned to funds on the list.

For veterans of union-backed, "profit-for-member" industry funds, the commission's far-reaching proposal amounts to an attempt to fix something that isn't broken.

Funds have outperformed

The commission's own research confirms that "industry funds have systematically outperformed" retail funds, and members in default funds selected by employers and unions under the current system have fared better than members making their own choices, said Zachary May, Melbourne-based director of policy with advocacy group Industry Super Australia.

The commission report showed 9.6 million member accounts — with combined assets of A$436 billion — in default funds that have topped their benchmark portfolio returns over the past decade, and only 1.6 million accounts with A$57 billion underperforming. The commission highlighted the problem of members with multiple default accounts — the result of job changes — as a crucial inefficiency to be addressed.

Those results suggest the industrial relations system has been a healthy counterweight to financial industry interests in the superannuation sector, Mr. May said.

Proposing radical changes for a system generating good outcomes reflects political considerations more than practical ones, he said.

And that more than 5-to-1 lead for outperforming accounts could have been even more lopsided if the role Australia's Fair Work Commission should be playing in weeding out underperforming funds wasn't being obstructed by the ruling party's refusal to make needed appointments to fill vacancies there, said Eva Scheerlinck, CEO of the Sydney-based Australian Institute of Superannuation Trustees.

Mr. May called getting the Fair Work Commission process restarted a top priority for Industry Super Australia.

If Labor is taking Australia's Liberals to task for obstructing the FWC's workings, Liberal Party heavyweights have taken the opportunity to respond in kind.

Josh Frydenberg, Australia's treasurer, in a statement following the Jan. 10 release of the Productivity Commission report called on the Labor Party to stop blocking amendments before Parliament endorsed by the commission, including ones which would introduce strengthened "outcomes tests" for "MySuper" default products.

The treasurer pledged a final response to the Productivity Commission report following the Feb. 4 release of the Royal Commission report but had yet to do so as of Feb. 15, leading some market veterans to conclude the controversial "best in show" recommendation is dead in the water.

Skye Buttenshaw, Mr. Frydenberg's spokeswoman, countered that the recommendation is still under consideration. The treasurer's official response to the Productivity Commission report will be released "in due course," she said.

Meanwhile, Sally Loane, the CEO of the Financial Services Council, a retail super fund advocacy group, responded to the commission's best in show proposal with a mix of praise and concern.

She welcomed "taking default superannuation out of the industrial relations system" and tying default funds to individual members rather than employers, making it easier for members to become more engaged. At the same time, she warned that a best-in-show list of 10 funds could lead to a "monolithic concentration."

At the end of the day, the commission said while the current default system is working "reasonably well," it remains an "unlucky lottery" for too many members.

The report called for steps to make the system work better "for all members," including heightened "outcome" tests for funds hoping to retain default option status and a mechanism which allows members to consolidate multiple default accounts.

The commission's "implied assumption … is that there cannot be any weak links or missteps for default funds," and their solution is an "assisted employee model" that will "nudge" or encourage members to make choices, Mr. May said.

The commission report noted that a member in a bottom-quartile fund would have an additional A$533,000 if he or she had been in a median top-quartile fund instead.

'Straw man' argument

Martin Fahy, CEO of the Sydney-based Association of Superannuation Funds of Australia, called that eye-popping figure a "straw man," noting that no one is likely to be in a fund consistently at the bottom or the top of performance charts across a 45-year work life.

A spokeswoman for the Productivity Commission declined to comment.

Mr. Fahy said the best-in-show recommendation could simply be a reflection of the pressures facing regulators and policymakers from a combustible mix of perennial principal-agent conflicts and "robust community expectations" bubbling over into populism.

Their answer may be to seek consolidation, making the super industry "massive, passive, stable and efficient."

Still, especially with a national election due by May 18 where the Labor Party is expected to make gains, observers predict the political stars will likely fail to align for the best in show proposal, even though the commission called it a "must-have" to make the system work for members.

Labor is naturally against that proposal and the Liberals likewise, as a matter of philosophy, shouldn't be enthusiastic about "picking winners," Mr. Fahy said. Politically, "it doesn't have any natural allies," Mr. May agreed.