FSI canvasses default fund status auctions

The Financial Systems Inquiry has canvassed the idea of auctioning default fund status as a mechanism for driving down fees which it has noted are comparatively high in the Australian superannuation fund sector. 

The proposal for the default fund auction is revealed in the inquiry’s interim report, delivered today, in which it notes that while superannuation represents an important source of funding for long-term capital formation, there is little evidence of “strong fee-based competition” 

It goes on to say there that “operating costs and fees appear high by international standards” and that this “indicates there is scope for greater efficiencies in the superannuation system”. 

“Notwithstanding the difficulties in comparing fees and costs across funds, Australia’s superannuation sector has some of the highest operating costs among Organisation for Economic Co-operation and Development countries,” the interim report said. “The decline in fees over the past decade is modest, given the economies of scale that the sector has achieved. That said, high allocations to growth and alternative assets contribute to these costs, but they can also deliver higher after-fee returns to members.” 

The report went to say that “high demand for liquidity from superannuation funds might be reducing after-fee returns to members and that the mandatory inter-fund portability timeframe of three days was contributing to higher allocations to liquid assets than the system required. 

“It remains unclear whether funds are chasing short-term returns and, if so, whether this is contributing to lower after-fee returns, as well as to what extent more individual tailoring of asset allocations would produce net benefits to members,” it said. 

The report then canvassed opinions on the default fund auction and replacing the three-day portability rule with a longer maximum time period or a staged transfer of members’ balances between funds, including expanding the regulator’s power to extend the maximum time period to the entire industry in times of stress.