Inadequate competition, governance and regulation have led to a situation in which many Australians are not achieving an optimal outcome from superannuation, including being signed up to underperforming funds, holding unintended multiple accounts and having their balances eroded by unsuitable insurance.
That is the bottom line of the Productivity Commission’s (PC’s) third tranche assessment of Efficiency and Competitiveness in the Australian superannuation industry.
In making that assessment, the PC has delivered squarely on the terms of reference outlined by the Government more than two years’ ago, and it will be up to the Turnbull Government or its Labor successor to decide what is to be done about the shortcoming identified in the draft report.
It will be pleased with the PC’s recommendation that members should only ever be allocated to a default fund once, upon entering the workforce, and that they should be empowered to choose from a “best on show” shortlist set by an independent competitive process.
What will not please the Turnbull Government, however, is that the PC’s assessment that “most (but not all) underperforming products are in the retail segment”, but it will be pleased by the assessment that Labor’s default funds under modern awards regime has led to inadequate competition.
The PC’s draft report concluded that “rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including the proliferation of over 40,000 products)”.
It said that while the default segment outperformed the system on average, the way members were allocated to default products left some exposed to the costly risk of being defaulted into an underperforming fund.
Further, the report said the regulators focused too much on funds rather than members, with sub-par data and disclosure inhibiting accountability to members and regulators.
The PC’s draft report findings also stand to erode the MySuper outcome of the Labor-initiated Cooper Review, arguing for an elevated threshold for MySuper authorisation and more encouragement for members to get “engaged in products they can easily and safely choose from”.
“This is superior to other default models – it side-steps employers and puts decision-making back with members in a way that supports them with safer, simpler choice,” it said.
The PC’s draft report also backed the Government’s push for stronger super fund governance, especially around board appoints and mergers, and urged funds to do more to provide insurance that was valuable to members.