Questions have been raised about Australian government proposals that could force underperforming superannuation funds to merge or exit the system. The changes would likely mean savings for members but result in the closure of numerous sub-scale funds, noted consultants.
The Productivity Commission – which advises the government on microeconomic policy – released a 256-page draft report at the end of March investigating ways to reduce super fees and streamline the number of accounts held by members.
Interested parties have until the end of May to comment on what regulatory action would be needed to oblige trustees to seriously consider merger proposals.
Up to 45% of super fund members have multiple accounts – some as many as six – which have been accumulated as they have changed jobs, according to the Australian Taxation Office.
The commission wants to see a system whereby each person is allocated one portable account for life and has proposed four alternative models for how default super should be distributed.
At stake is A$500 billion ($375 billion) in assets, which are managed on behalf of workers who do not choose their own fund.
“If the system is going to rely on defaults, it needs to guide members to products that at a minimum seek to maximise long-term net returns” the Commission said in its report.
"Complacent and fat on fees"
It argued that the industry had become complacent and grown fat on fees charged on mandatory contributions from unengaged members. Since 2006 the average annual percentage fee in the sector has fallen a measly 23 basis points despite a near trebling of assets in the super pool to A$2.1 trillion.
Average fees charged to members stand at 1.03%, equating to more than A$20 billion in annual revenue flowing to the financial and professional services sector. In dollar terms, fees have grown well above the rate of inflation.
The compulsory nature of Australia’s super scheme has compromised competition. Despite a long-running war between for-profit retail funds and not-for-profit industry funds over which offers a more efficient product, there are some who believe the real problem is a general lack of competition among all funds.
Too many accounts?
Actuarial consulting firm Rice Warner estimates there would be an immediate saving of A$150 million for members by halting the proliferation of multiple accounts.
As of June 2016 there were 244 funds chasing the same members – made up of 105 retail funds and 139 company, industry and public sector funds, said Michael Rice, a partner at the firm.
“Of the 139 not-for-profit funds, 71 have less than A$1 billion in assets and another 21 have less than A$2 billion,” said Rice. He added that the Australian Prudential Regulation Authority had not effectively applied its scale test.
“If we regard $2 billion as a minimum size, that means two-thirds of these funds are not viable,” he said.
Many small funds have fair administration fees, added Rice, but they can sometimes struggle in the areas of investments, business strategy and member engagement where scale is needed. They don’t always have access to the necessary resources, he said.
Rice believes there should be a governance framework for mergers to help funds deal with the process, including clear guidelines on how to approach another fund with a merger proposal.
Tax treatment concerns
Any reforms aimed at encouraging mergers should include revisions to the tax treatment on asset transfers, said Zak May, head of policy at Industry Super Australia (ISA), which manages collective projects on behalf of industry super funds. This is a point overlooked in the Productivity Commission’s draft report.
“One of the barriers to mergers succeeding in this sector is tax, and this would need to be addressed,” said May
ISA supports a more efficient super system, but May questions why the Productivity Commission has conflated the issue of mergers with its recommended changes to default funds.
“These are two separate issues,” he said. “We agree with the idea of single rather than multiple accounts, but this can be achieved by making adjustments to the existing system rather than dismantling it completely.”
Moreover, ISA is stunned that the Productivity Commission turned to New Zealand and Chile to formulate its proposal. “Outcomes for beneficiaries in these market are far inferior to Australia’s current workplace default system,” said May.
Opposition to alternative models
Industry funds are strongly opposed to the commission’s alternative models for default super distribution, because they curtail the role of trade unions in the selection of shortlisted default funds.
One of the new models would see the shortlisting process transferred from the Fair Work Commission to a new government-appointed panel that would apply a quality filter to pick a group of four to ten default products. Another model would see funds compete for default status by outbidding each other on fees in an auction process.
“In New Zealand, where a multi-criteria tender process exists, the government panels haven’t chosen the best-performing funds,” said May. “They have taken a cautious route and selected funds offered by large blue-chip financial institutions with conservative allocation strategies.”
He flagged the potential for the auction process to become highly politicised and steer contributions towards Australia’s big four banks.
If the ISA is unsuccessful in its opposition to the proposed changes, it could see industry funds lose their prized status as the primary beneficiaries of default contributions through the industrial awards system.
AsianInvestor contacted two of the largest industry funds – Hostplus and Cbus – for comment on this story, but they either failed to respond or declined to comment, suggesting the Productivity Commission has hit a nerve.
Public hearings into the commission’s draft report are being held in May with a final report to be released in August.