Australia’s superannuation industry has seen its reputation take a nose-dive, courtesy of recent revelations from a Royal Commission into financial services, that is hammering the industry for being far too inscrutable and for failing to deliver its customers with the right products and services.
The ongoing fallout offers lessons for other markets, including Hong Kong, that they should try to keep pension options simple for the benefit of members. Greater choice does not equate to better outcomes.
Hearings are ongoing, with commission saying on Monday that it would conduct two weeks' worth of hearings that investigate fund payments to unions, credit card payments and the allocation of member funds, as it continues to dig into how the supers have used money from members to run their organisations.
The investigations follow a report by the Productivity Commission entitled ‘Superannuation: Assessing Efficiency and Competitiveness’, that was issued in May, The detailed analysis in the report slammed the culture of underperformance and a lack of transparency in the management and regulation of super funds, and initiated the ongoing investigations.
"The superannuation system has not kept pace with the needs of members," noted the report. "Most notably, structural flaws have led to the absurdity of unintended multiple accounts (one in every three accounts is unintended) in a system anchored to the job or the employer, and not the member.”
Superannuation consultant Gordon Noble of Melbourne-based director at FenElpi Partners said he considers the combined effect of the various commission and reports will be a change in how clients and investors look at financial services companies.
Public faith in the system has hit a new low and Helen Rowell, deputy chairman of Australia’s prudential regulator, APRA has said that “No-one will benefit from erosion of this trust.”
Encouraged by the government to suggest changes, the Productivity Commission also proposed a radical reform of the $600 billion default superannuation system.
Fixing the twin problems of unintended multiple accounts and entrenched underperformers could benefit members to the tune of A$3.9 billion (US$2.9 billion) each year, it added. “Even a 55 year old today could gain $61,000 by retirement, and lift the balance for a new job entrant today by $407,000 when they retire in 2064.”
The first major issue the PC report sought to tackle was mobility of individual pension pots in Australia. Up to two-thirds of workers choose the default fund option when starting a new job, but rather than migrating that fund when they change jobs, a new fund is created.
“Members should only ever be allocated to a default product once, upon entering the workforce,” said the report. They should also be empowered to choose their own super product by being provided a ‘best in show’ shortlist, set by a competitive and independent process.
However, it is the presence of an extraordinary product diversity in the accumulation phase of superannuation that the PC found most perplexing. During the accumulation phase, members’ needs are typically similar it noted, which would lend itself to some fairly vanilla growth-oriented funds.
About half of super member accounts are in default products. For industry fund members, that involves a relatively small number of options (a median of 16 among the funds in 2016) and most members choose one of four pre-mixed options — high growth, growth, balanced or conservative.
The story for retail funds is quite different. In 2016, 18 approved fund providers offered more than 1,000 investment options and a further 24 offered between 100 and 1,000 options. The Productivity Commission’s view was “The proliferation of little-used and complex investment options (some 40,000 in 2016) in the choice segment of the market collectively appear to increase fees and to lower members’ net returns (potentially reducing the retirement balance of a member in a high option fund by much more than $100 000). And it is a sign of unhealthy competition.”
In a separate review issued in late 2017, the prudential regulator of superannuation, the Australian Prudential Regulation Authority (APRA), agreed with this assessment. It noted that “it seems legitimate to ask why the industry offers members an average of nearly 200 investment options when many funds have a significant proportion of members in their default MySuper products and hence relatively few members in each of the many choice investment options on offer".
It went on to say that this "is particularly the case when many of the options don’t appear to be markedly different in their asset allocation or risk/return characteristics”.
The regulator also confirmed that weaknesses in the current reporting and disclosure framework for super make it difficult for regulators, industry and members of the public to meaningfully compare outcomes across funds.
To greatly simplify the options for super members, the PC report suggested the formation of an independent panel of experts who would create a list of the top-10 superannuation products based on various criteria (performance, fees, number of independent directors). These would then become the default funds for new members, the ones they might automatically be enrolled on to when joining a new employer pension scheme.
“This is superior to other default models,” said the report. “It sidesteps employers and puts decision making back with members in a way that supports them with safer, simpler choice.”
One concern expressed about creating a ‘best of breed’ list is how it impacts on asset allocation. Gordon Noble, director at FenElpi Partners in Melbourne told AsianInvestor there is a risk that passive investment strategies could come to dominate the ASX.
“If cost is a major factor in making it to the list then we face a very real scenario where funds progressively move to passive strategies. This would impact on the potential for funds to allocate to assets such as venture capital, private equity and infrastructure. There are system implications that need to be understood,” he said.
This article was adapted from a feature in AsianInvestor's June/July 2018 magazine.