The Coalition will make its views clear on the report after cabinet considers the recommendations alongside those of the banking royal commission due on February 1 – with considerable overlap on super expected. (Commissioner Kenneth Hayne has quietly had the PC report to read for some time.)
But there will be no time for the Coalition to pass or attempt legislation ahead of the election – looking likely to be won by a Labor Party with different priorities.
Overly complex system
What is clear is that the PC is determined to simplify a system so complex few understand it. A majority of people just “default” into a super fund chosen by their employers on the basis of relevant awards, for example, often being “defaulted” again when they change jobs or industries and ending up with multiple accounts and fees.
Given the tendency for the modern workforce to change jobs several times, that’s a growing problem. So a fundamental recommendation would mean members would only default once, retaining existing accounts for any new jobs.
But the commission’s other complementary requirement is for all funds to face an annual “elevated outcomes test” of their returns over a rolling eight-year period.
It’s effectively a “right to remain” test where funds and products consistently falling below those benchmarks would be forced out or made to merge with better performing funds.
Despite repeated promises of progress from the Australian Prudential Regulation Authority (APRA), astonishingly little of this winnowing out of underperforming funds has happened, leaving many members stuck indefinitely.
Another PC recommendation would see a “best in show” default system where new employees are nudged into one of the 10 best funds as judged by an independent expert panel every four years.
And this would all be supervised by far more assertive regulators with better defined roles for the Australian Securities and Investments Commission and APRA. (That this inquiry was headed by deputy PC chairman Karen Chester, about to become deputy chair of ASIC, gives this recommendation particular potency.)
Plenty of critics
But critics on all sides of super were waiting as soon as Treasurer Josh Frydenberg released the report last week. The commission’s focus is on protecting the paramount interests of individual members rather than those of funds or other parties in the system. Reactions to its recommendations are not always so pure of heart or policy.
The troika of Labor, unions and industry funds, made up of union and employer representatives, reject any notion of breaking the traditional linkage between the industrial award system and super, for example.
They argue, with firm backing from the commission’s extensive research, that not-for-profit industry funds have consistently out-performed the for-profit retail sector.
That outperformance is compounded by the retail funds keeping members in high-fee legacy products, aided by trustees apparently unable to comprehend their duty to act in the best interests of their members.
Not that any sector comes out unscathed. Many smaller industry funds are among the serial offenders. According to the commission, of the 29 underperforming funds, about half are industry and almost a third are retail. But because the retail funds tend to be larger, they account for 77 per cent of the five million member accounts in underperforming funds.
Yet smaller, underperforming industry funds – and their unions – would fight the idea of a member being defaulted once only. This shift would inevitably swell the membership of big successful industry funds in the retail and hospitality sectors where so many young people start their working lives. But it would further diminish other funds no longer able to rely on an annual flow of new default members and their money.
Labor is also opposed to any “best-in-show” shortlist, given their view this would remove super from the industrial relations framework. Despite the Coalition’s preference to do just that, its views on a shortlist are more equivocal. Frydenberg is more open to the idea than the former and current Financial Services Ministers, Kelly O’Dwyer and Stuart Robert.
This division is behind the proposal – backed by O’Dwyer and Robert – to give the government-owned Future Fund a role in any new default model. Peter Costello, former Treasurer and current chairman of the Future Fund, is pushing this hard despite the obvious reservations of the Productivity Commission. This proposition is also opposed by Labor and industry funds
More politics to come…
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