The Productivity Commission report says best in show will funnel default super savings and a proportion of discretionary savings into such funds.
The report acknowledges that the best in show will “stimulate competition between funds to get on the shortlist, and thus drive healthier competition to deliver for members, present clear ‘role models’ for other funds to emulate, accelerate desirable industry consolidation and serve as a discernible point of reference for financial advisers and their customers.
Australia’s largest super fund, AustralianSuper cautioned during the consultation process that “the Commission’s top ten default products would result in a market concentration to only 10 funds, homogenise the superannuation landscape, and may result in behaviour that may not be in the interests of superannuation fund members”.
Accounting firm Deloitte made similar comments. “A shortlist of 10 funds has the strong potential, in our view, of promoting an uncompetitive market with those funds selected having an almost guaranteed growth and source of new members while those funds not selected for the top 10 will face growth pressures that means they will struggle to remain competitive over time,” Deloitte said.
“As they will struggle to remain competitive, it will be difficult for them to supplant any of the initially chosen “top ten”. Thus, in our view, rather than promoting a competitive superannuation system the proposal has the highly likely result of a concentrated and less competitive system.”
Chanticleer agrees that smaller, poor performing funds need to be merged with larger, better performing funds but there is a danger that the consolidation process will result in those funds outside the top 10 having negative cashflows.
There could be a negative feedback loop for those outside the top 10 and a positive reinforcement of the dominance of larger funds.
When these trends are combined with the likely outcome of the recommendation for a new outcomes test the super system could move to a structure of a small number of large funds investing passively.
This change in the billions of dollars of compulsory savings flows would feed into a global mega trend whereby an increasing amount of global savings are in passive strategies. During 2018, exchange traded funds and exchange traded products attracted $US516 billion in net inflows globally taking total funds in these strategies to $US4.8 trillion, according to consultancy ETFGI.
The super fund outcome test proposed by the Productivity Commission would require “all investment options to be compared with a listed investment benchmark portfolio tailored to their asset allocation (with exceptions only to be granted on an ‘if not, why not’ basis).”
“APRA should issue clear and specific guidance on the construction of these benchmark portfolios (drawing on the methodology established by this inquiry).
“Options that fall short of this benchmark portfolio by more than 0.5 percentage points a year, on average, over a rolling eight-year period should be subjected to a 12-month period of remediation or, if remediation is not possible, withdrawn from the market, with members transferred by funds to a better performing option. Any remediation or transfer activity should be subject to close oversight by APRA.”
By tying the outcome test to the performance of a listed investment benchmark portfolio, the government would give super fund trustees an incentive to track benchmarks as a way of preserving their favourable treatment under the law.
This would funnel money into passive strategies and potentially lead to lower investment performance outcomes over time. There would be little incentive for trustees to opt for alternative investments such as unlisted infrastructure, which has been the secret to the consistent outperformance of industry super funds.
Tony Boyd
from Just News Viral http://bit.ly/2skkgBe
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