THE Productivity Commission is calling for a shake-up in how super funds are selected for workers covered by industrial awards, in a push to increase competition in a market worth at least $7 billion a year.
Under todays laws, a large share of the retirement savings of people on award wages flows into default funds, the option for people who do not choose a super fund.
Employer groups and unions select default funds, most of which are not-for-profit industry funds.
With compulsory no-frills super products to be introduced next year, for-profit super funds have complained that the selection process is a closed shop favouring industry funds.
A draft report from the commission, to be published today, echoes some of these concerns, calling for an overhaul in how funds are chosen.
Instead of unions and employers choosing default funds, the commission said Fair Work Australia or another independent body should choose which funds qualify as default funds.
Australian employees would benefit from a default superannuation-fund selection process that is contestable, transparent, and provides for the regular reassessment of the most appropriate funds to be listed in awards, said commission deputy chairman Mike Woods.
The report also said the standards for My Super funds a low-cost product to be introduced from next year would provide a sound basis for selecting default funds.
With about 1.5 million workers employed on award agreements, the market for default funds is worth $7 billion-$10 billion a year to the superannuation industry.
The commission said default funds had performed better than the industry-wide average, returning 6.4 per cent a year over the past eight years, compared with 5.8 per cent for all funds. Despite this better performance, it said the changes would benefit members by boosting competition between providers.
Industry funds which have posted stronger returns than for-profit funds say the main criterion for selecting default funds should be their performance.
It has proposed new rules that would prevent the billions of dollars in award workers super contributions from going to funds that do not meet performance criteria.
However, the commission said there was no case for prescriptive criteria for selecting default funds, though expected investment returns were the most important issue for employers to consider.
The commissions findings are expected to be welcomed by superannuation companies owned by the big banks, which have argued that the process for selecting default funds suffers from poor transparency and weak competition.
The report comes amid political tension over super. In March, Opposition Leader Tony Abbott claimed industry funds were a gravy train for union employees, who often sit on their boards.
Frequently Asked Questions about this Article…
What is the Productivity Commission proposing to change about default super funds for award workers?
The Productivity Commission is calling for an overhaul of how default super funds are chosen for workers on industrial awards. It wants an independent body such as Fair Work Australia to decide which funds qualify as default funds, making the selection process more contestable, transparent and regularly reassessed.
Who currently chooses default super funds for people on award wages?
Under current rules employer groups and unions select default funds for award-covered workers. Most of those default funds are not-for-profit industry super funds.
How big is the market for default super funds for award workers?
The report estimates the market for default funds serving about 1.5 million award workers is worth roughly $7 billion to $10 billion a year to the superannuation industry.
What is MySuper and how could it affect default fund selection?
MySuper is a low‑cost super product due to be introduced next year. The Productivity Commission says MySuper standards would provide a 'sound basis' for deciding which funds qualify as default funds.
How have default funds performed compared with all super funds?
According to the commission's draft report, default funds returned 6.4% a year over the past eight years, compared with 5.8% a year for all funds — meaning default funds have outperformed the industry average over that period.
Will the commission impose strict performance rules to decide which funds become defaults?
The commission said there is 'no case' for prescriptive selection criteria. While it expects investment returns to be the most important issue employers consider, it did not recommend rigid, prescriptive rules for selecting default funds.
Who might benefit from the proposed changes to default fund selection?
Everyday employees could benefit from increased competition and transparency in the default fund selection process. The report is also expected to be welcomed by super funds owned by big banks, which have argued current selection lacks transparency and competition; industry funds, meanwhile, stress that past performance should be a primary selection criterion.
Are there political or industry tensions around default super funds?
Yes. The report comes amid political debate over superannuation. For example, Opposition Leader Tony Abbott previously described industry funds as a 'gravy train' for union employees, reflecting broader tensions between industry funds, unions and for‑profit providers about governance, transparency and competition.
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