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.