Commission supports improved choice of default funds

THE Productivity Commission is calling for a shake-up in how super funds are selected for workers covered by industrial awards, in a bid to lift competition in a market worth at least $7 billion a year.

By InvestSMART · 29 Jun 2012

By InvestSMART ·
29 Jun 2012

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Under today's 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 the selection process favours industry funds.

A draft report from the commission, to be published today, echoed 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.

"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," the commission's deputy chairman, Mike Woods, said.

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 default fund market is worth between $7 billion and $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 super providers.

Industry funds - which have posted stronger returns than for-profit funds - say the main criteria for selecting default funds should be their performance.

The commission said there was "no case" for a prescriptive criteria for selecting default funds, though expected investment returns were the most important issue for employers to consider.

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Frequently Asked Questions about this Article…

What is the Productivity Commission recommending for the selection of default super funds?

The Productivity Commission is calling for an overhaul of the default super fund selection process: instead of unions and employer groups choosing default funds, it recommends an independent body such as Fair Work Australia should select which funds qualify. The commission wants a contestable, transparent process with regular reassessment of the funds listed in awards.

What exactly are 'default funds' and who do they affect?

Default funds are the superannuation option used for workers who don’t pick a fund themselves. Under current rules many award-covered workers end up in default funds chosen by employers and unions. The article notes about 1.5 million workers are employed under award agreements and feed into this default fund market.

Why does the commission want to change how default super funds are chosen?

The commission says changing the selection process would boost competition among super providers, make selection contestable and transparent, and regularly re-evaluate which funds are most appropriate for awards. The goal is to deliver better outcomes for employees and strengthen competition in a market worth billions each year.

How large is the default super fund market and who currently benefits?

The default fund market for award-covered workers is estimated to be worth between $7 billion and $10 billion a year. Currently employer and union-selected default funds are often not-for-profit industry funds, and for-profit super funds have complained that the selection process favours industry funds.

How have default funds performed compared with all super funds?

According to the commission, default funds have returned 6.4% per year over the past eight years, compared with 5.8% per year for all funds. Despite better historic performance by default funds, the commission believes more competition would still benefit members.

What is MySuper and how might it affect default fund selection?

MySuper is a proposed low-cost super product due to be introduced from next year. The commission says MySuper standards would provide a 'sound basis' for selecting default funds, suggesting those standards could be used as part of an independent selection process.

Will the commission require a single prescriptive criterion like past performance to pick default funds?

No. While industry funds argue performance should be the main criterion, the Productivity Commission says there is 'no case' for a prescriptive single criterion. However, expected investment returns are identified as the most important issue employers consider when choosing funds.

What would these proposed changes mean for everyday super members?

If implemented, the changes aim to give members clearer, more competitive choices by making the default fund list contestable and transparent and by reassessing funds regularly. The commission expects this would boost competition between super providers and ultimately benefit members' retirement savings.