One great stride towards super efficiency

The Productivity Commission's inquiry into default super fund selection is a major step to redressing an inappropriate and potentially dangerous inequity.

Bill Shorten and Mark Arbib took a great step on Friday towards addressing a major inequity and inefficiency in the award superannuation system when they asked the Productivity Commission to conduct an inquiry into the selection of default super funds in modernised awards.

Three years ago the old Australian Industrial Relations Commission handed down its first decisions in the government’s 'awards modernisation' program, creating new awards for 17 of the industries and occupations prioritised by the program.

In most of them it made decisions about the default arrangements for employers’ compulsory superannuation contributions, nominating the specific funds that would become the default funds for workers covered by the awards.

While, after an outcry from the for-profit funds sector, it grandfathered existing arrangements, it nominated, almost exclusively, a very small number of big industry funds as the default funds under the awards – despite having previously conceded that it hadn’t conducted any independent appraisals of the performance of particular funds because that was beyond its expertise.

Apart from AMP, which got a small slice of the racing industry, the decisions shut out the for-profit sector of the industry, including the big wholesale platforms that are more than competitive with industry funds on costs and service. The AIRC effectively created a new oligopoly with the award super system, protected from competition.

In a sector that deals with 'other peoples’ money', creating protected monopolies and captive memberships without even scrutinising the costs, strategies and risks of the funds or assessing the suitability of particular funds for the membership of the industry in question is inappropriate and potentially dangerous. Different industries have different demographics and different priorities, particularly in terms of their insurance arrangements.

The Cooper review of the super system recognised both the importance of default options for workers without either the interest or expertise in making their own assessments and informed choices of funds – which is what led to the My Super concept of a low-cost, low-frills default option for all funds – and recognised the need to review the process by which default funds were nominated in awards to ensure it was transparent and competitive.

Now the federal government is asking the Productivity Commission to develop the criteria on which aspiring default option providers can be assessed.

It has asked the commission to have regard to the costs of the options, the appropriateness of their investment strategies, the scale of the funds, the suitability and cost of the insurance arrangements associated with the funds, their governance and their exit arrangements in developing the criteria.

The natural inclination of the commission will be to inject as much scope for competition as possible into the system, which, given the compulsory nature of award super, is a highly desirable objective.

The overwhelming majority of employees don’t exercise their right to choose their fund, which makes it vital that the process by which default options are chosen is transparent, objective and competitive.

A rational approach to assessing default options wouldn’t necessarily undermine the position of the bigger and more efficient industry funds. But it would open up the potential for competition – not necessarily from retail funds but from the big wholesale and master trust platforms operated by the for-profit sector that have been the option that has benefitted most from the large-scale outsourcing of previously employer-sponsored fund that has occurred over the past 20 years. It would level the playing field.

It made no sense that an industrial tribunal – Fair Work Australia in the current system – should be asked to make such important determinations in an area where it has no expertise.

While it might have taken a while, Shorten and Arbib have set in motion a process that will almost inevitably redress an inequity and contribute to a better and more efficient super system.

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