Sorting out the super industry

Coalition financial services spokesman Mathias Cormann is expected to table a motion in the Senate today calling on the Gillard government to table the findings of a report from the Productivity Commission into one of the most important issues facing the superannuation industry: how super funds are selected as default funds.

Coalition financial services spokesman Mathias Cormann is expected to table a motion in the Senate today calling on the Gillard government to table the findings of a report from the Productivity Commission into one of the most important issues facing the superannuation industry: how super funds are selected as default funds.

It is a high-stakes issue that goes to the heart of transparency, conflicts of interest and competition in the $1.3 trillion superannuation industry. Getting default fund status can be likened to the goose that laid the golden egg.

An estimated $10.5 billion of compulsory savings flows into default funds each year and while employees can choose their fund, more than 80 per cent do not take up this option but go into a default fund, which is generally linked to the industry in which they work.

The way the system works, the default superannuation market under modern awards is closed (almost half the regulated market is effectively locked out of the default system - only 104 out of the 196 public-offer licensed funds are listed).

While industry funds would argue they have averaged better returns than retail funds and therefore should be granted default-fund status, the reality is it should be conducted on a more arms-length basis.

The Productivity Commission report is believed to have been handed to Shorten late lastweek

and he is obligated to release it to Parliament within 25 sitting days. Given there are 20 sitting days left, he will have the choice of releasing it publicly this year or delaying it until next year.

But given its importance, Cormann will issue a notice today ordering the report to be released

by Thursday at midday.

Under normal circumstances a final report rarely diverges too far from its key draft

recommendations, but this is far from normal, and explains the buzz  and concern  about what is in the final recommendations.

The ALP agreed to an inquiry into the default fund system before the last election, requesting the Productivity Commission to investigate the current model and write a report based on its terms of reference.

Soon after the commission released the draft recommendations in June, suggesting a fairer and more transparent way for selecting default funds to make the market more competitive and in the interests of members, Treasury and the Department of Education, Employment andWorkplace Relations intervened and made a joint submission that the commission was wrong and needed to change direction.

Given that that department and Treasury are in Shortens portfolio, it was seen as an attempt to strong arm the commission and influence its final recommendation.

On the back of Shortens extraordinary intervention, rumours are rife that the commission has backflipped on a key recommendation and will instead recommend that employers

can choose any MySuper product in the default system,which is tantamount to saying that the

status quo will prevail.

It will try to tart it up by making the system more transparent about which funds go intowhich awards. But at the end of the day if the same funds are given the same default status, then little will change.

Given Parliament is currently legislatingwhat a default product must look like, including the

various consumer protection mechanisms that have to be part of any MySuper product, there is a strong argument that once a provider has been registered as a MySuper provider, they should be able to compete freely in the default fund market.

This means there is no reason why FairWorkAustralia should continue on top of the registration of default fund products through the MySuper process.

The release of the report will determinewhether the rumours are right. In its draft report, the

commission made it clear that it believed reform was required. It said: Not all superannuation funds can present their case for inclusion as a default fund in an award on an

equal basis. It based this on the fact that funds that are not in a default fund butwant to be in one cant present their case unless they can find an industrial party that has

standing before FairWork Australia and is willing to make the application.

Given that a significant proportion of industrial parties have an interest in (and nominate

trustees to) one or more superannuation funds, they could be expected to extend preference to those funds, to the exclusion of potential competitors, the report said. Even some funds that had been included in pre-modern awards, but have only slight coverage of the national industry now covered by the modern award, have had their application for inclusion denied.

MTAASuper highlightswhy there is a need to change the default system. In 2010,when itwas being investigated by APRAand after it was ranked the worst-performing balanced fund, MTAASuper was signed up as a default fund to a number of industrial awards covering millions of workers in banking, finance and insurance, and in the general retail industry.

FairWorkAustralia permitted this after an applicationwasmade by theAustralian Manufacturing

WorkersUnion. The two AMWU officials making the application before FairWork were trustees of MTAASuperannuation Fund, which is arguably a conflict of interest given the poor

performance of the fund at the time. The countrys compulsory super industry turned 20 last year and in terms of transparency and conflicts of interest it leaves a lot to be desired.