John Wylie, a high-profile capital markets veteran who is involved with the Oxford university endowment fund, said giving Australians access to the Future Fund would be a “very good” move and better than the commission’s recommendation for a panel of experts trying to pick top-performing funds based on past performance.
“The Future Fund is a well managed fund that has produced stable, good returns, beating its investment target over a long time in varying market conditions,” said Mr Wylie, principal of advisory and investment firm, Tanarra Group.
“Endowment funds like the Future Fund tend not to perform as well as aggressive growth funds in up markets, but they tend to significantly outperform in negative markets.
“When you’re going into potentially turbulent times like this, globally significant endowment funds can focus on risk-adjusted returns.”
Liberal sources pointed to one of the masterminds of industry super, Labor giant Bill Kelty, saying last year there was an “arguable case” for the Future Fund to operate as a default superannuation fund.
“I don’t think every idea Peter Costello had was a bad idea. It doesn’t matter if it was rejected [by the Productivity Commission],” Mr Kelty said at the time. “It’s a major fund. It’s got competitive capacity and organisational capacity.”
Labor and the superannuation industry oppose the idea that has been pushed behind the scenes by Future Fund chairman and former Liberal federal treasurer Peter Costello and cabinet minister Kelly O’Dwyer.
Mr Costello is also chairman of Nine, owner of The Australian Financial Review.
The Financial Review revealed at the weekend that the Morrison government is considering allowing a federal institution such as the Future Fund to offer low-fee superannuation accounts in a potential major shake-up move to inject competition into Australia’s underperforming $2.7 trillion retirement fund system.
The independent Productivity Commission said a government-owned fund should not be precluded from being on its proposed “best in show” top-10 default funds, a recommendation that has caught the interest of Treasurer Josh Frydenberg, according to sources.
The commission rejected a government “monopoly” fund that all workers would be automatically defaulted into if they didn’t choose a fund, along the lines of what Mr Costello and Ms O’Dwyer have backed.
The PC said the biggest risk of all default contributions being allocated to a government-owned fund was that in the event of poor performance there could be significant political pressure on the government to “top up” returns for members and taxpayers could be put at risk.
A single default fund would also fail to harness the benefits of competition for better member outcomes, it said.
Almost half a million people receiving about $1 billion of super contributions begin their careers each year and could enter a new default system the government is considering in the wake of findings by the Productivity Commission and the royal commission into financial services exposing shortcomings in the money management sector.
The superannuation industry, trade unions and Labor have pushed back against a government-owned fund entering the superannuation market and shifting away from employers and unions using the industrial relations system to select default funds when workers don’t nominate a fund.
Industry Super Australia chief economist Stephen Anthony, writing in the Financial Review on Tuesday, noted that “reducing competition in the default market to a list of providers, including the Future Fund, fails to acknowledge the evidence that individuals consistently make bad choices in superannuation.
“The Future Fund itself would soon be so large that it could experience diseconomies of scale. It will likely find few appropriate large sized investments in the local markets and so would be forced offshore,” Mr Anthony wrote.
“While the Future Fund may superficially appear to offer a clean-slate solution to a set of insurmountable problems, we should build the system on what already works, always acting in the best interests of members at every step.”
Some senior Liberals are concerned a top-10 list selected by financial regulators such as the Reserve Bank of Australia governor and head of the competition watchdog may entrench power among union-linked industry funds and not boost competition to benefit members.
The guaranteed fund flow from being on the shortlist could reduce redemption risk and make it difficult for regulators to add and remove the names of funds, one source said.
“Never say never, but I’m not really in favour of this option,” one senior Liberal said.
Mr Frydenberg said last week the PC’s recommendations deserved serious consideration because the “big idea” was for the default system to focus on the interest of members, not their workplace or the interests of funds.
“I think there is merit to this idea that the better performing funds are taken up by more members … rather than a lottery,” he said last week.
“What they are suggesting is that people [new workers] only default once and that is certainly an idea that deserves very serious consideration.”
Labor’s shadow treasurer Chris Bowen this week backed the PC’s warnings of risks to the government’s finances from a government-mandated fund.
“This is just the next phase of the Liberal Party’s ideological war on not-for-profit super funds,” Mr Bowen said.
Liberal MP Jason Falinski, a self-identified economic dry, said he didn’t favour the PC’s recommendation for a government-chosen list of 10 default funds, but a government default fund like the Future Fund, similar to Singapore, was more plausible.
“A government default fund like the Future Fund has a lot to like given the current ‘half-way house’ of superannuation where industry funds have an advantage of guaranteed flow of funds through the industrial system,” he said.
“But I lean more towards continuing encouraging as many people as possible getting involved in self-managed superannuation funds, because even though it’s inefficient in the short term, over the long term the more dynamic your system, the more efficient it is.”