The report contains an implicit warning to Labor to put on hold plans to lift the superannuation guarantee rate to 12 per cent, from the existing 9.5 per cent, and proposes new ways to stop fee-gouging by funds.
Broad inquiry first
The commission says before any possible further rise, an independent inquiry into the broader retirement income system is needed to check if it is helping the poor and wealthy equitably, and to see if tax-concessional super and the pension system are taking pressure off the government budget.
Treasurer Josh Frydenberg said the final report, to be published on Thursday, endorsed many of the government’s super changes, including the automatic consolidation of low-balance inactive accounts, tougher penalties for trustees and limits on fee erosion by insurance premiums.
“It’s time the Labor Party stop blocking these amendments, listen to consumer advocates, independent experts and support what the Productivity Commission calls ‘must have’ common sense reforms that put the interests of members first.”
He said before finalising its response to the PC report, the government want to consider the Banking Royal Commission’s final report due on February 1, which is examining the conduct of super funds and regulators.
Echoing evidence heard by the royal commission, the report says the approach of regulators has been “inappropriate and inadequate” for superannuation products. It recommends a capability review of the Australian Prudential Regulation Authority. It said the roles of APRA and the Australian Securities and Investments Commission in the sector were confused.
The commission also criticises super funds for their “broad and at times inappropriate” interpretation of the best interests’ duty – an issue at the heart of the royal commission.
Along those lines, the trustees of super funds should only be allowed to collect fees on a cost recovery basis. It also recommends that trailing commissions be banned.
“Because super funds are legally obliged to act in members’ best interests, the fees they charge should not exceed cost recovery levels,” the report says.
“The government should enforce this across all MySuper and choice products, and prohibit funds from cross-subsidising between members – which would see an end to excessive fees while also ruling out scope for some members to bear the cost of other members’ decisions.”
Default ‘safe’ products
At present, default products are either selected by employers or listed in modern awards. Up to two-thirds of workers default when starting a new job and as at June 2017 MySuper products held $595 billion in assets. Under the proposed new system, people who do not choose will be tipped one of 10 “safe” funds as selected by the expert panel.
By appointing an expert panel to choose defaults, the commission’s preferred model removes super from the industrial relations system. The report suggests Reserve Bank of Australia governor Philip Lowe and Australian Competition and Consumer Commission chairman Rod Sims help choose the expert panel.
The commission suggests the expert panel could be chosen by the RBA governor, among others. The report estimates that “best in show” will almost double member benefits.
Any move to remove super from the industrial relations system will be met with opposition by unions.
In response to the commission’s earlier draft report, ACTU assistant secretary Scott Connolly said: “The link between employers, unions, workers and their funds has been a key reason why industry super funds have systemically outperformed bank-owned super funds, and a pillar of the success of our retirement system.”
The best in show proposal has been unpopular among some segments of the super industry.
In response to an earlier draft proposal, Industry Super Australia said last year that handing the power to choose default funds to an untried expert panel chosen by government was “experimental, risky and unproven”.
Retails funds still struggle
As with its draft report, the Productivity Commission finds retail funds dominating the ranks of underperformers.
“The retail segment delivered returns below benchmarks and significantly below the not-for-profit segment,” the report says.
“There is an almost 2 percentage point gap in net returns between the segments that cannot be explained by differences in asset allocation, reported expenses or tax – and is most likely primarily due to asset selection.”
The final report will compound negative sentiment emanating from the banking royal commission, which has exposed bad behaviour by banks and financial services companies AMP and IOOF.
Industry funds, which were left largely untouched during last year’s royal commission hearings, have been enjoying a membership surge.
This, along with better investment returns, has turbocharged their growth to such an extent that they will hold more assets than self-managed super funds within the next two years.
Lower fees push
The report notes that fund size is strongly associated with lower average costs.
“Annual fees exceed 1.5 per cent of balances for an estimated four million member accounts holding about $275 billion.
“Almost all of these accounts are in choice products offered by retail funds.”
Funds need to be capitalising on economies of scale to complete mergers and therefore reduce fees, it says.
“There is little evidence that realised economies of scale have systematically been passed through to members in the form of lower fees,” the report says, adding that better data is needed to ascertain whether members are truly benefiting.
“For example, annual cost savings of at least $1.8 billion could be realised if the 50 highest-cost funds merged with the 10 lowest-cost funds.”
Yet the report also notes that “analysing fees is bedevilled by significant gaps and inconsistencies in how funds report data on fees and costs, despite regulator endeavour to fix this”.
“This lack of transparency harms members by making fee comparability difficult at best, and renders cost-based competition largely elusive.”