The Productivity Commission's report on superannuation scoffs at the industry claim that Australia's retirement-income system is among the world's best. And its evidence of administrative costs and poor investment performance for many Australians is damning, suggesting we do in fact have a remarkably expensive system.
There is also much merit in its prescription to resolve the serious problems identified, but the commission might have garnered wider support if its diagnosis was more carefully presented.
It might have acknowledged, for example, that our system potentially offers considerable advantages over most other countries' systems. It involves far lower government costs, both now and into the future; its defined contributions funding ensures much greater intergenerational equity; the emerging benefit levels will be comparable to those of most national defined-benefit super schemes; and it allows much more flexibility and choice for members.
The commission is also highly critical of the system's continuing link to the industrial-relations system. While there is good reason to re-assess these links as the superannuation system matures, the commission might have been more diplomatic, acknowledging the strengths of those historic ties. These include, in particular, ensuring that the mandated contributions are properly paid for, in effect by employees as part of their remuneration as each increase in employer contributions is taken into account in wage agreements. Moreover, the involvement of unions has provided some protection of members' interests – the lack of which, in much of the system, the commission rightly highlights as a major concern. Employer involvement in super funds as trustees also avoids the sorts of conflicts of interest that the commission identifies as common elsewhere in the industry.
Its key finding is that fund performance varies significantly but that members are not sufficiently well-informed to select the fund likely to best meet their interests. This is exacerbated by variations in administrative expenses, excessive fees, and excessive and duplicative insurance premiums. The effect on members' final retirement benefits can be extremely high, in some cases halving the real value of those available from well-performing funds.
The drivers of these problems are the excessive number of funds, the multiplicity of accounts that a large proportion of people have, the lack of relevant information for members and the understandable reluctance of most people – especially the young – to devote time and effort to examining funds and products (particularly given most contributions are compulsory, not by choice). In addition, there is extensive conflict of interest across the industry and inappropriate behaviour, as the banking royal commission revealed.
The Productivity Commission's prescription is to tap better economies of scale and to strengthen real competition. The former is promoted first by changing the default process so that, once a person has been directed to a default fund, any subsequent employer must use that fund as the default, not a new default fund (individuals may still choose a different fund). This is a long overdue reform, building on MySuper arrangements.
The more controversial measure is to impose an expert-based competition among default products, replacing the inexpert and potentially conflict-riven process that now operates and has evidently not led to improved performance or efficiency. The recommended process would lead to identifying up to 10 "best in show" super products to be used as defaults, still allowing individuals to choose other funds and products if they wish. The "best in show" process would be repeated every four years.
Among the challenges in designing such an expert-based competition are:
- the criteria for determining the "best in show"; and
- who manages the process.
The commission itself developed a methodology for benchmarking funds' investment performance, which it believes is independent of the risk profile a member selects. While some funds have queried whether the commission's methodology actually achieves this, and indeed whether this is feasible at all, the status quo of no expert guidance at all seems indefensible, particularly given major variations in performance. In any case, having as many as 10 "best in show" products should reduce the risk that the methodology used is not entirely independent of the chosen investment risk profile and, hopefully, the commission's methodology can be refined over time. At the very least, we need a process to remove poorly performing funds as defaults.
The commission suggests the criteria should be based on three guiding principles:
- Products should be chosen based on the fund's likelihood of providing the best outcomes for members in the accumulation phase, taking account of risk.
- Products chosen should be particularly suitable for members who have typically defaulted but also highly suitable for all members.
- The panel should always seek to ensure a competitive dynamic between funds without compromising the integrity of the "best in show" list.
I hope these principles require criteria that go beyond investment performance and suitability of products, and reinforce good governance in the interest of members. On the evidence in the commission's report, it would seem that such a "best in show" list today would be dominated by industry funds (perhaps exclusively so).
On selecting the panel, the commission rightly recommends a tightly controlled arrangement. It recommends the panel be independent experts identified by a selection committee comprised of the heads of respected, independent government agencies, including the Reserve Bank, and appointed by the Parliament's presiding officers through procedures similar to those used to appoint the parliamentary budget officer, including approval by a parliamentary committee. The panel arrangement would replace the Fair Work Commission's role in approving defaults.
While I agree the process should now move away from the Fair Work Commission, and that we need a robust, independent process, I think the function of such a panel should be the responsibility of the executive arm of government, not the legislature. The panel appointment could be by the governor-general in council so long as no room for political interference is allowed: my suggestions to the current APS review for appointing "integrity officers" (such as the auditor-general and the electoral commissioner) might provide a model, with an appropriate selection committee and approval by a parliamentary committee. For these appointments, I agree the selection panel should include the RBA governor and one or two heads of other relevant independent agencies (such as the Australian Competition and Consumer Commission or Australian Prudential Regulation Authority), but perhaps be coordinated by the public service commissioner or Treasury secretary.
Despite the (unsurprising) reaction of many in the industry, I believe this approach is eminently feasible, retaining competition in the system (unlike most overseas systems, which have monopoly providers of products from mandated contributions) and greatly increasing pressure to perform well.
Interestingly, the Productivity Commission does not rule out a government fund being involved, and I see considerable advantages in allowing a fund such as ComSuper to offer itself as a default for employees outside the public sector (the Future Fund is another option, but its experience in the retirement incomes space is only indirect). Most obviously, this would add a very large-scale competitor to the system, but it might also help demonstrate to the industry how to offer secure, suitable and convenient income products in the pensions phase. This, in my view, remains a critical weakness in our system. There is still considerable reluctance in the industry to offer annuities at all, let alone at a reasonable price. But the government funds have some experience in providing and/or financing super pensions. The Commonwealth already provides indexed annuities in the form of age pensions – why not allow it to sell them as well?
Finally, the commission calls for an independent inquiry into the whole retirement incomes system in advance of any further increase in the superannuation guarantee (the next increase to 10 per cent is legislated to take effect in 2021). The recommendation is not without merit as there are legitimate questions about how the guarantee is affecting national savings and private savings (including home ownership), and about striking the right balance to achieve adequate and secure retirement incomes by spreading lifetime earnings without imposing undue burdens on families facing immediate financial burdens. But the commission's failure to acknowledge the important benefits of the emerging Australian retirement incomes system, and its list of issues to be examined by an independent review, leaves the impression it wants to extend indefinitely the current pause in increasing the guarantee towards its intended 12 per cent rate, and it has only limited interest in the essential, yet-to-be-finalised agenda of turning accumulations into income streams.
My unease may be related more to the Grattan Institute's recent attack on any increase in the super guarantee (see my article in the Informant in December). I might feel less uneasy if the review the commission recommended has terms of reference that clarify the objectives the government has for the system, such as those suggested a couple of years ago by the Committee for Sustainable Retirement Incomes (based around "secure and adequate incomes for all Australians", and encompassing the four pillars of the system: the age pension, compulsory super, voluntary super and housing). My preference also would not be to delay further the next increase in the guarantee, but to hold off increases beyond 10 per cent until after such an independent inquiry is completed.
Those in the industry and elsewhere publicly opposing the sorts of reforms recommended by the commission might like to reflect that, if our system remains as expensive and complicated as it now clearly is, future governments might well agree we would do better to allow a government fund to play not just a limited role for the public, but to have a monopoly role with respect to mandated superannuation, with standard investment arrangements and standard retirement-income products, as operates quite successfully and efficiently in some other countries, with standard accountability for performance to the Parliament.
Andrew Podger, a former senior public servant, is an honorary professor of public policy at the Australian National University and was a foundation member of the Committee for Sustainable Retirement Incomes. firstname.lastname@example.org