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Boondoggling on defaults
With the Financial Services Council locked in litigation with the Fair Work Commission over default funds, Mike Taylor wonders whether the changes wrought via the Cooper Review were really worth it.
The Financial Services Council (FSC) earlier this month ensured that the Fair Work Commission’s (FWC’s) review of default funds under modern awards would take somewhat longer than was originally envisaged when it initiated action in the Federal Court challenging the constitution of the FWC expert superannuation panel.
In fact, the FSC has been challenging the FWC’s default review process for most of this year, starting by raising concerns about perceived conflicts of interest involving those appointed to the expert panel and then questioning whether, given probable Government policy changes, the review should proceed at all.
If the objective of the FSC was to cause delay and confusion, then it has proved successful. In the space of a few short months two members of the expert panel were forced by FWC president, Justice Iain Ross to stand aside because of perceived conflicts of interest, and Ross himself has found it necessary to join the panel to ensure its legislative validity.
However, as challenging as the FSC’s approach has been, the response of Justice Ross has been equally belligerent as he has parried many of the points made by the FSC’s John Brogden and thrust back with challenges of his own, including suggestions that the FSC should test its arguments in court.
But as the Federal Court begins it hearing of the issue later this month, it is worth reflecting upon the underlying arguments and the fact that the FSC and its retail banking constituency believe that all registered MySuper funds should be eligible to be default funds, while the industry funds lobby wishes to maintain the status quo.
Those who understand how the default super regime works, know that billions of dollars of contribution inflows are at stake and that, in some instances, so are some delicate industrial alliances.
But it is also worth reflecting upon the fact that prior to the election of the Rudd Labor Government in 2007, the default superannuation regime was not quite so contested as it is today and that it was operating perfectly well without MySuper products.
There are many people within the superannuation industry who privately reflect that the introduction of MySuper was not necessary, and new research produced by Chant West and the Centre for International Finance and Regulation suggests their arguments have some merit.
That research, MySuper: A New Landscape for Default Superannuation Funds, broadly found that most superannuation funds, and particularly industry funds, simply rebranded existing balanced default options as their MySuper offering.
The research also found that certain funds in the public sector not regulated by the Australian Prudential Regulation Authority, and which manage default money, did not obtain a MySuper licence at all.
“Overall we surmise that at least two-thirds of default funds by value and more than half by number underwent no meaningful change following the introduction of MySuper,” the report said, before suggesting that MySuper also failed to bring about a range of simple, low cost, easy-to-compare default products, which was the original goal.
“If anything, the default landscape has become more complex rather than simpler,” the authors said.
“The launch of lifecycle products and other changes in product design have led to a more diverse array of offerings,” it said.
Retail funds, on the other hand, have jumped on the bandwagon by substantially changing their product offerings and lowering fees by 0.14 per cent.
Around 60 per cent of the sector adopted a lifecycle approach where investment risk is dialled down as the member moves towards retirement.
Retail funds have also moved towards passively managed products, with lower fees averaging 0.95 per cent per annum, and away from alternative assets.
“Whether these design changes are considered beneficial depends on one’s view on debatable issues such as the trade-off between sequencing risk and expected return, active versus passive management, and the benefits of alternative assets,” the report said.
So the bottom line is that while the Financial Services Council and Fair Work Australia duke it out in the Federal Court over the constitution of an expert panel intended to identify appropriate default funds, the efficacy of the MySuper regime remains in question and the Federal Government seems likely to change the rules in any case.
In these circumstances, the industry might care to reflect what, beyond SuperStream, was actually achieved out of the Cooper Review.
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