Default fund changes – necessary or politically motivated?

There is a belief that the default funds regime is not broken and that the Government’s pursuit of changes via the Productivity Commission are politically motivated. This is part two of a roundtable.

Mike Taylor (MT) (chair) – managing editor, Super Review
David Haynes (DH) – policy director, Australian Institute of Superannuation Trustees
Andrew Proebstl (AP) – chief executive, legalsuper
Brian Zanker (BZ) – head of business development, Mercer
Robin Petrou (RP) – chief executive, Energy Super
David Bardsley (DB) – director, superannuation, KPMG
Jocelyn Furlan (JF) – consultant, former Superannuation Complaints Tribunal chair

MT: Another question and David alluded to it in his earlier answer and that is default funds and the Productivity Commission. Where do you think that’s headed David? I mean you’ve sort of said but what was your expectation out of the Productivity Commission?

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DH: Well by the time this article is published, the draft report will be there, so this is a slippery slope Michael because there’s no offside for me. If I get it right everyone will say well of course that’s what’s going to happen. If I get it wrong, everyone – that will be the lead comment that you make. But it is clear that the government is hell bent on changing the existing way of choosing defaults and it’s doing that without a particularly strong view of what the alternative has to be.

The Financial System Inquiry [FSI] came down in favour of an auction type of system implemented slowly over a long period of time. I think the betting money would probably be on some variation of that theme. In a way it’s a little bit strange because even in terms of looking at just the market-based model, that’s just one model that’s available for introducing the market. And they haven’t even gone to the best performing superannuation funds in the world, they’ve gone to Chile.

So rather than finding the best outcome, they’ve found an outcome that fits in with the answer that they are looking for. Our position, our I guess old school position is again there needs to be higher standards of governance, people need to be held to account.

The previous government many years ago made a whole raft of changes to the rules around the selection of defaults and that’s never ever been given the opportunity to be implemented. So I can’t say with certainty that it would necessarily be the answer that we need that is the Fair Work Commission’s solution but it certainly introduced issues of an additional quantity filter, having regard to a better connection between the needs of members in particular workforces and what a particular super fund has to offer than is the case under the existing situation. But the short answer is Mike I don’t know which way the Productivity Commission is going to fall on this.

MT: Okay, well Andrew, your views?

AP: Well I guess if you read all the signs you’d be thinking that the more likely outcome is going to be that they’re going to do something fairly different to what we’ve currently got. And given some of the ideological stuff we’ve spoken about already I think that the extent of the change will be pushed more on that spectrum than anywhere else.

So I think really those potential changes affect different industry funds in particular differently. I think funds are to varying degrees dependent upon the existing mechanisms for default fund [status]. And so the impact is going to be different across funds.

I think industry funds should, by virtue of their structure and their representative structure, should have a better connection with their members and should therefore be better placed in a circumstance where there’s more choice and they’ve got to fight for their place, fight for members.

We just have to step up to the challenge really when it comes down to it but I think – and most funds are very – this very conference is very focused a lot on member experience and maintaining that contact and all the multichannel stuff and all the rest of it. So I think we’re going down paths of making sure that we’re preparing for what’s coming but you can only do as much as you can.

DH: But the government is not preparing the way for a level playing field. If you go back and saw what David Murray recommended back in his draft report, he just said he’s looking at the idea of there being a very few number of funds and it’s basically decided on the basis of fees. And there would be some sort of mechanism for choosing default funds, and that would be it and every three years there’d be a process to look at that. That hasn’t delivered the best results in Chile and there’s no reason to expect that it would lead to an improvement of what is already a very well performing system in Australia.

AP: But that would be for people who don’t choose. But if we’re operating on the basis that we’ve got that great connection with our target membership, whatever that is in a particular fund’s case, then I guess what I’m saying is you can have that small number of funds that are the default funds but if you’ve got your connection to your target market you’re the logical choice for your target market.

DH: You are, but there are very low levels of financial engagement and financial literacy whether people are in a default option or whether they’ve chosen an investment option or whether they’re in a SMSF [self-managed superannuation fund].

I think one of the big myths is that the people who are in default funds are somehow in a worse position financially than others. If you actually drill down into the composition of who’s in SMSFs, the level of financial literacy is still very low and people – it’s just using that method of fund and that distribution channel – people are reliant not on a trustee but on an adviser to make the decision in their best interests. And until recently that adviser wasn’t actually required to act in the member’s best interest whereas the trustee was.

RP: And we’re breaking the nexus of the relationship with the employer and the workplace opportunities to be able to educate and support members. And we are systematically breaking that employee based benefit. I mean this used to be an employee benefit. Superannuation can be an employee benefit. It became a compulsory part of employment but it can also be an employee benefit that an employer could use.

From a superannuation fund point of view, being able to talk to our members in the workplace and be able to educate and all the things that we want to do, the employers give us the opportunity and the access to do so. And so we’re breaking away some of those fundamental access to be able to support our members in what they need to do in the future.

I mean we talk about disengaged members, we talk about age groups, let’s face it, we’re not going to be able to do it with digital right? They’re not interested unless we sit down and have the conversation with them that would then spur them to move on to utilise the tools that we have available for them. Because superannuation – retirement is a long way off. None of us when we were 20 thought we were going to die or retire any time soon.

DB: Look it’s not my domain of expertise but I share the sentiment that Robin just gave the table and that is that the relationship with the employers is changing. We’re seeing, in an advisory capacity, a lot of large and medium size funds looking at how to better engage directly with their members whereas traditionally their focus was on those employer relationships.

I don’t have a view on where the Productivity Commission is going to land. I share David’s sentiments, it’s too risky to put anything on the table. It’s all downside really isn’t it? I wonder again about the flexibility in the options and the timing associated with change that the government is going to expect on the back of its recommendations. I hope that it’s not prescriptive. I hope it’s more directional but my fear is that it will be quite prescriptive. And again, they’re going to look to push it, that prescription as far as they can along the curve. They want to do something different and they’re going to use this mechanism to do something different.

MT: Brian?

BZ: I mean I look at it in a number of ways. We provide services to industry funds, to government sector funds, to retail funds. And in an ideal world you’d probably have a superannuation system or retirement system that’s apolitical.

We’re not going to get that. There’s too much money in the system so you’re never going to really be able to separate that. But that would be the ideal position. The hope that I think we would all have in whatever outcome we end up with is that you don’t create complacency within the funds where they’ve got an automatic flow of members and it reduces the emphasis that they have on becoming or continuing the drive to be engaging with members and competitive and providing best outcomes. So I think we’ve just got to be careful that we don’t create a system that creates complacency.

MT: Jocelyn?

JF: I agree with everything that’s been said. I don’t know what the Productivity Commission is going to say either. I think when I think about it, superannuation is compulsory as we know and it’s a compulsory diversion of the best part of an Australian’s income. And so there’s a duty of care there that the industry takes incredibly seriously to do no harm to members, given that legal framework. And my hope is that the Productivity Commission also feels the burden of that obligation, that they are making recommendations in relation to a system where Australian’s are losing their own money into a system and therefore they have a sense of they’ve got a duty of care in their recommendations to do no harm to members in that environment. That’s my hope.

Part one

Part three

Part four