Default superannuation funds divide industry

A Super Review roundtable has revealed that while the superannuation industry has embraced many of the recommendations contained in the Productivity Commission report on default funds under modern awards, some strongly divergent views remain.

Mike Taylor, managing editor, Super Review: The purpose of this roundtable is really to examine some of the current issues confronting the superannuation industry, and I guess one of the most current issues is the Productivity Commission Interim Report, which was handed down late on Friday, or early on Friday.

What it has specifically recommended, of course, is that MySuper be used far more as a base for default funds under modern awards.

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There’s the case at the moment where you have default funds selected in large part by Fair Work Australia according to the award system.

So as a starting point, because I know Fiona Reynolds has a very strong point of view on MySuper and the default fund arrangement and the industrial awards arrangement, I’ll just ask that Fiona …

Fiona Reynolds, CEO, Australian Institute of Superannuation Trustees (AIST): Okay, I think first of all with the Productivity Commission paper, we’ve welcomed the paper as a good starting point, and in actual fact they’ve picked up a number of the things that we’ve recommended.

So we’ve said MySuper isn’t enough, you have to have other criteria to address the needs of people within … that have superannuation, and by that we mean that a fund needs to really be fit for purpose.

So there’s no good having in an award, if you’re in the mining industry or you’re in the construction industry, a generic sort of fund that doesn’t have, doesn’t really look after the needs of those members that they work in dangerous areas, that they need different kinds of insurance arrangements, things like that just as sort of a starting point.

I think also that while there’s a lot of criticism of the default system, that the Commission does recognise that in actual fact, it’s done what it was supposed to do, it was there as a protection for workers, and the default funds have outperformed.

So I think it was 5.6 per cent ten year returns to 4.4 per cent returns on average.

So we’re looking forward to sort of the next stage, because I think the report, there’s a lot that’s left to a second stage, there’s a lot to work through.

I think the one thing that really perplexes us in the review though is the employer opt out, so we don’t quite understand why you would build a new, “you beaut!” system, make it all transparent, make it all the things that you said it wanted to be, and then go “but now you don’t have to use it”.

So that seems an anomaly to us, and probably one of our key concerns about it.

But it will be interesting to see how the rest plays out, we’ve got a meeting with the Productivity Commission next week, then there’s submissions, the final report due in October, and obviously I think that the default funds play a really important part, as I said, in protecting workers who don’t make a choice, and some workers who do.

But in people who don’t want to make a choice, and I think we really need to be careful before we ‘throw the baby out with the bath water’, because this system has worked, that is not to say that it can’t be improved.

Everybody who participated in the Commission, in the reviews, has said the system can be improved. So no-one’s arguing against that, but let’s see what the end result will be, but as I said I think we have to remember that it’s there, about members, to protect members, and that should not be given away easily just to open up a system to other people who want to make more money out of superannuation, and in my view, that’s what it’s really all about.

Mike Taylor, Super Review: Pauline Vamos, you come from a fairly broad-based organisation, what’s your take?

Pauline Vamos, CEO, Association of Superannuation Funds of Australia (ASFA): It’s a very broad organisation because it is the whole industry.

I think what is fairly interesting is the statement made in the report, and one in particular, it says the Stronger Super reforms that serve largely to standardise features and promote disclosure to include comparability between funds, rather than filter out any fund which may not represent the best interests of members.

And then they also talk about the administration burden on the trustees, sorry, on employers.

So what we’re doing, I think a lot of people in the industry are doing, is actually looking at a lot of the statements made in the Commission, it is over 200 pages long, and it does make some very, very good points.

And I agree with Fiona, I think there are some … there’s some points that are made particularly around the review of a default fund once it’s been nominated in an award, because what they’ve said in there with that, often the default fund is appointed, or previously a default fund was appointed to an award, for reasons other than fit for purpose or in the best interests of those in … that cohort of employees.

But once in, they were there, and so the fact that they’ve recognised there needs to be a review model, I think is a fairly important recommendation.

Mike Taylor, Super Review: Russell Mason, you’ve consulted to a lot of funds, and you must have had a lot of discussion about how they are approaching it – what is your take on the Productivity Commission’s recommendations?

Russell Mason, partner, Deloitte: I’m fully supportive and I agree with many of the comments that Fiona and Pauline have made.

Over 80 per cent, 85 per cent of employees end up in the default option, in the default fund, so it’s an important choice.

And many employers – especially small to medium size employers – rely on the default funds and the modern awards as the fund of choice.

So there is an assumption by many that if it’s made it this far, if it’s become a default fund under the modern award, that that means it’s past certain criteria and it has certain standards, certain performance, certain fee structures.

That isn’t always the case and there’s a mixture of funds in modern awards, and in many cases, he or she that lobbied best got in to modern awards.

So to set some criteria to raise the bar on funds, I don’t think it will affect very many funds that are currently in the modern awards, but I think it provides a further protection for employers who use those default funds, and in turn as Fiona said, will protect members.

So as far as I’m concerned, the Productivity Commission recommendations will ultimately be good for members, will raise the bar, and will protect their money even further, and set standards that funds should aspire to.

Fiona Reynolds, AIST: And a lot of employers are happy with the system.

If you read the submissions, there isn’t an outcry from employers about wanting great changes.

It works for them – they don’t want to have a list of 500 MySuper products, that somehow they’re supposed to make, you know, their job might be building widgets, and they’re supposed to somehow make some assessment about whether this is a good fund for them, they have really relied on things that are right for their industry, funds that have worked within their industry, and I think employers don’t … are concerned about more regulatory burden for them, and I think concerns about liability issues as well, and that’s always been a concern for employers.

Pauline Vamos, ASFA: I think the Commission recognised that because they said that having all MySupers listed on awards would be too much of a compliance burden for funds.

What was also, I think, important … and again, with a lot of the reports that come out about the industry, and even though there was a lot of direct statements, we’ve got to also look between the lines, and one of the statements in here, which was just a single statement, ‘promote stability in the superannuation system as a whole and hence confidence among all stakeholders’.

And what we always failed to see as an industry is we might have the conversation with the consumer or from the industry, that a lot of comments and conversations about the industry are happening off the record in confidential submissions, so we’ve got to remember that others have informed a lot of these recommendations.

Mike Taylor, Super Review: Michael Dwyer, you’re certainly on the front line I guess, as a fund executive of a very large fund in New South Wales. What’s your take on the Productivity Commission’s recommendations?

Michael Dwyer, CEO, First State Super: Look it’s fair enough as far as it goes. We believe the current system has worked quite effectively, and I think the point was made by one of the panel members that there haven’t been a lot of overt complaints about the current system.

I think the efficiency in the administration side for employers is probably the area that we get most feedback about, and that’s what employers, by and large, with a default fund position seem to have accepted the proposition that largely they, in many cases might be a not-for-profit, they’ll be a low cost fund, they’ll provide a limited range of services, and importantly, they’ve got the insurance component.

And I must say I agree with the comment that Fiona made about fit for purpose.

I mean, 40 per cent of our members now work in the health sector, and over the years the default fund has looked to provide a level of insurance that was tailored for that particular sector – particularly when you are dealing with the nursing community and their special needs.

So from our point of view, look, anything … it can always be improved.

I think one of the great challenges we’ve got at the moment though, with the Productivity Commission coming in to the debate about default funds, is I think if we were concerned about members being disengaged before, I think that the way that constant change which is hitting … hitting members at the moment, hitting funds and then will hit members, probably doesn’t increase the level of engagement, there’s just a lot of it coming, it’s an onslaught of the legislation and change.

Now, is it necessary change? Well in the fullness of time I think it would be, but all at the one time, all within the 6-12 month period. I think is a tough ask for anyone to digest, from a member perspective.

Fiona Reynolds, AIST: And I don’t think we should underestimate how much the default system drives our cost as well, and makes a lot more … well, cheaper. It does drive down costs, you’ve got a really good distribution model and you’ve got an effective communication model as well with members, when people work in one particular sector, and I think it has played a key role in keeping costs down.

Mike Taylor, Super Review: Col McGuinness, I guess with Auscoal, you couldn’t get more single industry focus than that as a fund, and dare I say it you’d be a default fund under the award. How do you see the Productivity Commission’s recommendation?

Colin McGuinness, strategic manager, Auscoal: Mike, I think there’s, from our perspective, and you’re right, we’re a single industry fund – surprisingly though, there is no superannuation fund listed under the mining industry … the coal mining industry modern award.

The parties took a position that, in the enterprise bargaining negotiations that are widespread throughout the industry, there was no need to, because we had the enterprise agreements in place, and arguably the parties take a much closer interest in the development of all employment related services that are offered.

One of the things that I think is a danger in the Productivity Commission’s report is that they’re applying a broadbrush solution to an industry which has many and varied iterations.

And take our own industry, for example. We have a preponderance of enterprise agreements. Auscoal is listed in most of those enterprise agreements as the default fund, and both the employer organisation and the employee organisation own the fund.

So there is a common interest in getting a product together that fits that industry. Now our insurance is tailored, and it covers people who wouldn’t normally be able to get cover, under a general insurance policy, for example.

So a lot of the things that we have been building up over the years, if you apply a broadbrush solution to it and impose on the industry a number of other choices, you are getting inappropriate selections given to people who are unaware, if you like.

So our fund, for example, does a health check each year with the employers, where we actually benchmark ourselves against the industry, we use SuperRatings and Chant West reports to indicate where we stand in respect to a wide variety of benchmarks.

We have a benchmarking report that’s done by SuperRatings, an extensive report; we release the executive summary of that to the employers, so there’s ‘warts and all’, if you like, exposure to the employers of what’s happening.

Now we are concerned that that could be disrupted by the employer being forced into other arrangements.

So I think it’s early days – there’s still a lot of review of the report yet to come, and I think quite a bit of discussion, public discussion otherwise, which will probably move some of the outcomes.

Mike Taylor, Super Review: Bryan Gray.

Bryan Gray, J.P. Morgan: I mean I’m clearly not as close to the issues as these guys are, but my read of it, I mean I liked the sort of putting members first, the whole transparency focus, the criteria that was kind of being used to assess, I recognise that you don’t want to have a situation which is far too onerous for employers, so you don’t want to be in a situation where they’re having to go through and select from multitudes of funds.

So I like the idea, the recommendations they were making, which essentially was to limit the number of funds that were there.

I think they made an interesting point though, about being in a situation where conflicts or perceived conflicts are not apparent, and that’s why I think the idea of being able to have funds present and have an equal opportunity, and an opportunity to be included in award is probably not a bad thing, but clearly you don’t want to be in a situation where it becomes too onerous for employers to make that selection.

Pauline Vamos, ASFA: One of the big things they’re recommending – and this is one of the great things about this report, is that the primary factors for consideration are the appropriateness of the risk, return objectives of the portfolio, of the MySuper, and the expected ability of the provider to deliver on that.

So they pull those out of the number one issues, when one of the big issues with MySuper which we’re all grappling with is the lowest common denominator, passive investing, low cost, where they’ve actually said it should be net returns, that is a very important part of this report.

Mike Taylor, Super Review: Warren Chant, you’re a researcher, one of the people who looks at funds, how they’re performing, and I know you’ve been studiously studying the Productivity Commission report.

So as a ratings person looking at super funds, how do you see the recommendations, and whether they were … whether the review was warranted?

Warren Chant, principal, Chant West: Look, sadly at Chant West I think we have a somewhat different view from most people on this panel.

We are basically very disappointed with the report. If you think about what the report said, it said “look, MySuper products don’t go quite far enough, you need to take some extra things into consideration”.

When you look at those extra things, you sort of say to yourself “most of them didn’t take into account in MySuper anyway”.

And then what it says, we are going to get an expert panel, a relatively small group of people, and they’re going to choose a relatively small number of funds to go into awards.

And then they say, employers, if they want to, they can choose any MySuper product, provided it doesn’t make employees worse off. So the onus of proof is on employers.

And I think that’s quite a burden. I think it would be much better if employers could just choose a MySuper fund, because after all, we’re going through an enormous change in our industry – a lot of focus has been put on MySuper.

For me, it’s just a bit rich for the Productivity Commission to come out and say “MySuper hasn’t gone far enough”. I mean, for goodness sake … and now we’re going to have a group, a small group choosing a small group of funds to be put in an award, and by the way, if an employer doesn’t like that, they can go and choose any MySuper product they like, provided they can satisfy themselves that employers are no worse off. What’s the first thing they’re going to ask their lawyer when they come to choose another fund?

How do we satisfy ourselves? We go through the whole thing again.

So I think that instead of everyone congratulating the Commission, and saying ‘what a wonderful report’ – I think people should be really critical of it. Why do you think the FSC [Financial Services Council] is so happy with it?

For their members, all of those retail institutions, they don’t have to go out, they can continue to go out and sell their product, the onus of proof is not on them that employees are not worse off, the onus of proof is on the employer.

The employer is putting their, you know, they’re the ones that are at risk, not the service providers, not the product providers.

So I’m sorry, I’m very disappointed, very, very disappointed with what the Productivity Commission has come up with.

If MySuper is not good enough, then we’ve got a real problem with MySuper.

Fiona Reynolds, AIST: Can I just respond to that by saying that the problem about the MySuper is that if … if you just pick any MySuper fund as an employer, but that fund is not fit for your members, you’ve got a problem.

So this is why the …

Warren Chant, principal, Chant West: But Fiona, if you’ve got a dozen funds, are they going to be … are that dozen funds, are they going to sort of cater for all of the fit for purpose?

I mean why … I can understand when you say a construction worker has specific issues, or I can understand why a coal miner has specific issues, but for the life of me I can’t see why a teacher or a breadmaker, a nurse, et cetera, has to have a fit for purpose product, because in an investment sense it’s all the same, so we’re just trying to get their nest egg to a certain level.

With insurance, well in 12 funds, or a smaller number of funds, you are not going to cover all of the insurance needs of a vast array of different people.

So when you say fit for purpose, it sounds nice, but in reality, if you’ve got a small number of funds that are chosen, it’s not going … they’re not going to be enough for fit for purpose, I’m sorry.

Fiona Reynolds, AIST: Well then people will choose funds that will be appropriate to that industry to be in the list. So I think it’s an extremely important thing, and in actual fact are all our recommendations.

So I think those things are good. I don’t think that people fell over themselves welcoming the report though, I think we said “well we welcome that it’s out there, and now we can have …”.

Warren Chant, principal, Chant West: If you listen to the comments tonight, they’re all pretty positive about it.

Fiona Reynolds, AIST: Really?

Warren Chant, principal, Chant West: When you replay the tapes it’ll be pretty positive.

Fiona Reynolds, AIST: Okay, I was trying to be balanced. I think I said some good things and some bad things, but I think the fit for purpose does go further than mining and construction, I think some funds have, for example, an overwhelmingly older workforce that might not be able to continue working well into their 70s, et cetera, they have particular investment options, or they look at their fund in a particular way.

If we get to the point where we have this cookie-cutter view of superannuation that it is some commodity, or some product you buy off the shelf …

Warren Chant, principal, Chant West: But that’s exactly what you are doing if you buy these recommendations, you are going to have a small number of funds, right, whatever it is, a dozen or so, and that’s your ‘cookie-cutter’.

That dozen funds isn’t going to fit all of the different, as you put it, “different needs of different groups”. There are many different groups out there.

Fiona Reynolds, AIST: I think if I’m a coal miner, twelve funds is plenty for me to choose from.

Warren Chant, principal, Chant West: When it’s highly likely that an employer would choose a fund that specifically looks out for the construction industry, or the coal mining industry or whatever.

So the thing is, though, that you are putting a tremendous burden on employers by saying they have to prove, if they want to go outside of the nominated dozen.

I don’t think that’s right. I don’t see why they’ve gone to all this effort in MySuper …

Fiona Reynolds, AIST: We didn’t ask for the awards to be opened up, so we didn’t ask for that.

Warren Chant, Chant West: But everyone knows they should be, so …

Bryan Gray, J.P. Morgan: But Warren, my question would be, what is the Fair Work Australia or expert panel going to do?

I mean, the people that … my understanding of it is that they’re going to have a panel of people who select these, and they will bring in experts, so what are they going to do, if not, assess what’s a reasonable fund for that particular …

Warren Chant, Chant West: Well page 2 of this report spells out these extra things they are meant to be considering, but in a factual sense, how are they going to … I mean how they are different from MySuper is extremely difficult to understand.

So in reality, I mean how do these wise people come up with this small list of funds?

Fiona Reynolds, AIST: I don’t know.

I read it and I can understand perfectly, and it makes complete sense to me that you would do it, so do it this way, and that it makes complete sense to me that the fund that I am in should be the appropriate fund for me as an individual.

That makes … I just can’t see that there is not … that’s just perfectly logical.

Warren Chant, Chant West: I can’t see why you want a panel of so-called ‘experts’ without … I mean, I suppose it’s early days.

They don’t have guidelines, but whoever is going to give them the guidelines, how are you going to have a panel choosing a small group of funds?

I just don’t see how that’s going to satisfy all of the modern awards.

And I don’t see … if we’ve gone to all this trouble to introduce MySuper, then why are we saying it’s not good enough for an employer to choose one of those products if they think it’s right?

Fiona Reynolds, AIST: There won’t be just like 12 funds across all the awards – it’s going to look at individual awards. There are over 100 awards, so you’re going to look at the particular award for a sector, and choose the funds for that sector – not just have 12 funds.