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‘Once only’ default advantages must be balanced out
A shift to a “once only” default superannuation system will spark a battle for new starters, particularly an increase in direct competition, but will also impact the costs of acquisition per member for each fund, according to AustralianSuper.
In a submission to the Productivity Commission (PC) on competitiveness and efficiency of super, the industry fund said that while the increase in competition could deliver member benefits, and that it would impact system costs, the advantage of a “once only” default must be balanced by:
- Ensuring only the best performing superannuation funds, measured by long-term net investment performance, are eligible default funds;
- Mandated communication to fund members if the fund they have been defaulted into consistently underperforms; and
- Other safeguards identified to ensure members have the best possible retirement outcomes.
The submission also noted that “first timer default” system decision for employees had a danger of employees defaulting into a poor performing fund and member disengagement could be perpetuated.
“Research indicates that the majority of first time job starters do not actively choose their own superannuation fund. If members continue to be disengaged this default has lifelong implications and potentially more damaging than current shortcomings of the system,” the submission said.
“Consequently, it is essential that there is a significantly rigorous selection process for eligible default funds based on long term net investment performance.”
AustralianSuper said issues that would need to be addressed were:
- Those with broken work patterns will have superannuation accounts that close and they should be afforded a further default option;
- Those who depart Australia and return later with depleted accounts will need further default option consideration;
- At a system level, we expect a shift to “once only” default will spark a battle for new starters in particular that will increase direct competition (which may deliver member benefits) but have a marked impact on costs of acquisition per member for each fund (impacting systems costs).
AustralianSuper also urged the PC to conduct a full cost benefit analysis of any recommendation to understand and assess the costs, benefits, and risks associated with any alternative default arrangement.
It said that any change to the current default arrangements should only be undertaken when there was confidence that the changed system would work better for defaulting members.
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