The trouble with default superannuation funds

• Roundtable part 1: Fallout from the Productivity Commission's super findings
• Roundtable part 2: The trouble with default superannuation funds
• Roundtable part 3: Is enough superannuation reform never enough?
• Roundtable part 4: Has the excess contributions regime become excessive?
• Roundtable part 5: Superannuation lump sums – like it or lump it?

In this session from the 2012 Super Review ASFA roundtable, participants examine the strengths and weaknesses of default superannuation fund arrangements prior to 2007.

Mike Taylor, managing editor, Super Review: Well let me ask this: was there anything particularly wrong with the default fund arrangements prior to 2007?

Because what we’re talking about now, of course, is something that grew out of changes that came in post-2007, and I can’t recall there being any great debate or any great momentum for change prior to that, within the industry itself.

So, looking back at the situation that existed pre-2007, was it a problem?

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Russell Mason, partner, Deloitte: I think, Mike, we need some sort of default fund system and sort of protection for members, because I’ve come across cases in the past where, when we had commission, employers – inadvertently or otherwise – put members into high-commission, high-fee products, with perhaps poor insurance.

I think there needs to be some sort of protection to say, “If we’re going to have a default system, that there has to be a minimum standard.”

I would rather funds be able to apply to the Productivity Commission or some other body and say, “Well, if I meet these criteria, I therefore am able to be a default fund”. That would be my preference.

Certainly, you can name certain default funds, but [you should] allow others to be default, if they meet certain criteria.

With some of the corporate funds – I know there’s not many left – but they have very generous insurance benefits and very generous retirement benefits, and there’s some very large corporates out there.

Is it in the members’ best interests that those funds be wound up? I suspect the answer is no, and so, if they meet the minimum requirements of benefits for members and investment returns, if they’re defined contribution, then I think they should be allowed to exist and thrive under an award default system. 

Mike Taylor, Super Review: Pauline? 

Pauline Vamos, CEO, Association of Superannuation Funds of Australia (ASFA): I think the biggest impact of recent times was the reduction in the number of awards, and to have some awards with one fund, others with multiples.

When you look at some of the providers and some of the schemes, we know that there were some funds or providers’ products named that are no longer in existence.

So, the issue that we have raised, and a lot of members across all sectors have raised, is the transparency of the process. It is about two industrial parties coming together and making a selection – and so a process like that must be transparent.

The big question for us is whether the process that is likely to be put in place – if this legislation does go through – whether that process is going to be more transparent and whether it’s going to be more effective, and who’s going to be on the panel?

And how do we create the criteria?

I’m a firm believer in there needing to be a new measure in terms of the possible, or the potential, performance of a provider or product or a fund in the future, and that is a very hard measure to put in place.

Even if the legislation comes through, we’ve got a long way to go and there will be incredible ramifications for transition and incredible ramifications in terms if, suddenly, a fund on an award at the moment does not get up a second time.

What happens to all those vendors? What is this transition – we’re moving the capital, when we’ve already got massive movements of capital across the industry.

The timing’s a little bit unfortunate, because there’s so many other movements going on and we’ve said this publicly.

It’s been rushed and the unintended consequences just have not been able to be thought through, and the assumptions were that it would be easy for all our corporate funds to set up an enterprise bargain and agreement. Just not true.

Mike Taylor, Super Review: Peter Beck, your perspective on that?

Peter Beck, CEO, Pillar: Mike, your question really is, was there need for a change? I think historically there was this habit of truce between corporate master funds, retail and industry funds, and there was the with-advice and without-advice space. 

There were corporate tailored plans, and I think that what the MySuper has done is to create this new fresh market that everyone wants to compete in.

I think the environment has changed, and because the environment has changed I think there had to be a consideration as to how that impacts all the various market segments.

So, to answer your question specifically, yes, I think there had to be some change. And I’ll just pick up Pauline’s points: I think one market segment’s calling for greater competition.

The other ones are saying, “What’s wrong with the existing system?”

But I think the thing that probably transcends both of that is transparency.

No-one can actually argue against transparency and being absolutely transparent in how these decisions are made. So I think probably more needs to be done on that transparency. 

Mike Taylor, Super Review: Anne?

Anne Myers, CIO, ING Direct: I think that backs up what Russel said. Also, that it’s the [ability to make the] comparison, and it’s actually being able to be clear to people and be clear about the benefit to members that absolutely should be paramount.

And I’m not sure that it is, the way that what’s being put forward is currently drafted. 

Peter Smith, head of distribution, Metlife: Yeah I think a key point is just the credibility with members and communicating with other members. It’s another change on top of all the other changes, and as industry experts we understand it.

But does your man on the street understand what the benefit is to him in all of these changes? I think the more changes we make, the more complex we’re making it to actually communicate that back out to individuals. 

Russell Mason, Deloitte: And I think, Mike too, provided there is that protection and transparency, competition is a very healthy thing.

We’ve all seen industries where there’s been a lack of competition, and either a single player or a very small number of players controls the market.

That hasn’t, at the end of the day, been necessarily in the best interests of the consumer.

So, if we had the protections in place to stop the bad old days of high commission, non-disclosure to members, badly and underperforming investment products, if we’d had those sorts of protections in place, then at the end of the day – just as all of us do in our day-to-day lives where we choose our bank and we choose our health insurer – so we should have a reasonable choice for our superannuation and be encouraged to exercise that choice. 

Peter Beck, Pillar: Look Mike, I’ll make one other point about the competition.

I think the environment has changed and the focus has been on competition for the MySuper product.

But that was something the environment’s changed: that there’ll be more competition for the with--advice and without-advice product.

There’s going to be in all markets increased competition, not just the, MySuper, effectively no-advice products.