Too many lazy funds, but super system still delivers

The effectiveness and success of Australia’s superannuation system, examined separately but almost simultaneously by the Hayne Royal Commission and the Productivity Commission, has never been more challenged in the court of public opinion.

It is hard to believe that we have reached this point in the context of the widely publicised Melbourne Mercer Global Pension Index, which has ranked the Australian retirement system among the top three in the world out of 34 assessed across the Americas, Europe and Asia-Pacific.

Australian retirement income derives from what have traditionally been referred to as the three pillars:

·       Compulsory superannuation savings;

·       Voluntary superannuation savings; and

·       The government funded Age Pension.

This provides the basis upon which Mercer assesses the efficacy and adequacy of the Australian retirement system in its global survey.

Evaluating the effectiveness and adequacy of the superannuation system by the Productivity Commission essentially carves out the contribution to retirement income made by the Age Pension, upon which hundreds of thousands of retired Australians are wholly or partially reliant.

However, the Financial Services Inquiry of 2014 chaired by David Murray defined the purpose of superannuation in Australia as ‘To provide income in retirement to substitute or supplement the Age Pension.’ It is a definition that the government has essentially adopted and comments during 2018 from the former Treasurer and now Prime Minister, Scott Morrison, have confirmed.

If this is super’s role, then Michael Roddan’s article, Age Pension liability will fall faster than projected’, published in The Australian on 28 December 2018, suggests that the system is delivering outcomes somewhat better than what might be reflected in the recommendations and tone of the two recent inquiries.

Roddan’s article reported that Australian Treasury modelling had revealed that the nation’s reliance on the Age Pension “will fall faster than previously expected, as bigger superannuation nesteggs push Australians into self-funded retirement”. A paper by industry analysts, Rice Warner, in May 2018 supported this modelling, saying that the proportion of the population eligible to receive the Age Pension would reduce from around 69% in 2017 to 57% by 2038. It’s still a considerable community dependency, but the trend is positive.

This makes the central question around the superannuation system’s effectiveness about whether a better performing and more competitive system would accelerate this reduction in community reliance on the government pension. This was really the point of focus for the Productivity Commission and will have the greatest impact on future federal budgets.

Moreover, the Commission specifically examined, and was ultimately critical of, how effectively the superannuation system meets and needs and services default members – those who drop into their fund through their employer and passively roll along in the default investment option, taking no action to choose investments appropriate to their circumstances or life stage.

More than 200 superannuation funds is too many and it is absolutely valid to examine the competitiveness of the system. In any truly competitive environment, natural selection would lead to the extinction of some, but there is no evidence that Charles Darwin’s thesis has applied in the superannuation sector.

This situation is without doubt due to vested interests living in denial of the fact that they should simply roll their under-performing funds into better-performing funds. Those interests sitting on both retail and profit-to-member boards and executives have been well documented and have often not served the interests of their members.

By virtue of insufficient scale or conflicted remuneration, or both, they are unable to keep a lid on fees, thereby eroding investment returns. They are making it impossible for those funds to make on-going investment in the products and services needed to nurture their members to an optimal retirement. If they are keeping their heads above water, it will not be for much longer.

The Productivity Commission was critical of the industry regulators but, recognising that fund scale is not the sole evidence of capacity to deliver good outcomes for members, APRA has been evolving a member outcomes model against which funds will have to report in the new financial year.

This aligns with the Productivity Commission’s proposal for an ‘elevated member outcomes’ test as a measure of whether funds should retain their licence to operate and, therefore, has great potential to build on and, hopefully, accelerate and make more robust a concept already in advanced development.

Of the more than 200 funds, there are more than ten that are effectively delivering a great level of confidence and financial security for members in retirement, which makes the concept of forcing employers to choose from a pre-selected group of ten ‘best in show’ funds problematic. It would likely challenge the viability of funds just outside the ten to the unnecessary detriment of their existing members.

Far better to arm the regulator with any necessary mandate backed by political will to rid the sector of underperforming funds, of which at least 25 have already been earmarked as under review. Their elimination would inevitably improve the overall performance of the superannuation system in reducing reliance on the Age Pension.

Superannuation law and regulations already clearly define the responsibility of fund trustee directors to act in the best interest of members. Rather than await action by the regulator, a good starting point in cleaning up the industry would be for the boards of underperforming funds to start making arrangements to move their employers and members into other funds better able to support their members’ retirement aspirations and needs.

Disclaimer: I am a former employee of one of Australia’s top performing funds, Equipsuper, and am still retained as a consultant.