Debate continues to rage on about the best way to manage Australia’s $2.7 trillion superannuation sector, with the idea of opening up a government fund now being suggested.
Under the current system, most Australians have the choice of two types of managed superannuation funds: retail or industry.
Many retail funds pay their profits in dividends to shareholders and investors and are tied to banks and financial institutions.
Industry super funds, on the other hand, return their profits to members, with many tied to trade unions.
Both have long been engaged in a tense fight to control Australian retirement savings and have faced criticism about conflicts of interest.
What’s the current problem with super?
The recent Productivity Commission report released last week concluded that:
“The system delivers good outcomes for many members, but not all. The industry’s peak body submitted that “the Australian superannuation system is not broken, and is, in fact, a world-class private pension system”. The evidence suggests otherwise.”
While parts of the superannuation system work well, there are also many problems causing chronic under-performance at the bottom end.
This is a huge issue in a compulsory system that is meant to grow 9.5 per cent of your salary each year into a substantial investment that can fund your retirement.
In the Productivity Commission’s review of five million under-performing superannuation accounts, it found that the overwhelming majority (more than three in four) were retail funds.
That was despite the fact that retail funds only represented nine of the 29 funds reviewed.
Counsel assisting QC Michael Hodge also identified during the financial services royal commission that misconduct was far more prevalent in the retail space, while complaints against industry funds in comparison were “extremely minimalist”.
However, industry funds are certainly not without issue either.
Some industry funds have also chronically under-performed, particularly in the case of default funds provided when new employees fail to nominate another. Industry funds tend to be over-represented among these default options.
But they also carry with them another problem.
There is a danger of industry funds creating an economic imbalance as they grant disproportionate power to trade unions, according to a recent editorial from the Australian Financial Review.
“Whatever one thinks of the politics of the unions, from an objective political economy point of view it is destabilising for the financial system to have such a politicised element so close to its commanding heights. It pulls the politically-driven [industrial relations] system into the heart of the financial system, where it has no place being,” the AFR’s editors wrote.
Given that both sides are not without fault then, and given that self-managed superannuation will not be for everyone, it raises the question: what’s the alternative?
A third way
Both sides of politics appeared lukewarm on the raft of recommendations proposed by the Productivity Commission last week.
The heated debate surrounding certain controversial proposals contained within it is also sure to continue.
But now, the idea of offering a government-run default option has emerged.
That would be ultimately controlled by the country’s Future Fund: a national fund that was set up to invest and grow Australia’s long-term wealth.
That wealth is then used to satisfy a number of government liabilities, including to pay pensions for some Australian civil servants.
Your Money chief business reporter Leo Shanahan said that there would be two different ways the Future Fund could be used as a superannuation option for everyday Australians.
“Whilst the Future Fund might allocate the assets broadly, you would get fund managers to run the fund on a competitive process,” Shanahan told Your Money Live.
“The other one would be that the Future Fund sets up its own consumer fund and competes with the industry and retail funds,” he explained.
The Coalition government are reportedly considering the move, with Jobs Minister Kelly O’Dwyer backing the proposal along with the fund’s founder, former federal treasurer Peter Costello.
“Either way this is done, if it is done, it’s actually a huge policy change for super because it would really wipe out eventually the retail and even the industry funds no matter how well they’re performing,” Shanahan explained.
That’s because if the government-run option didn’t outperform its competitors, Shanahan said there would be “huge pressure” on the government to pay out more money anyway.
So what’s it worth?
With the super sector only projected to swell to $6 trillion by 2030, the ongoing debate about the best way to manage Australians’ retirement funds will always be a fiery topic.
Given the projection that 500,000 members would flood into the government option each year, this new idea is only likely to fan the flames further.
Like all recommendations to improve the superannuation system, there is no silver bullet.
One potential pitfall of the proposal would be that it could simply shift expenses around.
“One criticism of the [superannuation] industry, and it’s justified, is that you have this huge industry around super,” Shanahan explained.
“You have union lackeys and bankers and others who are hanging on and making a lot of money of it. Are we just going to create another huge bureaucracy around this in the government, which is also going to cost? It’s unclear whether this stacks up.”
Your Money asked current superannuation figures to weigh in.
Martin Fahy, Association of Superannuation Funds of Australia
The policy and advocacy body of the superannuation sector, ASFA, represents both retail and industry funds as well as corporate and public sector funds.
Chief executive Martin Fahy told Trading Day that the Future Fund proposal raises two types of issues.
“There’s the philosophical or ideological issue of whether we want to nationalise retirement savings. That seems a strange thing to do given how successful the system has been to date,” he said.
“Then there are pragmatic issues. The Future Fund is a sovereign wealth fund, it’s exempt from taxes, it doesn’t have any liquidity requirement, it typically has higher investment costs and while it has performed very well, its initial starting point meant it was long cash at the height of the GFC as it sold down Telstra shares,” Fahy explained.
That consequently improved its performance as its cash holdings were left unaffected by the 2008 downturn.
While average fees across the superannuation system more broadly remain high, they’re not typically any lower in the Future Fund either, Fahy added.
“The Future Fund’s investment fees last year was 1.34 per cent- that’s quite high,” Fahy explained.
Watch the full interview below.
Stephen Anthony, Industry Super Australia
The peak body for the industry superannuation sector, Industry Super Australia (ISA), told Trading Day in no uncertain terms that the proposal would contravene the Future Fund’s purpose.
“The Future Fund was set up to deal with certain public sector superannuation liabilities, which it is doing well, but it is not a public offer superannuation fund,” ISA chief economist Stephen Anthony said.
“When it enters that universe it will be a very different beast to what it is now, it will have a very different asset allocation and performance outcome.”
The solution, he said, lay in fixing up the current environment rather than simply adding another fund.
“Essentially the government is saying, ‘we will create a new fund to compete against existing funds in a system that is vastly underperforming for so many Australians, especially where they have exercised choice’. Do you think that sounds like good economic policy?”
Watch the full interview below.
Watch Leo Shanahan’s full analysis at the top of the article.