The Productive Commission has released an issues paper as part of its inquiry into the superannuation system. This starts to unpick the complex maze of issues surrounding superannuation and is part of the mandate from February 2016 given by the Government “to conduct: a study to develop criteria to assess the efficiency and competitiveness of the superannuation system; and an inquiry to develop alternative models for a formal competitive process for allocating default fund members to products”. The inquiry is part of a three stage process running to 2020.
The concept of defaults (and their presence in workplace instruments) has been integral to the development of Australia’s superannuation system, largely stemming from the decision to make superannuation compulsory and the inherent complexity that individuals face in making decisions about retirement incomes. Having no defaults is their preferred, objective baseline for this inquiry. Alternative allocative models would be assessed against this baseline, and their relative performance against the agreed assessment criteria.
They make the point that default superannuation arrangements in Australia have primarily arisen out of the workplace relations system, though employees not employed under the national system are generally covered by state‑based systems.
MySuper was introduced in 2013. MySuper products were designed to be simple and cost‑effective superannuation products replacing previous default products. The intention was to ensure members do not pay for any unnecessary features they do not need or use.
For the purposes of this inquiry, the Commission will be developing models to allocate default fund members (employees who do not make an active choice about their superannuation fund) to default products. There is no intermediate decision of selecting a default fund.
The Commission proposes to assess alternative models against five criteria:
- members’ best interests: meeting the best interests of members, by maximising long‑term net returns and allocating members to products that meet their needs
- competition: fostering competition between funds that drives innovation and cost reductions, facilitates new entrants to the market (contestability) and leads to efficient long‑term outcomes
- integrity: minimising scope for the allocation process to be manipulated (or ‘gamed’), including by using clear metrics that are difficult to dispute and by holding funds accountable for the outcomes they deliver to members
- stability: supporting a stable superannuation system, including by building trust and confidence in funds regulated by APRA
- system‑wide costs: minimising the total costs to members, employers and funds, including costs associated with regulatory compliance, complexity, ‘churn’ and ‘gaming’, and minimising costs to government of implementing and administering the models.
The five criteria collectively capture competition and efficiency. These criteria essentially relate to the benefits and costs of each model, and will be assessed from the perspective of the community as a whole. As noted, the Commission proposes to assess benefits and costs relative to a baseline scenario of no default system.
Some of the models being tabled are:
Administrative model
In an administrative model, a government body would use a ‘filter’ to determine which products are eligible to be used as defaults. This filter (the regulatory mechanism) would be akin to a set of minimum standards that products must meet. The filter would not rank the relative performance of products.
Market‑based models
A market‑based model would involve some form of explicit and formalised process through which products compete to be deemed eligible as defaults: in other words, some form of a tender or reverse auction process. Numerous variations in design have been proposed in the literature and exist in practice. However, at its heart, the market model involves superannuation funds bidding for the right to receive contributions from default members.
Active choice by employees
The baseline to be used in this inquiry is that there is no default system at all. After nearly 25 years’ experience, it could be even argued that this itself be a new allocation model, where employees themselves must make an active choice of superannuation product. This would remove the employer’s responsibility for choosing a default fund and place the onus on the employee, who may be better placed to make a decision in his or her own best interests. However, research on an active choice model (without defaults) is scarce. Most countries that have employer‑funded superannuation also have some variant of a default option.
An active choice model need not be completely decentralised. A filter or a market‑based mechanism could be used to narrow choices or ‘nudge’ members to high‑performing fund.
They are seeking submissions and alternative suggestions for models by 28 October 2016.
