Super reforms will deliver for consumers
The Financial Services Council's Blake Briggs argues that the Government's changes to super fund governance arrangements and default funds will ultimately help consumers.
Reforms requiring independent directors on trustee boards have passed the House of Representatives. It is likely the Senate will vote on the reforms soon, one way or another bringing to a close one of the more divisive debates within in the superannuation industry.
The reforms are contentious but it is difficult to understand why this should be the case. The superannuation industry manages over $2 trillion on behalf of working Australians and has an obligation to embrace the highest standards of governance to protect consumers.
The Financial Services Council (FSC) has always viewed governance and competition reforms as a package that will prepare our superannuation system to deliver more Australians a higher standard of living in retirement.
In practice, the reforms will likely have little impact on the majority of superannuation trustees. Professionally run superannuation funds have moved to appoint independent directors already, including many of the large industry funds and members of the FSC, who have been obligated to have a majority of independent directors since 2013.
The increasing frequency of the appointment of independent directors to the boards of industry, retail and corporate funds is the product of overwhelming evidence that the incidence of independent directors benefits consumers. Multiple reviews under governments of different colours have demonstrated that consumers will be better off as a result of the improvement in the collective skills and experience of a trustee board that includes independent directors.
Labor's Super System Review in 2010 concluded that independence on all trustee boards was international best practice. It recommended the appointment of independent directors as the cornerstone of a package governance reforms, but this element of that package was not implemented by the previous government.
The Financial System Inquiry (FSI) reconfirmed that independent directors would strengthen our superannuation system and, given the diversity of fund membership in the modern super system, concluded that "it is more important for directors to be independent, skilled and accountable than ‘representative'."
Claims that the reforms are ideological and partisan are misguided. These reforms have broad-based support from consumers and seniors advocacy groups, the small business sector, many in the superannuation industry, the prudential regulator, and employers who sit on industry super boards, including Australian Industry Group and the Australian Chamber of Commerce and Industry.
In the face of widespread support and evidence the reforms are good for consumers, the recent public accusation that Helen Rowell, Member for Superannuation at the Australian Prudential Regulation Authority (APRA), was acting in a partisan manner sounds desperate.
It is likely that the industry will look back at the claim the prudential regulator was acting in a partisan manner as superannuation's version of Fonzie jumping the shark.
Understanding the motivation for attacking the independent regulator, however, requires an understanding of how APRA has rejected a longstanding fallacy at the heart of industry fund lobbying efforts; that special arrangements for industry funds are appropriate as all industry super funds outperform all retail funds.
The fallacy was exposed when APRA made it clear the comparisons between industry and retail fund performance never compared like with like.
The myth is based upon comparing the investment performance of products catering to older members, which have a greater allocation to defensive assets; to those of younger members, which have a greater allocation to growth assets. Unsurprisingly, the returns are different. Returns also differ when the performance of choice investment options, such as 100 per cent cash or bond portfolio, are aggregated with a diversified MySuper product.
APRA comprehensively rejected the longstanding fallacy and this rejection has not been disputed. Instead, it was met with a feeble attempt to discredit APRA over its use of short-term MySuper performance data as part of its overall analysis of the sector.
APRA's comments are also important to the ongoing debate around the benefits that competition may deliver for superannuation consumers. If there are some highly performing industry funds, and some poorly performing, why are consumers sometimes prevented from choosing their own fund?
The FSI made sensible recommendations to increase competition in the MySuper sector to reduce fees and increase net returns for consumers. The FSI saw through industry fund lobbying and endorsed the principle that, if a consumer does not like the product on offer, they should have the freedom to switch to a competitor.
The FSI recommended that the industrial framework that protects industry funds from competition should be dismantled so that consumers have the freedom to leave poorly performing funds.
Research by Rice Warner has demonstrated that members of the average industry super fund managing less than $1 billion is paying 141 basis points in fees each year. This is 31 basis points above the industry average of 110 basis points.
Allowing all consumers to choose their own superannuation fund and allowing all MySuper products to compete for default contributions are important reforms that will force all funds to reduce their fees and improve net returns if they want to attract and retain members.
FSC research has shown that, if competition and governance reforms drive consolidation of the industry so that the smallest fund is at least $10 billion, average fees could fall by a further 18 per cent, to 90 basis points.
Highly performing funds, regardless of whether they are industry, retail, or corporate funds, have nothing to fear from competition. Super funds that rely on the archaic industrial artifice that prevents consumers from choosing their own fund, however, will continue to find ways to argue that they deserve protection.
But ultimately the question will remain, if there are existing default funds performing poorly and charging excessive fees, why shouldn't consumers be allowed to leave those funds? After all, it is their retirement.
Blake Briggs is senior policy manager with the Financial Services Council.
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