The unintended consequences of superannuation reform

The Government’s Stronger Super policy package is positioned to deliver on MySuper and the other Cooper Review reforms but, as Mike Taylor reports, there remains considerable scope for unintended consequences.

When the Cooper Review into Australia’s superannuation system nearly 18 months ago generated its MySuper concept, it appeared anathema to a strategy which had been pursued by the financial services industry for most of the previous decade – to encourage member engagement.

As the Assistant Treasurer and Minister for Financial Services, Bill Shorten, last week prepared to release the latest iteration of the policy and legislative package reflecting the Cooper Review’s recommendations – Stronger Super – he would have been doing so fully aware that there are many on his own side of the political fence who believe the MySuper concept is badly flawed.

The critics of MySuper not only believe it is unwarranted in the context of a perfectly functional default superannuation fund regime, but also because it is based on the dangerous assumption that it is acceptable to provide Australian workers with a product which tacitly endorses their continued disengagement from superannuation.

Indeed, the entire concept of MySuper runs counter to the findings of the 1997 Financial System Inquiry which became know as the Wallis Report. Referring to that report, the Government’s own Stronger Super website notes that it argued that “superannuation members could generally be treated as rational and informed investors able to make their own decisions about their superannuation”.

The Cooper Review therefore essentially turned that notion on its head, finding that many consumers do not have the interest, information or expertise required to make informed choices about their superannuation.

It is the disparity in approach between Wallis and Cooper that the Government must therefore have in mind when it delivers the rules upon which MySuper will be based and, as a starting point, it should not assume that every person who happens to be in a default fund is there because they did not make a choice.

While MySuper has been the headline discussion point in the Stronger Super debate, there has been a far more important associated issue bubbling in the background – that of auto-consolidation.

Auto-consolidation would see people with balances held in multiple funds having those accounts automatically consolidated into a single account.

It is a notion that has attracted the support of the Association of Superannuation Funds of Australia (ASFA) with its chief executive, Pauline Vamos, suggesting earlier this year that it would lead to an aggregate reduction in fees paid by fund members of around $250 million a year.

The problem, of course, is the underlying presumption that people are unaware of their multiple accounts and would therefore welcome consolidation. Evidence exists suggesting some people are very much aware of their multiple account status and happy to stay that way.

The obvious answer for a Government looking to find an appropriate legislative approach is to have superannuation fund members given the opportunity to opt-in, but there are those in the superannuation industry who believe the reverse should be the case.

Enter the chief executive of the Industry Super Network, David Whiteley, a man whose opinions appear to have a pyrotechnic effect on sections of the financial planning industry.

Whiteley early last week utilised yet more research commissioned by his organisation to argue that all account balances within existing default funds on which commissions might be being paid should be transferred to MySuper accounts.

Again, there was the presumption that those people in default funds were there because they had not made a choice and were oblivious to the fact their account balances might be subject to commission payments.

When Whiteley’s contention is put together with the notion of auto-consolidation, then it becomes obvious that the Government must move with great caution to ensure its Stronger Super package does not result in a range of unintended consequences and loud complaints from superannuation fund members that they are being disenfranchised.

There are, of course, those who also argue that the Government will be wrong if it proceeds to implement its Stronger Super package in the absence of allowing the Productivity Commission to address the question of default superannuation funds under modern awards.

While the Stronger Super changes are expected to be a part of the Government’s legislative agenda in the Parliament through the closing months of 2011 and the opening months of next year, the Productivity Commission is unlikely to receive the reference on modern award default funds before next winter.

Given the degree to which modern award arrangements actually compel particular employees towards specified superannuation funds, one of which is MTAA Super, it is a concept that sits uneasily with the broader questions of auto-consolidation and the intended operating and performance requirements of compliant MySuper funds.

Then too, there is the question of how many Australians are really as disengaged as suggested by the Cooper Review.

It is perhaps a measure of the superannuation industry’s broader view on MySuper that many funds are increasing rather than reducing the amount of money they direct towards member engagement.