FSI urges competitive default fund environment
The Financial Services Council appears to have won a minor victory in its continuing default funds battle, with the Financial Systems Inquiry final report recommending opening up default funds to all eligible MySuper products.
At the same time, the FSI final report has recommended a new approach to superannuation policy development in Australia based on setting clear objectives for the system and improving its operational efficiency.
As part of this it said that, subject to the outcome of a review, a formal competitive process may be needed to allocate new default fund members to MySuper products, however the FSC lamented the fact that the FSI report had not recommended the removal of the Fair Work Commission from the default fund process.
“A formal competitive process would extend competitive pressures from the wholesale default fund market to the broader default fund market and improve after-fee returns. It would also reduce costs for funds and compliance costs for employers, who would no longer be required to select default funds for employees,” the report said.
However it said the recommendation should only be implemented subject to the outcome of a review of the superannuation system’s efficiency and competitiveness.
“This caveat acknowledges it is too early to assess the effectiveness of the Stronger Super reforms, although the Inquiry has reservations about whether these reforms alone will significantly improve system efficiency and member outcomes,” the report said.
Looking at the post-retirement picture, the report said that to improve efficiency in retirement, greater use of risk pooling could significantly increase retirement incomes generated from accumulated balances.
“This could allow individuals to allocate consumption throughout their lives better (greater dynamic efficiency) by reducing the savings required to achieve a target level of income in retirement. This could be achieved by removing barriers to new product development and using behavioural biases to encourage rather than discourage the use of products that provide longevity risk protection,” it said.
“This recommendation would involve trustees pre-selecting a comprehensive income product for retirement (CIPR) option for their members. Pre-selected options have been demonstrated to influence behaviour but do not limit personal choice and freedom. They would bring the policy philosophy at retirement closer to that of the accumulation phase.”
The report said that managing longevity risk through effective pooling in a CIPR could significantly increase private incomes for many Australians in retirement and provide retirees with the peace of mind that their income will endure throughout retirement, while still allowing them to retain some flexibility to meet unexpected expenses.
“An enduring income stream would give retirees the confidence to spend in retirement, which would help to sustain economic growth as the population ages and reduce the extent to which longevity risk falls on the taxpayer,” it said.
To support and complement these recommendations:
- All employees should be able to choose the superannuation fund that receives their Superannuation Guarantee (SG) contributions.
- Superannuation funds should provide retirement income projections on member statements to improve member engagement (recommended in Appendix 1: Significant matters).
- The Tax White Paper should consider the removal of tax barriers to a seamless transition to retirement and target superannuation tax concessions to the superannuation system’s objectives. Adjustments to tax settings and efforts to improve equity have been major contributors to superannuation policy change in the past. The Inquiry believes community concerns about these issues need to be addressed to achieve greater policy stability and long-term confidence and trust in the system.
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