Default superannuation under the microscope

By Geoff Sanders
Banking Financial Services Financial Services Royal Commission Superannuation

In brief

Written by Partner Geoff Sanders and Senior Associate Stephanie Malon

Hot on the heels of the Productivity Commission's draft report on criteria for assessing superannuation competitiveness and efficiency (see our earlier article here), the Commission has now released an issues paper in which it starts (but by no means finishes) the process of developing some feasible alternative models for allocating default contributions to superannuation funds.

In case you're wondering why the Commission is so fixated with superannuation at the moment, it's all down to the Government's response to the Financial System Inquiry (see our earlier article here). In that response, the Commission was tasked with three separate (but related) reviews on super – so once it's finished with the two mentioned above, we can look forward to a review of the competitiveness and efficiency of the super system.

But for the time being we're focussed on review number two – developing alternative models for allocating default members to products. And this is a very meaty topic with lots at stake for the players. Given the significant proportion of people who currently rely on the default allocation system to determine where their super goes (which is often attributed to high levels of disengagement with super), any changes to this system are likely to have a significant impact on the super system and the industry as a whole. We can therefore expect to see a lot of passionate responses to the issues paper's call for submissions.

Current defaults

Before we get into the detail of the issues paper, here's a quick refresh on the existing default super arrangements in Australia.

  • Employees under modern awards: Employers select a default fund from a list developed by the Fair Work Commission for the relevant award. The majority of modern awards specify one or more default funds from which an employer can choose. Where there's no fund listed for the award, employers are free to choose any with a MySuper product as a default. The former Labor federal Government introduced a 'filter' system to be applied by the Fair Work Commission when selecting products eligible for inclusion in modern awards in 2013, based on a range of criteria (ranging from the appropriateness of target return and fees and costs to governance practices and appropriateness of insurance offerings). Although this process has been legislated, it has not been implemented and no new funds have been listed in modern awards since 2013, largely due to political gridlock on the issue.
  • Other employees: Default funds under enterprise agreements are selected in a manner similar to awards, except that some name a specific fund that all covered employees must use. Otherwise, employers can generally choose any fund licenced by APRA that offers a MySuper product as the default fund (unless a particular fund is stipulated in the specific employment arrangement).

Potential alternate models

In what might be a scary thought for some, the baseline assumption of the issues paper is not that we're simply looking at tweaking these arrangements (although that might in fact be the end result). Instead, the issues paper asks us to start with a clean slate when considering alternatives.

To give people a framework for submissions, the issues paper outlines what might be two ends of the spectrum – an 'administrative' system and a 'market-based' system.

Administrative default models

The Commission envisages that an administrative model would involve some sort of 'filter' to determine which products are eligible to be used as defaults. It likens this to a set of minimum standards that a product must meet or (more memorably) a 'Heart Foundation tick of approval'.

The Commission is seeking submissions on all aspects of a possible 'filter', from the possible metrics that could be applied, to how the 'filter' would be used to allocate employees.

At one end of the scale, the Commission suggests that a centralised allocation approach could involve a government body deciding which employees are placed into which products. A decentralised approach, on the other hand, could involve employers deciding which product to select from a list of eligible products. If this sounds all too familiar, you're probably thinking of the modern award 'filter' we've already (in theory) got in place. The Commission is seemingly not discouraged by the stalled progress of that project.

Market-based models

According to the Commission, market-based models would involve at their core bidding by superannuation funds for the right to receive contributions. The Commission devotes a small chunk of the issues paper to outlining various types of tender processes, where bids would be submitted to a government body to assess and select the best products.

The Chilean-style system, where tenders are awarded to the fund that offers the lowest fee, rates a mention – but the Commission also flags concerns that this could potentially drive a 'race to the bottom' (see our earlier article here, which raised similar concerns). The issues paper also cites the New Zealand system as alternative, where the tender incorporates multiple metrics and not just fees.

While it refers to international systems as potentially useful examples, it's clear the Commission wants us to be as creative as possible when thinking about alternative default models, including possible combinations of elements of both administrative and market-based models.

A twist in the plot

Like all good reads, the issues paper finishes with an interesting twist – it asks us to consider a world without any defaults at all. That is, it asks the question - why don't we just ask people to provide employers with a super fund account number for their super contribution, in the same way as they provide bank details for their wages? Put this way, it's an enticingly simple idea.

But before we get too excited about asking people to just make their own decisions about super, the paper suggests that we stop and think about the tyranny of choice faced by ordinary people trying to navigate a complex system, and the behavioural biases that beset decision-making.

Wouldn't it be better if we could at least inform people which products have earned a 'Heart Foundation tick' or perform well on a market-based evaluation, to 'nudge' them into making a better decision? Come to think of it, perhaps the issues paper has just done some 'nudging' of its own…