INSIGHT

Productivity Commission on super system competitiveness and efficiency

By Jo Ottaway
Consumer law Funds Government Superannuation Financial Services

In brief

Written by Senior Associates Jo Ottaway and Stephanie Malon

With all the media attention on the Government's surprise announcement of its proposed package on improving accountability and member outcomes in super last week (see our earlier article here), you would be forgiven if the Productivity Commission's latest issues paper on competitiveness and efficiency in the super system had slipped under your radar.

However, this issues paper is certainly no less deserving of the limelight than the Government's current package. In fact, it may well pave the way for much more radical superannuation reform – especially if (as seems likely) one of the recommendations of the final report is a form of 'lifetime default product' to replace current default allocation arrangements.

Background

This review will form the third and final part of the superannuation review tasked to the Productivity Commission in the Government's response to the Financial System Inquiry (see our earlier article here).

As you may recall, part one was focused on developing the criteria for assessing the competitiveness and efficiency of the superannuation system (see our earlier article on the final report here).

Part two was devoted to developing alternative models for allocating default members to products (see our earlier article on the issues paper here). And before you ask why we have not published commentary on the final report for part two, it's not because we've been lazy, but rather because there hasn't been one yet! The final report for part two will now be swallowed up by the final report for part three (at the request of the Commission).

Part three will now assess the competitiveness and efficiency of the super system applying the criteria from part one, as well as finalising the Commission's work on default allocation models from part two. So this part will wrap up the entirety of the Commission's work on superannuation from the Financial System Inquiry – and potentially change the face of the superannuation system as we know it.

Assessment criteria

As a refresher, the assessment criteria that the Productivity Commission identified in part one was a set of largely economics-based criteria, developed around its interpretation of the goals of the super system. These goals were articulated as:

  • Treasury's proposed overarching system goal of 'providing income in retirement to substitute or supplement the Age Pension'; and
  • the following five subsidiary goals:
    • the superannuation system maximises net returns on member contributions and balances over the long term;
    • the superannuation system meets member preferences and needs, in relation to information, products and risk management, over the member's lifetime;
    • the superannuation system provides insurance that meets members' needs at the least cost;
    • the superannuation system complements a stable financial system and does not impede long-term improvements in efficiency; and
    • efficient outcomes for members are driven through a market structure that facilitates competition and with suppliers competing on features that members value.

However, the Commission is careful to emphasise in the issues paper that its overriding focus will be on the outcomes for members.

Contributions sought

While the Commission proudly views its assessment framework as 'comprehensive and robust' and fully intends to piggy back off its consultation from part one, it is looking for the following contributions to the issues paper:

  • evidence to underpin its assessment of the competitiveness and efficiency of the super system;
  • technical input on the methodology for deriving or interpreting the evidence and criteria; and
  • feedback on the performance of the current system for allocating default members to products.

We've set out further detail on each below.

Evidence base

The Commission thinks that it already has access to the vast majority of evidence that it needs to conduct its assessment, either in the public domain or available for purchase. However, to fill in the remaining evidence gap, it is looking primarily for:

  • illustrative case studies from members and industry;
  • existing research or reviews, and evidence from industry bodies;
  • unpublished data from key regulators;
  • responses to surveys from members (including SMSF owners), funds and fund CEOs; and
  • participation in round tables.
Methodology

The Commission readily acknowledges that applying the indicators to draw conclusions about the system overall will be 'challenging'. In light of this, it is seeking feedback on the methodology to be applied for two areas it has identified as being particularly thorny:

  • estimating the utilisation of economies of scale, and the pass through of the benefits of scale economies to members; and
  • the precise methods it should use in investment performance benchmarking.

To facilitate this, the Commission proposes to hold 'technical roundtables' to analyse and discuss the technical aspects of the review and the methodology to be applied.

Current default allocation system

In the Commission's draft report on part two (available here), it recommended that:

'[t]o avoid perpetuating the legacy problems of the current system, any future alternative system for allocating members to default products should be premised on employees being assigned a default product only once, when they join the workforce.'

So, it seems likely that there will be some potentially radical changes coming out of the final report in this space. During part two, the Commission developed four potential 'alternative default allocation models', which were fleshed out in the part two draft report, namely:

  • Model 1: Assisted employee choice;
  • Model 2: Assisted employer choice (with employee protections);
  • Model 3: Multi-criteria tender; and
  • Model 4: Fee-based auction.

Responses to the part two draft report urged the Commission to consider these 'alternative models' against the current default arrangements. The Commission has clearly listened to this feedback and as part of this review, it plans to analyse current arrangements using the same framework that it employed in developing the alternative models in part two.

Interestingly, the submissions that the Commission is seeking on current default allocation arrangements are focused on current arrangements as they apply both 'in practice' (how they currently apply) and 'in prospect' (how they would apply with the legislation fully implemented). You will recall that these 'in prospect' arrangements refer to the former Labor federal Government's introduction in 2013 of a 'filter' system to be applied by the Fair Work Commission when selecting products eligible for inclusion in modern awards, based on a range of criteria. These arrangements are 'in prospect' because while the 'filter' system 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).

In addition to assessing current default arrangements, the Commission is seeking feedback on transitional issues and costs associated with the four alternative models proposed in part two.

In case your eyes have glazed over while reading this, it is worth remembering that, while the process behind the Productivity Commission's review might be quite dry and technical, the consequences of its report could be quite dramatic.

Submissions on the issues paper are due 21 August. It will make for a busy month for those also making submissions on the Government's current exposure draft legislation.