Following changes to the Fair Work Act in December 2012 and June this year requiring awards to list default superannuation funds, after a two stage vetting by the Fair Work Commission, the HR Nicholls Society commissioned the superannuation expert and actuary Barry Rafe to review the changes.
The report finds that the changes entrench the industry funds (controlled jointly by unions and employer associations) and duplicate APRA’s oversight. The new requirements are biased against new entrants, including retail funds, and against innovation. The changes are anti-competitive and will create cost to employers as well as potentially disadvantaging superannuation fund members.
Report abstract and full report after the jump
Anti-Competitive Superannuation Requirements in Fair Work Act
Superannuation is an industrial issue in Australia. Most modern awards specify a default superannuation fund or funds. If an employee is covered by an award then, with some exceptions, their compulsory contribution must be made to a fund specified in the award. The main exceptions are where the member chooses otherwise or their employer has an enterprise agreement that specifies a fund for the compulsory contributions. The funds listed in awards are termed ‘default funds’. There are grandfathering provisions that apply where an employer had been making contributions to a fund prior to 12 Sept 2008.
Most default funds are Industry funds. These funds broke new ground when they were established in the mid 1990’s. These funds were at a competitive advantage to their for-profit competitors. They had little or no capital to service and they were provided with a substantial and secure contribution base. Industry funds outsourced virtually all of their key operations on favourable terms to third parties who had significant capital backing. They were also not burdened with legacy systems or products. Because they secured regular and significant contribution flows through the awards, they had little or no direct marketing costs.
Members of all superannuation funds have demonstrably benefitted from the approach taken by the early industry fund innovators. Industry funds organised themselves into purchasing blocks and either jointly own or have significant leverage over many of their third party providers. Costs have been driven down and the lessons learned from the design of high performance default funds have now been mandated across the industry through the Stronger Super initiatives and MySuper. The superannuation system has now matured however and industry funds have lost many of the competitive advantages they once had. The conditions that lead to industry fund out-performance are unlikely to be replicated in the future.
In May 2009 the Government announced a review into the superannuation system. The so-called Cooper review was tasked with reviewing the governance, efficiency, structure and operations of Australia’s superannuation system. The final report made a package of ten recommendations. The government adopted many of these and the various initiatives adopted have been termed Stronger Super. The most relevant elements of Stronger Super to this discussion are MySuper and the provision of additional powers to APRA to enable them to apply governance standards to the trustees of superannuation funds. These changes have reset the competitive landscape. APRA is in the process of granting MySuper licenses. As a general observation, most industry funds have simply adopted their existing default funds as their MySuper offerings. Many retail and corporate funds are redesigning their offerings.
In February 2012, the Government asked the Productivity Commission (PC) to undertake a review into default superannuation funds in modern awards. The objective of the PC review was to optimise the outcome for members whilst also considering the administrative and compliance impact on employers.
The Government proposed a set of amendments to the Fair Work Act based on some of the PC recommendations. The amendments were subject to a Senate review. Whilst the Senate review recommended that the amendments be passed, there was significant dissent amongst the Coalition members of the Senate review panel, employer groups and parts of the superannuation industry. There was a Coalition minority report critical of the changes. The amendments were passed unchanged. A period of intense lobbying by the superannuation industry resulted in further amendments being passed on the 24 June 2013.
The bulk of the changes to the selection of default funds do not commence until the 1st January 2015.
Whilst the objective of the PC report was to encourage competition, the actual application of rules for listing default funds set out in the Fair Work Act will achieve the opposite effect.
The amendments to the FWA will lead to constraints placed on competition and impose significant additional costs and disruption to a material number of employers. Those funds entrenched as the listed default funds will have achieved this status not because they are the most innovative, provide superior service, are best governed, have the best anticipated investment performance or have the most capital backing them, but because they are already well-established in the system. This does not appear to be an outcome that is in the employee’s best interests.
Employers should be free to select any MySuper product they consider appropriate. The market will be well informed as product performance will be transparent and it will be closely monitored by expert commentators and by APRA. To suggest otherwise infers that the MySuper regulatory regime or the APRA licensing process is somehow deficient.