Landmark Productivity Commission report must drive super industry overhaul

Paul Howes, Partner, Head of Wealth Management
Paul Howes, Partner, Head of Wealth Management

After 25 years, superannuation was due a landmark critical analysis – and the Productivity Commission’s draft report out yesterday certainly has not disappointed in that respect. It has spotlighted many important issues I would endorse.

Firstly the clear need for better data to allow more informed decisions is key – APRA needs to enhance its data reporting framework to make the data more amenable to analysis that informs actual member outcomes. For example more product-level reporting is clearly needed.

The push for more mergers in the sector, to start weeding out the underperformers is appropriate and overdue. In KPMG’s Super Insights report earlier this month we predicted that in ten years’ time the number of funds in Australia is likely to be halved – but that necessary process will be accelerated if, as expected, the number of default funds dwindles as a result of the Productivity Commission report.

For all the heated rivalry, it is clear from the report that this is not predominantly a retail versus industry issue. There is demonstrably above and below-par performance on both sides.

I believe the real pressure will be on the smaller funds, worth less than $1bn in assets, to merge with bigger funds. It is good that there will be more regulatory pressure in this area and a clearer delineation between the regulatory roles of APRA and ASIC.

The Productivity Commission’s governance recommendations should be prioritised. Outside the headline- grabbing debates on independence the Productivity Commission has sensibly placed more emphasis on the need to enhance the skills level on the board by having performance metric for each director, rather than focusing on structures.

But I place a question mark next to one of the key findings of the report. Having a top ten ‘best in show’ list will result in material changes to the sector and I would query how potentially reducing the number of funds on offer will increase competition and the overall efficiency of the system, which is surely the key tenet of the Productivity Commission’s review. While individuals would still be able to choose any fund they like, in reality having such a list will drive most people to those funds only – why would most people go outside it?

That said, I recognise that, given relatively low levels of financial literacy and the fact that large number of available funds can be overwhelming to many people, some selection process may be appropriate. The introduction of a tender selection process to get onto this list will challenge funds on issues like performance and liquidity – but it’s important to ensure that any selection panel is not politicised.

This may be difficult to achieve. The proposed changes would remove influence from sponsoring organisations, employers and the Fair Work Commission to assign default funds through employee assisted choice model but the implementation of such a model via selection panel in itself risks politicisation.

Moving to a system where employees can select a super product from a pool of highly performing funds relies on them making a decision. Whilst I agree providing choice is a positive step to give member control over the investment of their retirement savings, there are clear dangers. Inherent disengagement of members and limited understanding of how funds operate, as originally articulated in the 2010 Cooper Review, could easily result in a poor choice that is not tailored to the member’s needs. To support this change, members need to be equipped with knowledge and resources to effectively make an assessment that is best suited to them.

Simple dashboards for super products are essential and should be a priority for ASIC. Perfect should not be the enemy of the good here. Something is better than nothing.

Whilst solid and consistent returns have been a hallmark of Australia’s superannuation system, members are unaware of the systemic under-performance by some funds. Since members rarely question performance factors, the Productivity Commission report reveals that funds are not taking the initiative to do better.

Not doing better is no longer an option.The draft Productivity Commission Report should drive major changes in the industry. Shrewd fund trustees should not wait for the final report later this year but should respond to the clear lead given by this one.

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