Unions were quick to condemn the proposed decoupling of super and industrial relations, accusing the commission of “ideological fanaticism”.
Large sections of the $2.7 trillion super industry also attacked the best in show proposal even though the commission said its reforms could help save members $3.8 billion a year and deliver $533,000 in higher retirement income for an employee starting work today.
The Financial Services Council, representing for-profit retail super funds, said the plan would result in a “monolithic concentration of funds”.
The Association of Superannuation Funds of Australia agreed the approach “risks creating an oligopoly in default superannuation and reducing long-term competition”.
Westpac backs blueprint
Among the few supporters were Westpac and consumer groups such as Choice.
“Overall, the PC has put aside the ideology that undermines the industry and has crafted recommendations that are in the best interests of consumers,” said Melinda Howes, the general manager of super with BT Financial Group, which is part of Westpac. Westpac is the only one of the big four not selling its wealth business.
Under the commission’s blueprint for the $600 billion default super system, which was released yesterday, people who fail to nominate a super fund would be tipped into one of 10 top performing funds – the “best in show” – as chosen by an expert panel and reviewed every four years. People would only ever have one account, preventing the proliferation of accounts that characterises the current system.
Default funds are presently listed in industrial agreements as negotiated by employers and unions and overseen by the Fair Work Commission. Far more than 10 funds presently receive default money, which guarantees them a steady flow of fresh cash. But the best in show shortlist would replace those arrangements. Currently workers who do not choose their own fund are directed to so-called default funds nominated in industrial awards meaning that industry funds are the recipients of most of this business.
Although the change would have the most immediate affect on new entrants to the workforce, many in the super industry believe having a government-approved top 10 would send such a strong message of quality and safety that millions of workers would switch, giving rise to 10 mega funds of unassailable size and dominance.
Mr Bowen agreed that selecting just 10 funds could undermine competition between funds.
Head of advocacy at the Superannuation Consumers’ Centre, Xavier O’Halloran said the best in show would be periodically updated to add and remove funds, which would “massively” increase competition to get on the shortlist and benefit consumers through lower fees and higher returns.
“It’s something that is only going to drive a good market outcome for consumers,” Mr O’Halloran said.
Idea ‘deserves consideration’
Treasurer Josh Frydenberg said yesterday the “landmark” recommendations deserved serious consideration because the “big idea” was for the default system to focus on the interest of members, not their workplace or the interests of funds.
“I think there is merit to this idea that the better performing funds are taken up by more members … rather than a lottery,” Mr Frydenberg said.
“What they are suggesting is that people [new workers] only default once and that is certainly an idea that deserves very serious consideration.”
Boths sides of politics plan to officially respond more fully after the Hayne royal commission into financial services delivers its findings on February 1.
The 700-page PC report proposes new ways to stop fee-gouging by funds and contains an implicit warning to Labor to put on hold a scheduled superannuation guarantee rate to 12 per cent, from the existing 9.5 per cent.
Mr Bowen said the superannuation guarantee rate rise to 12 per cent had been delayed for far too long by Coalition governments dating back to John Howard in 1996.
“We can’t afford to wait longer,” Mr Bowen said. “We need to get the superannuation guarantee to 12 per cent to ensure an adequate retirement.”
The Superannuation: Assessing Efficiency and Competitiveness report led by Productivity Commission deputy chairman Karen Chester called for a new independent inquiry into the broader retirement income system before any possible increase in the current 9.5 per cent superannuation guarantee rate.
The proposed inquiry would asses whether the superannuation system set up 27 years ago was achieving its original stated objective of raising national savings – by increasing private savings and taking pressure off the government budget, and if the distributional effects were fair for lower and higher income earners.
Treasurer attacks Labor
The next increase legislated increase in the SG rate to 10 per cent is due to take place in July 2021, before it gradually increases to 12 per cent by 2025-26.
The Coalition officially supports the increase to an ultimate 12 per cent, but it has slowed the rollout rise and philosophically is more circumspect about the government forcing people to set aside more of their income in deferred retirement savings.
Asked about whether Labor would support a retirement incomes system review, Mr Bowen pointed to Labor’s existing policy for the Council of Superannuation Custodians to oversee potential changes to the system.
Mr Frydenberg stepped up attacks on Labor for blocking the government’s package of superannuation reforms to allow people under 25 to opt into insurance in their funds to save $1.9 billion a year in fees eroding account balances.
Labor has said it wants to protect young workers in dangerous jobs by ensuring they are still defaulted into insurance in super.
The government’s package, which Labor had referred several times to Senate committees, also proposes the automatic consolidation of low-balance inactive accounts, caps on fees for low-balance accounts and tougher penalties for trustees.
Mr Frydenberg said the PC had endorsed the government’s Protecting Your Super package. Labor pointed to the PC’s recommendation for an amendment to require exemptions to the under-25 opt-in restriction to only be granted if the trustee can demonstrate to APRA that opt-out disability or income protection insurance would be in the best interests of a specific cohort of younger members.
Mr Bowen challenged the government to “bring on” the legislation for a vote.
He accused the government of making ideological attacks on industry funds, when the report confirmed the union and employer-linked industry funds were overwhelmingly the top performers.
The Opposition treasury spokesman urged the government to support Labor’s proposals for people on paid parental leave and the lowest-paid workers to receive superannuation.