Karen Chester the Deputy Chair of the Productivity Commission and I talk about overhauling the superannuation system, so workers would only have one default super account their entire working lives
Introduction – Shaking up Superannuation
Ross Greenwood: Great to have your company on money news right across the country. Now let me tell you about a war that has gone on for many years in my opinion. I’ve actually been inside it, so I know this. That is the war between what you call retail superannuation funds and industry super funds. As you’re aware, industry super funds basically were born out of industrial agreements therefore deals done by unions. But when those super funds were created, they generally had an equal representation of both Union and also employer bodies. There might have been an independent chair there.
On the other side, you had the so-called retail funds that had plenty to lose. This is likes of the big insurance companies, the big banks and so forth, that previously and still do provide superannuation services to maybe your company. As a result, you might end up finding yourself in one of those funds. Then you’ve got on the other side of it self-managed superannuation funds. Well, over a very long period of time, the whole question of choice has been absolutely vital. As superannuation funds have gone beyond two trillion dollars, with the retail funds slightly bigger than what the industry superannuation funds are, but now the self-managed funds even bigger again.
It’s one of these situations where, is there genuine choice for you? Are you best served? While this fight keeps on going, the industry super funds thinks suggested changes to the way in which you choose a super fund or should I say it is chosen for you is still ongoing right now. The Productivity Commission has stepped into this with a paper which has looked at the alternatives of default models. This is the default superannuation fund that you have, that may take you through your life. In many cases, your employer chooses that for you or through the award that you work on through an industry, you actually get and industry fund that almost becomes your default model, but as we know people change jobs.
They end up with two, three, four and worst obscene I think is about eight or nine superannuation funds. It doesn’t quite work. This is where the Productivity Commission is trying to address these issues to save costs and to increase competition. It’s interesting to say this because Karen Chester is the Deputy Chair of the Productivity Commission, who’s on the line right now. Many thanks for your time Karen.
Interview with Karen Chester, Deputy Chair Productivity Commission
Karen Chester: Thanks Ross and thanks for asking me to join you this evening.
Ross Greenwood: Well, I hope I explained that reasonably well to people to try and set it up. Just explain why you were given this task to look at the way in which these so-called default superannuation funds are chosen or are chosen for individuals.
Karen: Ross that was a terrific introduction you set it up well. The reason we’ve been asked to do this inquiry is, when David Murray looked at the financial system a couple of years ago, he drew an inference that he thought there wasn’t enough competition for the default market. The reason he born that view was that he thought that fees and costs were higher than they are internationally, just the way that the current default arrangements worked. He suggested to the government, “Let’s have the Productivity Commission in a couple year’s time to ask and answer the question, is the superannuation system competitive and efficient?”
We’ve been given a three-stage inquiry to do. Stage one was setting up the framework to ask and answer the two trillion dollar question, is the system competitive and efficient?
Stage two which is the one we’re doing today, is a top drawer inquiry. It’s if when we get to stage three we don’t think the system’s competitive and efficient, what could we do? What could we pull out of the top drawer as a new way of making sure that workers get to the best performing default funds? Stage three, which will kick off later this year will then be assessing the competitiveness and efficiency of the super system.
Assessing the competitiveness and efficiency of superfunds
Ross Greenwood: What you’ve done is given four ways in which there could be overcoming these problems of whether a person has genuine choice of superannuation funds and also the problem as I explained, that a lot of people end up with more than one super fund. Just broadly explain the four alternatives that you have given.
Karen: Our focus here was to really identify new workable ways, new workable tested ways to harness healthy competition for the default market, to lift the performance of all, to get rid of the long tail of underperforming funds and make it easier to navigate for both employees and employers. As you said in the intro, to align the default system with a modern-day work force. We know that our young workers today under 25 are changing jobs every 1.5 years. 25 to 35 year olds every 2.5 years. We’ve got these new workable ways of getting them into better products, but we don’t we want them in a lot of products. We only want them in one good product.
Getting rid of that account proliferation, unintended account proliferation will save young workers, middle-aged workers, retirees, they’ll have 25,000 more at retirement in their balance. That’s a lot for some of these workers. Will save them very shortly 150 million dollars a year in unnecessary admin fees that they’re paying and multiple or duplicate insurance premiums, 150 million dollars a year. At the end of the day, what really matters in a mandated world of super saving is looking after and ensuring that the two thirds of Australian workers who don’t choose which super fund they go into are looked after.
Ross Greenwood: Okay, because one of the problems can often be- I can give a real-life example of this, because I know this. In many of the so-called retail funds, what happens is that that may be your default fund. You sit there, the money accumulates inside your super fund. Because your company might be quite large, it’s got the- well, the horsepower to be able to negotiate cheaper and lower fees with that particular bank or insurance company whatever it might be.
But what is never told to a lot of workers is if they leave that fund, even though they might keep the same superannuation on, that the fees might triple on them. They’re never told that they actually go from being a wholesale customer to being a retail customer. That’s what this type of arrangement might hopefully overcome, because I can transfer that superannuation they’ve got with one employer into a second employer’s fund or a second fund that actually goes with them for life.
Karen: That’s exactly right Ross. What we’re trying to do here, we’re solely focused on what’s in the best interest of members, here in particular, default members, is to make sure that they only go into top performing products that’s in their best interest and they only default once unless they choose down the track themselves to switch to something else.
The way that we’ve designed the new approaches, these very workable ways of defaulting new job entrance, is in such a way that down the track they might be more engaged.
It’ll be easier for them to compare, it’ll be easy with the ITO playing a more helping hand role, that they can then decide when they get older. We know that when people start to have a family, get a mortgage, all of a sudden they do start to focus on their superannuation. We’ll have them in a good product, but then they can step back and make an informed choice if they want to do so. The model helps new job entrance today, benefits all default members and even will benefit choice members by making it easy to compare apples with apples, not apples and zebras.
My Super Plan
Ross Greenwood: Just explain, because already previous governments have put in place the so-called my super plan. The people with relatively low balances don’t have that balance eroded by high fees and charges that could come on if you like, they might be more applicable for people with higher balances. In that case, how does that my super situation that we currently have, parallel with the work you’re doing right now?
Karen: Two things there Ross, firstly, there is a long fat tail of underperforming superannuation products and superannuation funds. They’re just not exiting, they’re not consolidating with other funds. EPP is trying hard there but it’s not happening. Effectively, to get onto any of our preferred fund default product lists, the underperformers would have to exit, because they wouldn’t have the inflows.
Ross Greenwood: Because one of my big grow ups over superannuation of many years is, let’s say for example, its 9 1/2% of people’s pay goes to super right now. I will sit there and think it’s the easiest job in the word. So long as you get the mandate and you don’t massively underperform, you’re just okay, that money just keeps pouring in the door year after year.
There’s not many businesses where you don’t often have to know what’s going to happen next year because you know you’re going to have more money coming through the door. If you perform with some mediocrity over a period of time, don’t excel, you still have a business that’s worth billions upon billions of dollars.
Karen: Exactly, in our new approaches, we actually have a new minimum standard. It’s like my super on steroids. It puts the bite into the scale test. It also means that if you don’t perform over a period of time, I’m not talking every year to year as you would know it, has to be over the medium term.
If you set a strategy and a target and you don’t meet that over a period of time, you’re off the list.
Ross Greenwood: Tell you what, that would be sudden death for some of those people who get fat off the back of our superannuation system. Great to have you on the program. As I said, that process is still going through with the Productivity Commission that inquiry, the Deputy Chair of the Productivity Commission Karen Chester on that superannuation inquiry.
Karen we appreciate your time.
Karen: Thanks so much Ross.