We wanted to get some independent research to add to the public debate – so we engaged the competition policy experts.
Choice and competition in superannuation
By FSC CEO Sally Loane
The Productivity Commission is currently examining whether our $2 trillion super system is as efficient and competitive as it should be. The Financial Services Council has been actively participating in the process.
We wanted to get some independent research to add to the public debate – so we engaged the competition policy experts, Deloitte Access Economics, to look at Choice and Competition in Australian Default Superannuation.
I hope this fact-based report can help map out the future for super – the one that is going to be fit for purpose for my Millennial children. I want them to be engaged with super, not default to ambivalence.
I think we can agree that our 25 year old super system has done pretty well up till now.
But in order to ensure this superb piece of public policy is fit for the next generation – where consumers have more power than ever and more of us work in the gig economy - we need to design what I call Super 2.0.
Super 2.0 must deliver choice and competition
- Competition in markets has consistently resulted in cheaper prices for consumers, better levels of product and service quality and new and innovative products and services.
- Competitive markets are more innovative.
- Competition spurs investment in products and innovation that benefit consumers.
When someone has to choose a product or service – they engage. The default system as it is now actually encourages ambivalence. Enabling choice and competition into the default system will lift engagement.
Young people (and some not so young) want to manage financial services on their digital device – we all want great tech and convenience. We want to be able to choose to put our super into a fund that suits our purpose and sometimes, our lifestyle.
Can we honestly say the system allows us to do this now? It doesn’t.
There are still two million Australians locked out of choice. They start work and their employer tells them the super fund they must use.
Can you imagine allowing our employer to choose our bank for us, or our health insurance, or any other part of our financial life?
Where Enterprise Agreements prevents choice being offered to employees, Deloitte makes the point that this is not default – it’s actually a condition of employment.
In a sample of Enterprise Agreements analysed by Deloitte, 19 per cent were found to offer no employee choice.
This matters. People can quite literally be stuck in poorly performing funds with poor governance charging high fees.
How is this fair and equitable for working Australians?
How is this fair to the 25 year old who wants to change to a fund that suits his or her lifestyle, like a BT fund, one from Mercer, Russell, Australian Ethical Super, NAB, CBA or ANZ - or a new digital disruptor like a Zuper or a GROW? Or perhaps they want to be in a different industry fund?
They go up to HR and find they can’t change funds - it’s their money, almost 10 per cent of their weekly salary, and they have no say in how it’s managed - how’s that going to improve that 25 year old’s view of compulsory super?
Deloitte Access Economics has found this is a clear restriction on trade. For those who argue that super should always be a condition of employment, like wages and salary, how can they argue that keeping people locked into poorly performing funds is an optimum condition of employment? It’s plainly not.
In doing the research, DAE applied principles of competition policy to the default superannuation system and made recommendations for reform.
They found the benefits of introducing choice and competition could be significant – including that fees would be reduced by $292 million each year, across the 14 million MySuper accounts in existence. This equates to a 13% decrease in total administration fees in the MySuper regime.
If we are to ensure that super will be fit for purpose for the next generation we cannot persist with protectionist industrial laws that prevent choice and competition for Australian consumers.
We removed agriculture’s protective tariff barriers long ago and can now boast the most competitive, adaptable and efficient farming sector on the world.
We’ve removed tariffs across most of the manufacturing sector, back in the 80s on our shoe and textile industries then finally cutting taxpayer subsidies to our uncompetitive car manufacturing industry.
We need to remove the protective legal barriers that stand in the way for a fairer, more equitable and better value outcome for consumers in the biggest industry of them all, super.
To quote Deloitte Access Economics: “The clear conclusion is that further choice and competition should be introduced into Australia’s default superannuation system. This is important microeconomic policy reform that could have a significant impact on Australia’s income in retirement.”