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Super system needs a level playing field

Monday, 30 October 2017

Super system needs a level playing field
Former Federal Treasurer Peter Costello. Picture: Stuart McEvoy

MRC's Director of Policy & Research Spiro Premetis writes in The Australian:

Australia’s compulsory superannuation system and the Future Fund have the same objective: to ensure Australians have adequate savings for their retirement. And now after 25 years of compulsory super and just over a decade of the Future Fund, it is becoming increasingly easier to make comparisons between the two.

The Future Fund has definitely held its own, and on a 10-year basis appears to have performed better than Australian super. More recently, the Future Fund’s tilt away from equities has given AustralianSuper a slight edge.

So after looking at the numbers, former federal Treasurer Peter Costello has noted: “There is a fair argument that these compulsory payments should be allocated to a national safety-net administrator — let’s call it the Super Guarantee ­Agency.”

Cue Ian Silk, CEO of AustralianSuper, one of the country’s largest superannuation funds, with more than $100bn in funds under management. He says the two cannot be compared.

“With the government as its only client, and with its long-term objectives, it has a different investment horizon to super funds. The liquidity conditions of the Future Fund today would need to change considerably if it were to manage super money on the basis that the money could move at any time,” Silk says.

“Liquidity is an important investment consideration for super funds. Super funds have to invest with an eye to the fact that members are increasingly changing their investment options, or even actively transferring from their default fund to another fund.”

It is ironic that the CEO of an industry super fund is telling us not to “compare the two”.

The Future Fund does indeed have a liquidity advantage when compared to AustralianSuper, just as AustralianSuper and its fellow industry funds have a liquidity advantage over privately owned funds. At first glance it appears that Silk has missed this point.

Funds flowing into superannuation from new entrants to the workforce would have a much longer-term investment objective — the length of time you would be expected to be in the workforce, some 40 years or more.

But this proposal, which seeks to generate economies of scale and an improved investment horizon over which to capture the illiquidity premium, would only work if super were compulsorily put into a single fund, with no ability to shift out of it.

The price of making this proposal work effectively would appear to be more limited choice and competition.

But choice and competition is already limited in Australia’s super system. For workers employed under modern awards, the available default super products are limited to those selected by the Fair Work Commission.

In 13 per cent of awards, the employer is provided with no choice of the default fund it may offer to employees. That is, there is only one fund offered.

The equivalent figure under enterprise agreements, based on a sample taken in 2015, is 56 per cent. This is the industry fund business model that has stifled true competition and choice in the sector, and arguments in favour of the status quo assume a level of competition that is not actually present in Australia’s superannuation system.

We have adopted a system where only some consumers can get access to the benefits of the illiquidity premium, and where full benefits of competition are stifled because of the industrial relations system and its effect of giving a guaranteed flow of funds to industry super funds — the worst of both worlds.

Overlay this situation with wasteful spending of superannuation money on marketing campaigns, and murky associations with unions which smack of a lack of independence, and it is clear why public sentiment appears to favour shutting down the superannuation market as a neat solution to a structural problem facing the industry.

But before embarking on such a reform, we shouldn’t kid ourselves that we have had true competition in superannuation and all the benefits that a competitive superannuation market would deliver. The PC chair has already noted that “structural faults are evident” in default super.

The Future Fund — or SGA, as Costello would call it — should be compared not to the status quo but to a genuinely competitive superannuation industry, one where there are no defaults and employees give employers their superannuation account details on arrival the same way they currently give them their savings account details.

This is the benchmark set by the Productivity Commission in the second stage of its review of the competitiveness and efficiency of the super industry, a benchmark it should be noted that the status quo failed to reach.

Both models (the SGA v competitive market) would promote economic efficiency but in different ways. A Superannuation Guarantee Agency may have an edge with an investment horizon that is more suitable to the illiquidity premium, and definitely achieve economies of scale.

But to create a competitive market, you don’t have to start from scratch, as would be necessary under Costello’s proposal. A properly designed competitive market would achieve an industry structure with sufficient size to achieve economies of scale within funds and sufficient scale in a competitive market would not meaningfully impact the liquidity premium.

A competitive market would diversify provider risk that the government would solely hold under a SGA. A competitive market would have an edge on dynamic efficiency and be more open to innovation. And a competitive market would allow people to vote with their feet and leave a poorly performing fund.

The lesson being ignored with proposals such as the SGA is that monopolies are almost always less efficient than businesses in competitive markets, and unless the SGA is a true monopoly, not just a government-run business competing against an existing industry, many of its perceived benefits would not necessarily eventuate.

Further, the implementation risk around the SGA is not something that should be discounted, especially the risk of politicisation of such a body and the risks such politicisation could present to the economy given the large sums of money at its disposal.

It is important to debate ways to increase value for money from the superannuation system. But when we do this we need to acknowledging that the current system is not a level playing field.

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