Not so hot – Chilean tender process for default super

The Association of Superannuation Funds of Australia (ASFA) today released a research paper that rejects a Chilean-style tender process for allocating Australian workers to default superannuation funds.

The Productivity Commission is currently considering alternative default models and examining the lessons arising from models used in other countries.

ASFA research shows the adoption of a Chilean-style tender process for default super in Australia would be a solution looking for a problem that doesn’t exist and have adverse effects on member outcomes.

ASFA CEO Dr Martin Fahy said the Chilean Government had introduced a tender process to solve a particular set of issues not relevant in the Australian context.

“In Chile, there were a very small number of pension fund providers in the market and individuals did not have access to low-cost fund options,” he said.

“The Australian superannuation industry is a much more competitive market. There are low levels of market concentration at the fund level and initiatives such as choice of fund and member investment choice have enhanced competition. The Chilean model, with only one recent round applicant, has failed to bolster competition.

“The Australian system already has low-cost product options. MySuper products are designed for default members who do not make an active decision and a large number of superannuation funds offer a MySuper product. Fees for Australian MySuper products compare favourably with fees in the Chilean system.”

Dr Fahy said a tender process like Chile’s would inevitably result in funds developing products that focus on lower fees at the expense of long-term returns and the dropping of services that many members expect, such as provision of information and advice.

“This would lead to inferior investment outcomes for fund members and a lower standard of living in retirement, as well as a significant reduction in the range and quality of products and services offered to members,” he said.

Dr Fahy said the Chilean tender process was not delivering on its main objectives:

• Successive tender rounds have not led to an increase in market competition. Since the first tender round in 2010, only one new pension fund operator (AFP) has entered the market. Only one AFP participated in the most recent tender round, demonstrating a failure in the process in terms of increasing market competition
• Successive tender rounds have reduced the level of administration fees for AFPs that have won tenders, but have not led to a broad-based reduction in fees
• The tender process is based on fees so AFPs that win the tender have an incentive to reduce the resources they devote to internal investment management, reduce the quality of their administrative functions and reduce the quality and range of member services
• Successive tender rounds have increased risks for AFPs that win tenders. Successive tender rounds have pushed down fees (for the tender holder). The lower the level of fees, the more vulnerable an AFP is to adverse shocks to member contributions – such as economic downturn.

Background: Under Chile’s biennial tender process, all workers who enter the labour force for the first time become members of the AFP that wins the biennial tender for those workers. The AFP that offers the lowest administration fee wins the tender.

For further information, please contact:

Teresa Mullan, Media Manager, 0451 949 300.

About ASFA

ASFA is the peak policy, research and advocacy body for Australia’s superannuation industry. It is a not-for-profit, sector-neutral and non-party political, national organisation. ASFA’s mission is to continuously improve the superannuation system so people can live in retirement with increasing prosperity. We focus on the issues that affect the entire superannuation system and represent more than 90 per cent of the 14.8 million Australians with superannuation.