ASFA submission to Productivity Commission’s Alternative Default Models

The Association of Superannuation Funds of Australia (ASFA) has lodged a submission to the Productivity Commission (PC) on its draft report Alternative Default Models.

ASFA CEO Dr Martin Fahy said ASFA had taken a balanced approach in its assessment of the four different models proposed by the PC for allocating default members to super products.

“ASFA supports reforms to the superannuation system that are in the best, long-term interests of fund members,” he said.

In particular, Dr Fahy said the fee-based auction model outlined by the PC would pose a significant risk to Australian super members’ long-term outcomes, as well as the stability of the broader system.

“A similar model operates in Chile’s pension system, yet it has failed to bolster competition and instead resulted in only one fund tendering in the most recent round,” he said.

“Over the long term, this type of model risks a ‘race to the bottom’ among funds, where funds focus on lower fees at the expense of long-term returns and member services.

“ASFA’s analysis of the Chilean model found it ‘less than hot’, a solution looking for a problem that doesn’t exist in Australia and that the model was failing to deliver the desired results in Chile.”

Dr Fahy said ASFA also rejected the omission of insurance in all four models proposed by the PC.

“Insurance plays an important role in the super system and will continue to do so into the future,” he said. “ASFA considers the benefits provided by insurance are consistent with the objective of superannuation.

“Insurance in super helps alleviate Australia’s under-insurance problems and lifts competition within the default sector as funds differentiate. It provides key benefits to members and this led to the consequential prescription of insurance as a mandatory feature of MySuper or default products.

“Removing insurance would potentially increase under-insurance and put vulnerable Australians at risk of reduced protection.

“The industry is working to improve insurance in super through self-regulation and believes it is a key element in any default selection process.”

Dr Fahy said the Commission’s model based on assisted employee choice envisages a ‘last-resort’ default fund for members who do not exercise choice of fund and proposes this fund could be run by the Future Fund or an existing eligible rollover fund (ERF) or funds.

“ASFA considers neither are suited for the proposed purpose and so would require significant governance and operational changes,” he said.

“The Future Fund lacks the administrative capabilities, including the ability to set unit prices for individuals, to operate in the superannuation context at the individual fund member level.

“Broadening the role of the Future Fund from managing money to meet public liabilities to also managing private super assets would represent an erosion of investment governance frameworks critical to the delivery of member returns.

“It would also heighten political risk for the Fund and the Government and risk heightening member or market perceptions that savings are underwritten by the Government.”

Dr Fahy said the PC’s proposal for a centralised clearing house for receiving member contributions and distributing contributions to funds would introduce new and substantial risks and costs to government, employers, funds and members.

“The model is not suitable for the complex Australian market and it fails to leverage the benefits of SuperStream,” he said.

“Over the past five years, the superannuation industry has invested more than $900 million in SuperStream and it will take time to maximise the return on this substantial investment for the benefit of members.

“Any alternative arrangements to SuperStream would negate the efficiency gains yet to be realised and incur additional costs for members, with attendant transformation and implementation risks.”

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.