2020 super review must be comprehensive

10-Dec-2014

By Krystine Lumanta

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Several factors must be considered beyond a reduction in MySuper fees if an inquiry into the effectiveness of the super industry by the Productivity Commission is to go ahead in 2020, according to the superannuation industry peak body.

MySuper was not a silver bullet to delivering lower fees across the industry, therefore the possible review in six years’ time must look at all the costs that generated the fees, Association of Superannuation Funds of Australia (ASFA) chief executive Pauline Vamos said yesterday.

“We could have a situation where the average fee in MySuper has come down, but there are other areas of the system that are still expensive to deliver, so what it must be a review of are the costs for delivering the [entire] super system,” Vamos told financialobserver.

“One of the costs is bringing a product to market, another is the cost of delivering transactions across the system, while another is the cost of collecting tax and managing legacy tax regulation of the government.

“Another cost is the provision of insurance services and the final cost is the delivery of advisory services in all its forms. You really need to look at all those factors, as well as the cost of compliance and the cost of legacy frameworks.”

The Financial System Inquiry’s (FSI) final report, released on Sunday, said that while it had some reservations regarding the extent to which the Stronger Super reforms would increase efficiency in the super system, it recognised the need for full implementation of MySuper to allow it the opportunity to work before embarking on further reform.

As a result, it said the Productivity Commission inquiry into superannuation efficiency and competitiveness should occur by 2020, after the MySuper implementation was completed in 2017, to determine whether additional reform would be beneficial.

Vamos said she believed 2020 was the right time frame to review the effects of the Stronger Super reforms, which included MySuper.

Meanwhile, Financial Services Council chief executive John Brogden said while fees in default superannuation were already low, choice and competition could drive them lower.

“The FSI states that fees in the superannuation industry are 1.2 per cent on average. This is misleading,” Brogden said.

“Research by Chant West shows fees in MySuper have dropped to 0.85 per cent.

“MySuper is working and needs to be given time to further improve efficiency, but it must be an open market to do so.”

In addition, the MySuper default sector already had a quality filter in the Australian Prudential Regulation Authority (APRA), he said.

“All of the 116 MySuper products in the market have been approved by APRA as meeting the consumer protection and performance requirements that are enshrined in legislation and expected of a default superannuation fund,” he said.

“By allowing all APRA-approved MySuper funds to compete for default superannuation flows in an open market, the requirements of competition can be fulfilled and fees can be driven lower.”

He said the simple and appropriate solution was to remove default superannuation selection from the Fair Work Commission (FWC) and to allow all MySuper products to compete for funds.

“The FWC process is a racket where union officials dictate that their funds receive default status,” he said.

“Just as the FSI recognised that superannuation boards were conflicted because of their close links to unions, the FWC process must be abolished for the same reason.

“Maintaining the FWC closed shop in default superannuation will stymie competition and any further reduction in fees.”

The report said that despite some early signs of fee reductions, the fees offered on MySuper products still varied widely, with a difference of 136 basis points between the highest and lowest fees.

In addition, the reduction in MySuper fees against comparable default options appeared to have been largely due to the Future of Financial Advice reforms prohibiting commissions in MySuper products, rather than the introduction of MySuper, it said.

Under recommendation 10, the FSI proposed the introduction of a formal competitive process to allocate new default fund members to MySuper products, unless a review by 2020 concluded the Stronger Super reforms had been effective in significantly improving competition and efficiency in the super system.

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