Costello calls for national default fund

13-Oct-2017

By Krystine Lumanta

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Former Australian Treasurer Peter Costello believes setting up a superannuation guarantee (SG) agency pooling the funds of inactive default fund members will have enormous economies of scale as well as promoting industry competition and market discipline.

“I believe that people should be able to choose who manages their superannuation but the reality is in Australia, there’s a large cohort of people who simply don’t choose,” Costello told the SuperRatings and Lonsec Day of Confrontation event in Melbourne yesterday.

“Their money goes into default funds. They get allocated to an industry fund or an employer fund. They make no choice over the investment profile.

“My personal view is instead of the government arbitrating to industry funds, there’s a fair argument this compulsory component – the so-called default fund – should be allocating to a national savings administrator, let’s call it the ‘SG Agency’.”

Costello explained such an organisation could act as a not-for-profit agency, which could then set up its own investment board akin to the Canada Pension Plan Investment Board.

“It could be called the SGIA: the Super Guarantee Investment Arm,” he said.

“Or, it could contract that out.

“But there would be huge economies of scale, and it would end the fight between the industry and profit sectors as neither sector has been able to attract that money voluntarily.”

He added that default contributions are currently spread between many funds but often end up allocated to the same managers with each fund paying separate fees.

“Those fees would be reduced if that money were pooled and if there was only one default fund making large allocations, it would have the market power to reduce costs,” he said.

“The economies of scale would give the ability to accumulate and diversify, and it could introduce a little more competition and market discipline within the Australian financial sector.”

Costello highlighted that ultimately the Australian SG system existed for its beneficiaries.

“And that is the test [to determine whether the system is working],” he said.

“What is going to give our beneficiaries a better outcome? If we can agree on that goal, I think most of these questions can be solved.

“It’s not a system in its infancy anymore – the awards system is 25 years old and the SG system is 25 years old so if it’s not yet fully matured, it’s certainly a very maturing system.”

Costello served as federal treasurer from 1996 to 2007 under the Howard government and is also the founder and chair of the Future Fund.

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