The Productivity Commission’s (PC) interim report is an important step towards introducing genuine competition in the default superannuation market. The Financial Services Council (FSC) recognises the principle that competition policy is in the best interests of consumers is at the core of each of the four models proposed by the Commission. The evidence is clear; competitive markets drive prices lower, improves service quality and encourages product innovation.
The FSC agrees with the argument put forward by the Commission that there are features of the superannuation industry that stifle competition. These include incomplete and asymmetric information that interact with consumers’ cognitive constraints, which in turn impair engagement and undermine the quality of consumers’ decision.
Barriers to competition are exacerbated by the current industrial overlay that discourage consumers from engaging with their superannuation. This is reflected in the proliferation of multiple consumer accounts, as well as the perpetuation of subscale, high cost superannuation funds that are reliant on disengaged members for ongoing liquidity. The FSC submits that barriers to consumer engagement should be removed from the superannuation system wherever possible.
The FSC favours a model of competition that promotes consumer engagement and the exercise of choice between providers. This will impose market discipline on industry participants, including funds and their service providers. A default market that provides information to members to help them become engaged and offers incentives for providers to facilitate engagement, will drive higher levels of consumer engagement over time.
The FSC has built on the Commission’s proposals to develop a hybrid model that encourages more consumers to become engaged in the near term. The FSC supports a model, which we detail in this submission, taking the best features of the employee and employer choice models from the Commission’s interim report. The hybrid model is intended to promote engagement whilst also providing robust consumer protections, thereby reducing the population of MySuper products that can be chosen and improving the overall quality of products.
The FSC views a hybrid model as a more effective solution than the establishment of 'heavy-handed’ Government body to either create arbitrary shortlists or run auctions or tenders.
The FSC supports the introduction of a 'once only default’ arrangement, underpinned by the ATO’s Single Touch Payroll (STP) program, that ensures that where a consumer has previously defaulted into a fund they do not default again, thereby stemming the proliferation of accounts. It is critical, however, that any 'default once’ model is accompanied by a competitive model that promotes engagement, so that consumers are not defaulted into an inappropriate fund that fails to meet their needs as they age.
The benefit of the STP framework for the 'default once’ model is that it places a minimal burden and cost on employers due to the ATO being responsible for data-matching consumers’ information and prepopulating their superannuation 'choice’ form.
The FSC also supports the prospective application of any default model to new entrants to the superannuation system, which will remove the need to unnecessarily transfer existing default members to the new default product(s). Maintaining system stability and integrity is critical to consumer confidence in superannuation. The FSC is pleased that, unlike the current Fair Work Commission’s 'Expert Panel’ model, which would cause wholesale dislocation of consumers from their existing arrangements, the Commission has prioritised leaving undisturbed the current arrangements of consumers.
The FSC opposes, however, a Government body responsible for developing a shortlist of MySuper providers for consumers or employers to choose from. Rather, we support a stronger APRA MySuper approval process, in conjunction with competitive forces driving industry consolidation, which would significantly reduce the population of MySuper products. It would also result in a compression of the dispersion of MySuper product performance. The design of the approval process should operate in a way that is a 'gateway’ rather than a selection process. That is, APRA would be applying similar, albeit more robust criteria, through administrative processes and protocols that currently apply to the authorisation of MySuper products.
Collectively these policies will achieve the Commission’s objectives, without the inherent risk of the conflicts of interest emerging from the inevitable politicisation of a new Government body established to 'shortlist’ MySuper products.
The FSC is concerned that creation of a new Government body may be susceptible to political interference, given the often highly partisan nature of the superannuation industry. The onus is on the Commission to demonstrate how a Government appointed and controlled body would be preferable to a competitive model where politicisation is limited because the power of choosing a fund is vested in each individual consumer and employer.
The FSC is also of the view that if a consumer is comfortable with their existing default superannuation arrangements they should not be compelled to change their fund. The FSC supports the onus being placed on superannuation providers to 'win over’ consumers through competitive MySuper and choice products.