PC su­per re­port misses the big point


The Pro­duc­tiv­ity Com­mis­sion’s deep dive into su­per has borne some de­cent, if ob­vi­ous, fruit: it has pro­vided a clear ac­count of the un­fair­ness of peo­ple be­ing de­faulted into dif­fer­ent funds with dif­fer­ent re­turns, so there are wide dif­fer­ences in re­tire­ment out­comes through no fault of their own.

How­ever, the com­mis­sion’s so­lu­tion, it seems to me, would be only marginally less messy and un­fair, and the re­port fails in one very im­por­tant re­spect.

In­stead of 105 My Su­per de­fault funds, an ex­pert panel ¢ would choose the 10 best and they would be the de­fault funds, ex­cept they wouldn’t really be de­fault funds be­cause em­ploy­ees would have to choose one, and they could choose any fund they want, in­clud­ing their own.

Me­dia cov­er­age of the re­port, en­cour­aged by the gov­ern­ment, suggested that Aus­tralians would be $500,000 bet­ter off in re­tire­ment if the PC’s rec­om­men­da­tions were ac­cepted, but that’s quite mislead­ing.

That amount is the es­ti­mated dif­fer­ence in fi­nal re­tire­ment sum be­tween the bot­tom and top quar­tiles of the 53 (out of 105) funds sur­veyed by the PC. But there will al­ways be per­for­mance quar­tiles, in­clud­ing within the PC’s 10 best. The dif­fer­ence in the PC’s ap­proach would be that if there are 10 funds in­stead of 105, the dif­fer­ence be­tween the top and bot­tom quar­tiles would be less, prob­a­bly. Al­most cer­tainly.

The 10 would be cho­sen ev­ery four years based on the “like­li­hood of de­liv­er­ing strong long-term out­comes for mem­bers”.

What would hap­pen to the other 95 is not fully ex­plained. Pre­sum­ably many would shut up shop; some might hi­ber­nate for four years hop­ing to get picked next time. Oth­ers might spend big mar­ket­ing bud­gets try­ing to get picked de­spite not be­ing in the top 10.

But the most sig­nif­i­cant part of the PC’s pro­posal is this: “Our ap­proach is one of em­ployee (rather than em­ployer) choice.”

In other words, the PC is sug­gest­ing an end to the de­fault sys­tem en­tirely; in ef­fect, there would be no de­fault su­per, only com­pul­sory choice for work­ers. Ev­ery­one must choose. The real

choice — pick­ing the 10 cho­sen ones — would be done for us by a panel of ex­perts.

The panel would be cho­sen by an­other panel, “com­pris­ing the heads of re­spected, in­de­pen­dent gov­ern­ment agen­cies (such as the Re­serve Bank) and a con­sumer rep­re­sen­ta­tive”.

They would get to­gether ev­ery four years and make life or death de­ci­sions over su­per funds. Imag­ine the dev­as­ta­tion for a fund that is rel­e­gated to num­ber 11 and ob­scu­rity, and the ju­bi­la­tion for a fund that gets pro­moted into the top 10.

And what should a mem­ber do if the fund they had cho­sen later drops out of the top 10? The PC’s whole ap­proach is that each per­son is “de­faulted” (that is, chooses a fund, there’s no de­fault) only once in their life and takes the fund with them wher­ever they go, which sounds sen­si­ble, but what if that fund is de­moted be­cause the ex­perts don’t like it any more? Stick with it through thick and thin?

Or should ev­ery­one get a new choice ev­ery four years along with the ex­pert panel? What’s the point of com­pe­ti­tion if you never switch?

And there would still be un­fair­ness em­bed­ded in the sys­tem. Would the top 10 be ranked from 1 to 10? If so, ev­ery­one would nat­u­rally crowd into No 1 — no­body would pick No 10.

If they’re not ranked, so it’s just an equally pre­sented list of 10 funds, then it’s a mat­ter of “eeny meeny miney moe”.

And over the next 40 or so years there are go­ing to be big dif­fer­ences in per­for­mance be­tween funds in the top 10 be­cause they are not the same, pos­si­bly even as much as the $500,000 dif­fer­ence that now ex­ists be­tween the top and bot­tom quar­tile — who knows?

I have ar­gued, and still do, that the best so­lu­tion for su­per­annu- ation would be a sin­gle, gov­ern­ment-run de­fault su­per fund. Peo­ple could choose an­other fund if they wanted, but there should be a sin­gle de­fault if they don’t want to choose.

The PC ex­plic­itly re­jects this idea on the grounds that if per­for­mance fell short, tax­pay­ers would have to top it up. Well, yes. That’s what hap­pens now. It’s called the age pen­sion.

I un­der­stand the Coali­tion is now look­ing at cre­at­ing a gov­ern­ment su­per fund, per­haps by turn­ing the Fu­ture Fund into a pub­lic of­fer fund or, more likely, cre­at­ing a new one that the Fu­ture Fund’s staff would man­age. But it would only be one of the 105, and might not even make it into the in­de­pen­dent ex­perts’ top 10 (if the gov­ern­ment man­dates that it has be in the top 10, then the panel is not in­de­pen­dent, is it?).

So there’s not much point do­ing that, it seems to me, un­less the gov­ern­ment dis­penses with choice al­to­gether and makes it the only de­fault fund.

But the big­gest fail­ing of the PC re­port is that it misses the chance to shift the think­ing about su­per away from lump sums to re­tire­ment in­come. In fact by al­ways re­fer­ring to lump sums when talk­ing about su­per out­comes in the re­port, the com­mis­sion re­in­forces the idea that su­per is really just a slow-mov­ing lot­tery.

The big­gest prob­lem with Aus-

This coun­try has come up with a shock­ing su­per sys­tem that cre­ates huge and un­fair dif­fer­ences be­tween re­tirees.

tralia’s su­per­an­nu­a­tion sys­tem is that the in­dus­try is all about sav­ing an amount of money, which mem­bers get handed when they re­tire. We even talk about the $2.7 tril­lion su­per pool, as if that has any mean­ing (ex­cept for those feed­ing off it).

A su­per fund’s re­spon­si­bil­ity seems to end with re­tire­ment, when the lump sum is handed over. In most cases it is the largest amount of cash the re­tiree has ever had. It’s then up to the re­tiree what they do with it. Some spend it and go on the pen­sion.

Most peo­ple, in a state of high anx­i­ety, take it to a fi­nan­cial plan- ner, whence it is in­vested, usu­ally in in­come stocks, usu­ally banks, and mer­ci­lessly skimmed (by the plan­ner, plat­form, fund man­ager and com­pany ex­ec­u­tives).

This coun­try has man­aged to come up with an ab­so­lutely shock­ing su­per­an­nu­a­tion sys­tem that cre­ates huge and un­fair dif­fer­ences be­tween re­tirees, then en­riches in­ter­me­di­aries, some of them crooks, and throws or­di­nary peo­ple to the wolves.

The pur­pose of sav­ing in a su­per­an­nu­a­tion fund is — or at least should be — to pro­vide se­cure in­come in re­tire­ment, not the equiv­a­lent of a lot­tery win.

The in­dus­try needs to start talk­ing to mem­bers about the re­tire­ment in­come they are sav­ing for, in­clud­ing the part pen­sion, and not the lump sums they’ll get.

The Pro­duc­tiv­ity Com­mis­sion has missed a chance to start mov­ing the think­ing in that di­rec­tion.

Su­per shouldn’t be a lot­tery

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