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