Home / Default fund review poses more questions than answers

(pictured: Cathy Nance)

The Productivity Commission’s current review of super has the potential to turn the industry on its head. It’s the second part of the review, the report being delivered next year, and not the first part due this month, which will have all the impact.

Cathy Nance, influential actuary, trustee and head of PwC Investment Consulting, told the ASFA conference on the Gold Coast last week that the second half of the Commission’s review would be “quite contentious”. That is the part which deals with the default funds for members who do not choose a fund.

Previously established by industrial awards, the current system tends to favour industry funds. The retail funds, led by the big bank operators and the Financial Services Council, have long argued that the system be replaced by one which allows for-profit schemes to compete.

Nance said that about two-thirds of all employees have defaulted into their super funds. There were many questions the Commission would need to answer, though, in its review. It has already said that having “one default fund”, as is often the case now, would not be an option. Therefore, the Commission would recommend “just a few” default funds, however this is decided, or “many”.

Each option poses several questions and issues for both the Commission and the industry. For instance, Nance said, if the recommendation is for each employer to have “a few” default super funds to choose from, “this will become THE industry”. If it is “a lot”, then why not just make the choice all (115 currently) MySuper products? Nance asked. MySuper products are already contentious as default options because of their high reliance on cap-weighted index investment strategies, especially the retail funds. Across the whole industry there are about 250 remaining APRA-regulated big funds, but more than half of these have outsourced their investments to a handful of providers. The top 20 funds account for 64 per cent of the assets. The median size among the 250 is less than $1 billion.

Nance said, mischievously, that having one government-run default fund might not be a bad idea because Australians hated so much paying any money to the Australian Taxation Office that this might prompt them to make an active choice of fund.

“I think that one no-frills holding type account [operated by the Government] could actually help competition,” she said. “The dangers of having ‘a few’ or ‘many’ are that either could drive the industry to a new competition model.”

Nance proposed that the Commission should discuss what sort of industry it wanted to see in 20 years time and then see what sort of allocation models fall out of that, rather than doing it the other way around.

The current problems for the Commission, to do with improving efficiencies in the system, included that there were too many data points being considered in its analysis. Of the 168 data points for consideration, Nance said, many were qualitative and subjective, as well. And the engagement indicators could be misleading, such as what member switching actually indicated, and member satisfaction indicators could be unreliable.

“This vagueness could result in a focus on costs versus quality and services,” Nance said.

Of course, it is not the Commission which will be making the final decision on what should constitute a default fund or funds. The Government will. The Government plans to collect two years worth of data, starting next year, and then make its decision by 2020.

The ASFA conference, at the Gold Coast Convention Centre at Broadbeach, attracted about 1,900 delegates this year across an increasingly broad church of industry participants from small-to-large super funds, fund managers, actuarial and asset consultants, custodians, administrators and systems providers.