In Mercer’s forthcoming 2020 Super Fund Executive Report, 58% of surveyed funds ranked government regulation and the Productivity Commission Inquiry as their top risk. Some two-thirds of the way into the Productivity Commission Inquiry into the Efficiency and Competitiveness in Superannuation, funds would be well placed to stay focussed on member outcomes, rather than worry about an inquiry that has some years to run.
We are a long way from the finish
The Inquiry, which received its ministerial terms of reference in February 2016, has now reported on stage (1), efficiency and competitiveness measures; is close to finalising its report on stage (2) MySuper and default funds; and will soon head into the final stage, which will stretch into 2019. Even then, the completed report will contain recommendations that will depend on how Government receives it, and even who is in Government at the time. We are a long way from the finish line, perhaps three or four years.
A lot in super is already very competitive
With media focus on the Productivity Commission, it is easy to forget that super is actually very competitive in many parts, for example in the tendering processes available to employers, they can select the best fund for their employees from a competitive range of options. In insurance, funds can structure superior offers for members than what they could obtain themselves by tapping into the highly competitive global insurance and underwriting market. Funds are so powerful in the scale of capital they administer that they can readily negotiate superior access, product features and fee structures for members from global investment managers. Importantly, members with choice can still rollover to almost any other fund they like, and they can now do it with almost no paperwork.
It is unfortunate the Productivity Commission has omitted insurance in its inquiry. Super remains a very efficient and competitive environment in which members can purchase life and TPD insurances because of the scale benefits of pooling.
We would argue that insurance is a critical part of the overall member outcome equation because of the security that it offers to members. Of course, an inherent issue with insurance is that its value is usually not appreciated until a claim is paid, thus its benefits can be forgotten. If you are in the mining industry, the construction industry, or emergency services, you have a much higher risk of death and disability than for those in white collar jobs – insurance with super is therefore a crucial factor in the quality and value of your overall member outcome.
Super is about to get even more competitive
There are three developments unrelated to the Productivity Commission that could bring positive competition for all of us: APRA’s application of the scale test; the introduction of Single Touch Payroll; and the development of Comprehensive Income Products for Retirement (CIPRs).
APRA’s work on fund sustainability and the application of the scale test is more likely to change the make-up of the super industry in the near-term. That includes default funds. APRA began assessing funds in 2012 and is focusing on funds whose business models are not sustainable and threaten outcomes for members.
APRA is looking at sustainability as more than just maintaining growth in assets and membership, or sustaining the trustee’s business. They are expecting robust strategic and business planning processes that ensure funds deliver high quality, value for money outcomes for members over the medium and longer term.
A second, less obvious but important driver of change will be the introduction by the Australian Taxation Office of Single Touch Payroll on 1 July 2017, with mandatory use for businesses of 20 employees or more by 1 July 2018. Single Touch Payroll will enable people to use MyGov, the Australian Government online service portal, to see all the super funds where they have money, and to make both their tax file declaration and their super fund nomination (choice) to receive SG salary disbursements at the same time.
Single Touch Payroll has the potential to reduce the number of super accounts each person holds, which is one of the major inefficiencies in the system, because once you have started with a fund it is easy to follow with your job changes.
Finally, the Financial System Inquiry led by David Murray in 2014, recommended the development of CIPRs (Comprehensive Income Products for Retirement) to meet the income needs if retirees. CIPRs offer state-of-the-art income investment approaches, and will provide a competitive alternative to default funds for members in in MySuper. CIPRs will change the landscape of super, and further enhance competition between funds and product providers to the benefit of members.
How should employers respond?
It will be three or four years before we can say with certainty what the Productivity Commission report means for employees and their super. As always, business leaders should continue to assess their decisions on the basis of whether it provides the best product, service and experience possible for employees. For Mercer, we continue to work with employers and the broader superannuation industry to provide leading-edge solutions today to help individuals enjoy a better financial outcome tomorrow.
Dr David Knox - Senior Partner, Mercer Pacific