Retirement incomes will soar, but only if government acts

by Jim Minifie

Published by The Australian Financial Review, Monday 8 December

There is excellent news for Australia’s 14 million super account holders in David Murray’s financial system inquiry report – but only if government seizes the opportunity. Murray has recommended a package of reforms that could improve retirement incomes by 25 to 40 per cent.

The FSI’s three core superannuation recommendations concern superannuation’s objectives, its efficiency, and retirement incomes. The FSI recommends that the government clarifies the objectives of super and measures the system against those objectives; that it introduces a formal competitive process to select default funds (unless the system becomes markedly more efficient by 2020); and that it requires superannuation trustees to preselect a retirement income option for members.

The FSI makes other recommendations that will affect superannuation: that the government ensures that every account-holder has a choice of fund; ensures that superannuation trustee boards have a majority of independent directors; places limits on borrowing; increases the competencies of financial advisers; and that it opens the door to further reform or taxation in superannuation.

Much of this is a solid incremental reform. Getting broad agreement on objectives will help set priorities and rank options, such as how super should interact with the age pension, and how best to tax superannuation. Getting retirement incomes right is already recognised as a major focus for the industry and policymakers in coming years.

The third major recommendation – on efficiency – is more aggressive than many expected. The FSI has concluded that today’s system is “not operationally efficient due to a lack of strong price-based competition”. Murray clearly remains concerned that the current round of reforms will leave the sector far from the efficient frontier. It notes the failure of fees to drop much as the system grew over the last decade and that fees on many MySuper products remain far above what other funds have been able to deliver.

Murray’s concern about system efficiency is well founded. MySuper has cut default fees – but by little more than one-tenth. FoFA will help reduce costs in the choice part of the market. SuperStream will help, but may add less value than initially envisaged. Further strong gains across the system from fund consolidation and account consolidation are far from assured under current policy settings.


So how does Murray recommend efficiency be achieved? Pointedly, he has not recommended separating superannuation defaults from awards. The report argues that such a split could leave many worse off because many smaller employers are ill-equipped to select superannuation products.

Instead, Murray recommends that the government design what it calls a “competitive process” (such as a tender or auction) to select defaults, with design work to begin in 2015. He recommends implementing the process unless the current system becomes much more efficient by 2020. Such a process, Grattan has estimated, would cut costs by billions every year and increase retirement incomes by over 10 per cent.

In designing the competitive process, the government should draw insights from the experience of tenders and auctions run by companies and by other governments. The FSI recognises that an effective competitive process will need to ensure that the winners focus on after-fee returns.

Murray recommends a superannuation efficiency review be held between 2017 and 2020. It would need to define efficient outcomes and assess competition, fees, costs and net returns against these benchmarks. Murray recommends the review examine changes in fees and net returns, distribution of fees, and flow-on effects (to the choice part of the market). In doing so it will need to ensure it measures the total costs of the system, including costs not explicitly reported as fees.

Murray, then, has set out a broad pathway for superannuation reform. His recommendations are well short of a blueprint, but he sets out clear next steps for policymakers and for industry. He has thrown down the gauntlet to the government and to industry on efficiency. Industry now has a few years to demonstrate what MySuper, SuperStream and FoFA will deliver. And the government can get to work, developing the critical reforms needed to push efficiency further.