Turning the government’s post-FSI plans into superannuation policy

by Jim Minifie

Published by Australian Financial Review, Tuesday 20 October

The government has accepted five of David Murray’s six main superannuation recommendations – with a ban on borrowing by SMSFs the odd one out. This response opens a path to a much improved super system, but there’s still a lot of work to do to turn high-level guidance into policy.

Two of the decisions should be uncontroversial: to require superannuation trustees to design a “comprehensive income product” for members’ retirement; and to require all employees be given choice of super fund. That more than one in 10 workers do not have choice of fund – including, for example, many people on enterprise bargaining agreements – is simply an anachronism. Adopting Murray’s recommendation to fix this is an easy win and will allow some to find a better deal and others to close accounts they don’t need.

Work can also continue to ensure all funds offer a “comprehensive income product for retirement” (CIPR), as Murray recommended. This is worthwhile because some people “over-save”, fearing they may outlive their super and perhaps face high nursing home expenses late in life. A well-designed CIPR could help them live less frugally, by offering insurance against those risks. But many others will have no need of CIPRs – particularly those with small balances who will flip onto the pension within a few years of retiring.

Other recommendations are more contentious. The government had already responded to Murray on fund governance: a bill now before parliament prescribes that a third of fund directors or trustees – and the chair – be independent. That is defensible, though there is no reason to expect it to improve member outcomes much. The representative (non-profit) funds – most of whom have few independent directors – have historically tended to outperform most for-profit funds that have independent trustees, thanks to lower fees and better asset allocation.

Tax concessions may be wound back

The government has also agreed to “seek broad agreement on the objectives of superannuation and enshrine them in legislation”. If, as Murray proposed, the purpose of the super system is to provide “income in retirement to substitute or supplement the Age Pension”, the government may judge some current tax concessions to be overly generous.

Government also accepted the most contentious Murray recommendation: to task the Productivity Commission with designing a “competitive mechanism” (possibly a tender) that would match new default fund members to MySuper products. Murray recommended that government design it now and introduce it by 2020 if significant inefficiencies remain, as is likely. Grattan Institute’s recent report, Super Savings, estimates that there will still be well over a billion dollars in excess costs in default super even when recent reforms are fully bedded in.

In designing the “mechanism”, the Commission will need to review a range of options. One option – floated by Josh Frydenberg when he was assistant treasurer – is to split default super from industrial awards and open it to retail competition. Murray explicitly advised against this, and there is indeed no evidence that it would improve member returns.

What is needed instead is to impose a stronger screen on default products capable of weeding out the ones that are likely to underperform. One possibility would simply be a much tougher version of the screen applied today by the Australian Prudential Regulation Authority. In the meantime, there is much government can do to drive cost out of the system. APRA already has the powers it needs to pressure smaller and inefficient funds to merge with more efficient ones. Closing over 10 million excess accounts would also save hundreds of millions each year.

Finally, the government has elected to monitor borrowing by self-managed funds, rather than to limit it, as Murray proposed. Some people have taken risks with their self-managed super, but there is no evidence of widespread excess borrowing, so the government is right to wait before imposing an outright ban.

It’s encouraging when governments are prepared to take advice. Turning Murray’s vision into reality will take years of effort but can ensure superannuation retains community support as part of a fair and efficient retirement incomes system.