Anything but Super: Super shake-up puts industry funds on back foot
Posted on: 6 Jan 2016

Anything but Super: Super shake-up puts industry funds on back foot

The article below can be the wake up call that Australians need in order to realise that both the so called industry super funds as well as the big banks and AMP are simple wanting to make a profit from your retirement funds. 

If ever there was a time to explore the options you have, now should certainly be it.

Much of this money flows to industry funds via enterprise agreements and industry awards. It is a steady and lucrative stream of money that industry super funds guard jealously and bank-owned funds would like to access.

"It's quite clear that [banks] are seeking to dismantle the compulsory super system as we currently know it and replace it with a redesigned model to suit their business models."

Super shake-up puts industry funds on back foot

By Joanna Mather and James Eyers

October 20, 2015

The union movement's stranglehold over the $9 billion going to automatically selected superannuation funds each year will be broken by the Turnbull government.

The government plans to implement one of the most bitterly fought recommendations of the financial system inquiry and make it easier for bank-owned funds to challenge their union-aligned rivals for more of the money going into default accounts.

Treasurer Scott Morrison said the "closed shop" that mostly gives industry funds control over default super accounts was crimping competition and allowing fees to eat into retirement savings.

The government has asked the Productivity Commission to quickly develop options for a competitive tender process to select the best default funds.

Creating a competitive selection process for default super funds is designed to provide more choice and reduce fees. Perter Riches

The aim is to increase competition, thereby driving down fees and, in the long run, boosting private retirement savings to ease pressure on the age pension.

The decision is a big win for the big four banks, AMP and other financial institutions with large retail super operations.

"Our response to the inquiry today puts Australians in the driver's seat of their own money and no one else, and that's as it should be," Mr Morrison said. "It does end the closed shop when it comes to mandatory superannuation contributions."

Very pleased

Inquiry chairman David Murray said he was "very pleased" with the decision on, which went even further than he proposed.

"It will put pressure on the industry fund system. At the moment the system is just too expensive," he said.

In its long-awaited response to the financial system inquiry, the government also promised to enshrine in law the purpose of the super system. The could pave the way for a curbing of generous super tax concessions.

The government did not put forward an objective for super. However, Assistant Treasurer Kelly O'Dwyer said it was important to constrain spending on the pension, which takes up about 10 per cent of the federal budget.

"We want people to have retirement savings that they can live off, and not require the aged pension or even a part pension," she said.

The government will be under pressure to specify the core purpose of super as being to provide income in retirement, not to build wealth and transfer it to the next generation, which could justify tax breaks. Unlike his predecessor Tony Abbott, Prime Minister Malcolm Turnbull has left open the prospect of reducing super tax breaks.

Shadow treasurer Chris Bowen pledged bipartisan support for defining the objective of superannuation and urged the government not to politicise the issue.

In a move applauded by DIY investors, the government rejected the inquiry's recommendation to ban borrowing for property by self managed super funds. The inquiry expressed concern that high property prices were increasing risks in the financial system and said an unleveraged superannuation system was important to maintain stability in a downturn.

Insufficient data

The government said there was insufficient data to justify an immediate ban. However, Mr Morrison said the Council of Financial Regulators and tax office would be asked to keep a close eye on the situation and report back after three years.

Mr Bowen said it was "odd" for the government to choose to ignore recommendation on borrowing by super funds, which had grown by a factor of 18 times between 2009 and 2014.

"We will consider our response to the government's announcement today but it does appear odd that the government would choose to reject what is a very, very clear recommendation ... which goes to the very heart of risks in our financial system," he said.

In a move designed to help retirees generate stable retirement incomes, which will support economic growth, the government said it would support development of "comprehensive income products for retirement", which will provide better protection from longevity risks.

The government said further consultation was required on the framework, which will be developed with regard to the outcomes of the Tax White Paper process and review of retirement income streams.

Ms O'Dwyer said the Productivity Commission had been asked to quickly develop a way to select default funds, where contributions are directed when an employee does not nominate a super fund. The former Labor government introduced the MySuper regime as a low-cost, no-frills option for employees in default funds.

If an employee does not choose a super fund, their contributions go to a default option.

Eight million Australians have default funds and between $6 billion and $9 billion is deposited into these funds each year. Much of this money flows to industry super funds through enterprise awards and enterprise agreements. The government said all employee should be able to choose thier own fund.

Much of this money flows to industry funds via enterprise agreements and industry awards. It is a steady and lucrative stream of money that industry super funds guard jealously and bank-owned funds would like to access.

Labour wary

Opposition superannuation spokesman Jim Chalmers said Labor was "wary" of the government's motives for seeking changes to default superannuation arrangements. Legislation before federal Parliament will require most industry funds to appoint more independent directors.

"We are a bit wary of their motives in this area given their form when it comes to superannuation boards and the treatment of trustees," he said.

Industry Super Australia chief executive David Whiteley said the government should try harder to resist pressure from bank-owned super funds, which wanted more business.

"What the banks have been lobbying for is to have no selection process so that they can, in their terms, leverage their business banking relationships to become the employee default fund," he said.

"It's quite clear that [banks] are seeking to dismantle the compulsory super system as we currently know it and replace it with a redesigned to suit their business models."

Enterprise agreements can require all employees covered by the agreement to have their superannuation payments be made into a specific fund, which Grattan Institute retirement savings expert Jim Minifie described as an "outrageous anachronism".

He said a well-designed tender process could increase the balance of an average default fund by $40,000 over a lifetime.

"We think it has the potential, conservatively, to drop default costs and fees by about a third of a per cent per year, or 30 basis points, and over a working life that would increase people's retirement balances by about 7 per cent or $40,000," he said.

"There is a big opportunity to save money on administration. We think very conservatively it is $50 a person in the default space, very conservatively."

No tender process

The Financial Services Council, which represents retail super funds including those owned by the banks, does not want a tender process. Rather, it wants all funds to be able to compete for default status, and for employers to be able to nominate a default fund for their staff.

Allowing all MySuper providers to compete in the default superannuation market supports the recommendations outlined in the 2010 Cooper review.