Imagine if your boss called you into their office to tell you they had decided who you could bank with. Or your private telephone or electricity provider. Or whether you had to invest in shares or even the make of private car you could drive.
While most Australians would consider employer involvement in these private financial matters to be antiquated, absurd, patriarchal, or even downright suspicious, the law currently allows considerable third party involvement in your superannuation.
Some 25 years after the beginning of compulsory superannuation, the industry’s value has grown to $2 trillion, an amount expected to reach $9 trillion by 2040.
Yet perhaps unsurprisingly given its origins as an instrument of the workplace relations system, employers, unions, employer associations, the Fair Work Commission, and lobby groups for both industry and retail super funds retain considerable influence over how these funds are invested.
Around 20 per cent of Australians or 2 million people have little or no choice where their superannuation money is invested, up to 40 per cent have more than one superannuation account and potentially 60 per cent accept the ‘default fund’ offered by their employer.
The Heydon Trade Union Royal Commission highlighted the problematic relationships between some employers, unions and super funds, with its Final Report noting:
The potential for coercive conduct and conflicts of interest in enterprise bargaining identified in respect of employee benefit funds also exists in respect of superannuation funds.
With the default fund market alone worth $475 billion, the question of who picks a default fund, why that particular fund is selected, and if an alternative system could be more transparent, encourage stronger competition and empower consumers, is particularly important.
The Productivity Commission is currently looking at this issue, and its Draft Report, published on 29 March, had some good suggestions, including to only allocate a default product when an employee first joins the workforce, and the possibility of an NZ-style centralised clearing house for super payments, to reduce the impost on employers.
The Commission also showed that it understood the extent to which the system is influenced by vested interests.
It noted that only 3 of the 52 Inquiry submissions supported some sort of objective tender mechanism to select default funds and that:
There was near universal agreement amongst participants across all parts of the industry – industry and retail funds included – that it would not be desirable for the Commission to contemplate a tender or auction model.
Tellingly, it found:
The ability of this issue to unite an otherwise disparate set of industry voices against the introduction of an auction or tender model may, itself, be instructive [and that] the Inquiry has managed to unite the superannuation industry against the Inquiry’s potential contemplation of more than incremental reform. A healthy dose of scepticism would suggest that there must be rents to be recovered for the benefit of members for such unanimity to be valid.
This proprietorial approach is also apparent in the reactions industry stakeholders have had to the suggestion that the Turnbull Government is considering allowing first home buyers in its May 9 Budget to access their own superannuation to help fund a first home deposit.
As anyone who has ever tried to withdraw money from their own superannuation account can tell you, the industry clearly considers the funds it manages, to be its very own.
So, what should be done?
The simplest approach would be to abolish compulsory superannuation. Turning off the automatic rivers of gold would remove the need for any default fund and likely foster the immediate consolidation of underperforming funds and reduction of fees, as providers clamour to retain market share.
However, given that this is not likely to be on the cards, the Turnbull Government should at least seize the initiative and use next week’s Budget to announce a reform plan to put employees firmly in control of how their superannuation is invested.
Firstly, the Government should re-introduce its lapsed Superannuation (Choice of Fund) Bill, to extend choice of fund to all employees under workplace determinations or enterprise agreements. Personal superannuation accounts should not be a plaything for members of the industrial relations club.
Secondly, the Government should allow first home buyers to access their own superannuation money for a first-home deposit. This would immediately ignite the interest of under-25s in what would likely become their second most important financial asset.
Thirdly, the Government should declare that employers have no role in selecting default superannuation products for their employees and announce a tender process to select up to five private sector superannuation funds to be given the right to act as defaults for a set period. The tender should be open to existing retail and industry funds, as well as to new, approved, competitors, including from overseas.
It is instructive that the ACTU and superannuation industry representatives have already made supplementary submissions to the Commission arguing to leave the default system alone, because any default selection panel may be ‘political’ or ‘comprised of ex-bankers.’
With money locked up for up to 40 years, hundreds of separate funds, some of the world’s highest administrative fees, opaque commercial relationships and limited personal choice it is little wonder that people are disengaged from the superannuation system.
A reform package that improves choice and competition, removes vested interests, involves the private sector and empowers people to take greater responsibility for their own financial future is one that should comfortably be put forward in the Liberal name.