This is the heart of the problem in superannuation. In a normal market, if you perform poorly, people stop buying your product, leaving you to improve, merge or go out of business. Normally, this is a clarifying discipline that drives innovation and better products.
In superannuation, the poor performance of some funds has gone unchecked for years. You wouldn’t accept the bare minimum from a hospital or a school; we shouldn’t accept it from this essential service either.
The industry lobby turned the blame around on its customers last week, saying that it’s our fault for not shopping around, but if there’s anything we’ve learnt from other markets such as energy and insurance, complexity and confusion work in their favour, not ours. With more than 200 funds and more than 400,000 investment options, it is patently ridiculous to say it’s our fault for not staying on top of it.
Putting off the future
Sure, there’s a role for Australians to learn more about our super and be more engaged, but we know there are limits on how much information humans can comprehend. We’re also a pretty irrational bunch and can make bad decisions due to emotional factors and marketing.
Even where we present people with the cold, hard rational facts, they rarely act and make a switch. This is because of another limit on our capacity. Retirement is so far off in to the future and there are a lot of financial worries to deal with in the now, like buying a home or scraping together next fortnight’s rent. We tend to put off the future to deal with the present.
Where does all of this leave us? If you were unlucky enough to be defaulted into one of the worst funds, you could end up with half a million dollars less in retirement. For you, that might mean selling the family home to survive in retirement or moving in with your kids. It could be the difference between enjoying European summers in your retirement or living week to week, counting coins to afford a simple luxury like a coffee.
Whether its retail or industry super, the fees you pay are their wages, and they’ve got no interest in taking a pay cut.
At a recent superannuation industry conference, the host of one session seemed genuinely flummoxed by the notion of a top10 “best in show”. “What will happen to the funds that don’t get in to the top 10?!” he exclaimed. One word … competition.
One of the main fears is that funds will be forced into a win at all costs, battle royale for member contributions. To the extent that this makes them better, more efficient and lowers cost funds, mission accomplished! We will have implanted competition that leads to better outcomes for customers, which is what this is ultimately about: lower fees, better quality insurance and an end to unfair systems that leave people with multiple accounts. To the extent that funds might go too far, and ultimately harm consumers, trustees have a legal duty to act in the best interests of members. Like any business that breaks the law, I’d expect the full weight of the regulator to come down on them.
Hot under the collar
Reading the tea leaves, it seems there is general support for the idea of lopping off the poor performing tail through an “enhanced outcomes test”. This would give the regulator enhanced powers to force funds out if they have chronically underperformed. This response is hard to argue against, but it won’t actually create a competitive market. Put simply, removing a potential competitor to the top performers is more likely to erode competitive tension than boost it. Best in show is still required to push the top end of the market to keep delivering.
The critics have been getting hot under the collar about the top 10, all mimicking one another to make and stay on the list. This ignores the PC’s actual proposal. Of the total number of members, 12.5 million currently don’t change their job or voluntarily switch. That’s $128 billion, or 85 per cent of new super contributions that stay put each year, not being directed into a “best in show” fund. That leaves a huge space for funds to keep members by demonstrating they are unique, high value and worthy of people’s money. Even among the top 10 funds, we’ll see players wanting to stand out from the crowd as it will attract more members. Again these are the fundamentals of competition, which we see play out every day in competitive markets.
The industry response says it all – it’s all about them, but taking upwards of $500K away from what’s meant to be our golden years isn’t acceptable. Sensible initiatives such as “best in show” bring much needed competition to a sector that has relied on complexity and confusion to keep us in the dark. Superannuation is an essential service for a safe, fair and secure retirement for all Australians – not just the executives of the funds.
Xavier O’Halloran is acting head of advocacy in the Superannuation Consumers’ Centre at CHOICE.