Despite reasonable financial success the Productivity Commission has found that there is still room for improvement in the default superannuation fund arrangements.
Retirement income in Australia has three core pillars: a government funded age pension, voluntary saving, and compulsory superannuation. Superannuation is collected at the rate of 9% of ordinary earnings, and in 2011 its assets totaled to $1.3 trillion, equivalent to the national GDP in that year.
Despite the size of this industry many consumers do not actively choose their own superannuation fund, but rather accept the default fund which is selected for them by their employer from a list approved by Fair Work Australia (FWA).
In 2009 the Federal Government commissioned the Cooper Review to analyse superannuation. This review stated that ‘If members are not interested, then the system should still work to provide optimal outcomes for them’.
In line with this finding the federal government tasked the Productivity Commission with completing a review recommended by the Cooper Review of the processes by which default funds are nominated ‘to assess whether they are sufficiently open and competitive’.
In their draft report on Default Superannuation Funds in Modern Awards the Productivity Commission found that default funds have performed well with an average rate of return at 6.4% compared to the average of 5.8% for all funds.
They also found, however, that the default funds fell down in the areas of contestability, procedural fairness, and regular assessments which are all core elements of a fair and competitive selection process.
The Productivity Commission found that not all funds were permitted to put their case to be selected as default funds. Rather they found that the current nomination system had a bias towards funds that are supported by industrial parties. This significantly limits the contestability of the current system, and is not in the best interest of members.
Along with this the Productivity Commission stated that ‘the current system does not provide for full procedural fairness, with significant impediments for some funds to have their case to be listed as a default fund heard by FWA’.
Both of these issues significantly hinder the ability for an open and competitive nomination process to occur, meaning that best practice in the interests of consumers is not currently being followed.
The Productivity Commission also found that there is no requirement for funds which are approved to undergo regular reviews to analyse their performance for members.
These key areas of contestability, procedural fairness, and regular assessment are, in the view of the Productivity Commission’s draft report all significant impediments to default superannuation funds achieving the best results for their members.
The Productivity Commission’s Deputy Chair Mr. Mike Woods backed up the core elements of the draft report stating that ‘Australian employees would benefit from a default superannuation fund selection process that is contestable, transparent and provides for the regular reassessment of the most appropriate funds to be listed in awards’.
The Productivity Commission will release their final report into default superannuation funds in October this year.