Industry uncertain over form of tender process

FSI chairman David Murray

11-Dec-2014

By Wouter Klijn

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The superannuation industry is unsure how the Financial System Inquiry’s (FSI) proposed competitive tender process for MySuper options would operate if the government decides to implement it by 2020.

In its final report, released on Sunday, the FSI recommended the implementation of a competitive tender process for super funds, requiring them to compete for new workforce entrants to be allocated to the fund’s MySuper product, if MySuper had not provided significant cost savings to members by 2020.

Australian Institute of Superannuation Trustees chief executive Tom Garcia says he believes the FSI proposal is intended more as a principle than as a path to be taken.

“I had to read it a couple of times to really understand what they are getting at, but I think it is a principle,” Garcia tells theinstoreport.

“We are in agreement that now that the MySuper system is set up, let’s give it to 2020 to run.

“If it is not delivering any outcomes different from today, we’ve got to review it. Let’s be realistic.

“But what the solution is in terms of a tender or audit in 2020, I think what they are suggesting is that the Productivity Commission should start to look at that now and how that would work, because there are a lot of questions that it would raise.

“What happens if we have to do another tender? What happens to all the people that already have got defaults?

“There are a huge number of logistic questions, but I think it is about the principle that ‘if this is not working by 2020, we are going to go hard-core tender’. So the challenge is to the industry.”

Fees have declined

Financial Services Council chief executive John Brogden says in response to the report that fees of default super fund products have fallen since MySuper was introduced.

“Fees are already coming down in superannuation,” Brogden says.

“Research by Chant West in 2014 shows the average fees for MySuper funds are already 85 basis points.

“Fees can come down further through increased competition.”

But Garcia points out the full cost savings won’t be achieved until all default money is rolled into MySuper options and funds still have until 2017 to do that.

“[The FSI] has acknowledged that there is a whole heap of money sitting in accrued default accounts in the retail space that hasn’t have moved: $77 billion,” he says.

“And crude estimates show that there is 50 basis points attached to that; the difference between the grandfathered [default options] and the new MySupers that are being offered.”

Based on a 50-basis-point difference, this would mean a further $385 million could be saved in fees if all default money was transferred to these lower-cost options.

During a speech on Monday to the Committee for Economic Development of Australia (CEDA), FSI chair David Murray said the tender proposal was a challenge to the industry, but he seemed unconvinced MySuper would deliver meaningful cost savings by 2020.

“MySuper aims to improve efficiency and competition by mandating simple low-cost default products and by encouraging funds to become larger,” Murray said.

“It has only been in place for around 18 months. However, we are not confident it will drive the efficiency improvements required.

“We have, therefore, laid down a challenge to the superannuation industry.”

Tender process to provide filter

The proposed tender process seems to replace the current Fair Work Commission process for selecting default funds in awards, but still maintains an additional filter as it would not allow all MySuper licensed products to be considered for selection.

The FSI insisted there should be some filter for new entrants into the workforce and referred to the findings of the Productivity Commission’s inquiry into default funds in modern awards.

It also flagged it would not appoint a single fund as a result of the tender process, but instead would look to appoint a large number of funds to avoid concentration and reduced competition in the industry.

“A significant number of successful funds would be selected, which would drive competition and innovation,” the FSI said in its final report.

“Some market consolidation is likely to occur, but excessive market concentration can be avoided if a sufficient number of funds are selected through the competitive process.”

Murray reiterated the plans for a tender process during his CEDA speech.

“If [MySuper] has not been effective, we recommend the government introduce a competitive mechanism under which only the best-performing funds would be selected to receive default superannuation contributions,” he said.

“This would allow all default members to benefit from the type of purchasing power that currently delivers lower fees to employees of large firms that have negotiated bulk discounts for their employees.”

Yet, it is unclear how the selection process would work after the initial tender process came up with a range of approved MySuper options.

“We don’t really know what they are thinking,” Association of Superannuation Funds of Australia chief executive Pauline Vamos tells theinstoreport.

“One could argue that we’ve already got a competitive process with MySuper; we’ve just got to wait and see.

“What I do know is that as an industry we really need to focus on those areas that drive up costs.

“The margins in super are not huge, so let’s really look at that and make sure that competition as well as that cost saving is there.”

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