Competitive Implications of the MySuper Reforms - Case Study Example

Competitive Implications of the MySuper Reforms Introduction The objective of the MySuper reforms, according to a preliminary review report published by the government in April 2010 “…is predicated on providing a simple, cost‐effective product with a diversified portfolio of investments for the vast majority of Australian workers (shown to be above 80 per cent of members) who are invested in the default option in their current fund.” (Australian Government, 2010: 1) Calling MySuper a ‘product’ is not necessarily inaccurate, but it might be a bit misleading; rather than being a single, identifiable retirement savings and investment package it is instead a set of specific criteria to be applied to the packages offered to companies, that they can in turn offer to their workers as the default superannuation savings option. While the MySuper reforms are described by Prime Minister Julia Gillard as part of “Labor’s commitment to ensure all Australians enjoy a secure retirement” (Gillard, 2010), they have come under fire from some in the superannuation industry, who have complained that the programme hinders fair competition and is “...overly paternalistic and will entrench disengagement and disinterest,” among workers. (McDonald & Daley, 2010) This paper will summarise the key provisions of the MySuper programme, and explain what might be their impact on competition within the superannuation industry. The MySuper Reforms The MySuper reforms comprise a number of basic standards that a MySuper product will have to meet in order to used made available as the default option for workers who do not choose a specific superannuation plan, or prefer to let their savings be managed by a trustee. The first and most significant regulation is that fees will be greatly reduced; entry fees for joining a MySuper fund will be abolished, and exit fees will be limited to only those that can be justified as cost recovery. (Gillard, 2010: 2) The report of the Cooper panel which recommended the reforms estimated the savings for an average worker over his or her working life to be $33,000 (Barrymore, 2010), with estimates of the extent of the fee-cutting ranging from 30 to 40 percent. (McDonald & Daley, 2010; SBS, 2010) Additional fees to be reduced or eliminated altogether are for commissions involved in the sale of insurance policies to super funds, and automatically-included fees for investment advice to fund members. (“Central plank of Cooper Review is MySuper”, 2010) Intra-fund advisory fees would still be permitted under some circumstances and could either be charged to fund members who specifically requested it or spread out among all members as an administrative cost, but could not be charged if the services were not used, and members must be given access to “free, quality information” on the fund’s website. (Australian Government, 2010: 9) Also, switching fees charged to members for opting in or out between a MySuper fund and another option can no longer be paid to the trustee individually. (Gillard, 2010: 2) The MySuper reforms include criteria that cover concerns other than fees as well. Trustees must pursue a single, diversified investment strategy with a MySuper fund; in other words, the fund cannot have ‘growth’ or ‘defensive’ variants. MySuper funds must be kept separate from other RSEs the trustee may be handling, and have their own audited financial statements. The MySuper fund must be of sufficient scale in terms of assets or number of members to provide optimal performance for its member; if it is not, it must be pooled with other MySuper funds to reach the needed size. Fund and trustee performance will be monitored as well; trustees will be required to submit to benchmarking surveys to measure their efficiency against other funds in key areas. (Australian Government, 2010: 7-8) MySuper trustees will also be required to obtain a separate licence from APRA to handle a MySuper fund, something which has been bitterly criticised by the superannuation industry. (ASFA, 2010). Implications of the MySuper Reforms for Competition in the Superannuation Market One of the immediate impacts of the MySuper reforms might be felt by the industry super fund sector. Since the industry super funds were opened to all workers in 2005, the competitive advantage these funds present has been the “moral high ground” of a low-cost, no-commission model. (Korporaal, 2010) While the Industry SuperFunds group has publicly supported the MySuper reforms, stating they “have advocated for many years” these kinds of changes (“Supercharge Your Super”, 2010), the reforms remove the difference they have been able to promote between their funds and those managed by for-profit investment firms. The industry super funds will have to develop their own MySuper products as well. Instead of competing for members by offering a lower-cost alternative to other funds, however, the industry super funds will be competing with everyone else’s similar MySuper products to be selected as the default option by companies for their workers. In order to attract new members to their other fund plans apart from MySuper, the industry super funds can no longer rely on their “moral high ground,” and have to demonstrate superior performance and management of retirement savings. This is not impossible, of course, but is more of a challenge than the industry super funds have faced up until now, and whether they can continue their rapid growth after MySuper is in place is an open question. That scenario for the industry super funds seems to illustrate the intentions of the government with respect to competition in the superannuation market. As Taxpayers Australia asserted shortly after the release of the Cooper report, “The move to a MySuper concept is designed to create a new paradigm in respect of superannuation products that will also set the bar higher and create competition in the market space.” (Evans & Perry, 2010: 2) The rationale is that by applying a new, more stringent set of uniform standards to the super products, setting requirements for greater transparency, performance monitoring, and providing information to fund members, the focus of competition will shift to providing better quality in terms of management efficiency and performance of the funds. There are a couple aspects of the MySuper initiative that seem to contradict the expectation of greater competition in the superannuation market. Prior to the election, the Coalition complained that “... the Cooper review does not do enough to address how the Government can encourage increased employee engagement in superannuation and retirement savings. Further, it has noted concerns raised by the Financial Services Sector that the MySuper and ‘choice architecture’ proposal could lead to an increase in the cost of superannuation administration, rather than a reduction. The Coalition is concerned that the recommendations do little to reduce the lack of competition in the superannuation sector as caused by Labor policies such as mandated default funds in modern awards and that the recommendations ignore the importance of competitive pressures in keeping costs down.” (“Australian Election Briefing: Superannuation”, 2010) ASFA has also taken issue with the notion that the MySuper scheme will lead to a reduction in costs, pointing out that the new requirements, particularly the requirement that a separate audited account be kept for a MySuper product and that trustees obtain an additional licence, will create new costs that lessen the benefit of other cost-reduction measures. (ASFA, 2010) The Coalition may also have another good point in terms of the need to increase “employee engagement” in their superannuation planning and savings. About 80 percent of Australian workers already choose the default option for their retirement savings plan. (Korporaal, 2010) With the MySuper option being pitched as a simpler, lower-cost, balanced alternative to the current system, the impression that might very well be formed by workers is that it is “safe.” Which is not exactly the case, of course; while the MySuper criteria encourage prudent investment management, any investment carries some risk that should not be completely ignored. Nevertheless, the simplification of superannuation with the MySuper programme might encourage many workers to become even more inattentive to their funds. Without the accountability demanded by workers who are “engaged” with their retirement savings arrangements, there are no performance incentives other than the criteria laid down by the government for the programme to inspire fund managers to improve. The final part of the MySuper programme that does not indicate increased competition in the superannuation market is the directive that MySuper products should be of sufficient scale to provide the best results for their members. Right now, there are 270 funds, which the Cooper panel would like to reduce to a “double-digit number.” (Evans & Perry, 2010: 3) If there are fewer funds, there are fewer choices, and that simply means less competition among the ones that remain, at least for the vast bulk of the superannuation market that is represented by the 80% of the workforce that selects the default option. One could imagine a scenario in which the providers of funds all offer virtually-identical, non-competitive MySuper products, and then focus their competitive attention on the smaller one-fifth of the market that makes different choices. In summary, while MySuper may prove to be a boon to Australian workers and retirees, it appears to do very little to inspire competition in the superannuation market. It means to accomplish by mandate and legislation what would otherwise be achieved by free-market competition; only time will tell whether or not that is the right direction for superannuation in Australia. References ASFA. (2010) “The Cooper Review – My Super”. Association of Superannuation Funds of Australia [Internet], 2 June 2010. Available from: http://www.superannuation.asn.au/cooper-MySuper/default.aspx. “Australian Election Briefing: Superannuation”. (2010) Norton Rose Australia [Internet], July 2010. Available from: http://www.nortonrose.com/knowledge/publications/2010/%5BAustraliaElectionBriefing%5D/pub29784.aspx?page=all&lang=en-gb. Australian Government. (2010) “MySuper: Optimising Australian superannuation”. Second Phase One Preliminary Report, 20 April 2010. [Internet/PDF document] Available from: http://www.SuperSystemReview.gov.au. Barrymore, K. (2010) “Cheap MySuper funds come under fire from superannuation experts”. Herald-Sun [Internet], 27 August 2010. Available from: http://www.heraldsun.com.au/news/national/cheap-mysuper-funds-come-under-fire-from-supperannuation-experts/story-e6frf7l6-1225910663505. “Central plank of Cooper Review is MySuper”. (2010) Financial Standard [Internet], 5 July 2010. Available from: http://www.financialstandard.com.au/news/view/29203/. Evans, G., and Perry, M. “The Cooper Review Final Report”. Taxpayers Australia [Internet/PDF document], July 2010. Available from: http://www.taxpayer.com.au/downloads/The_Cooper_Review_Final_Report_SMSFs.pdf. Gillard, J. (2010) “Fairer, Simpler Superannuation”. Australian Labor Party, 31 July 2010. [Internet] Available from: http://www.scribd.com/doc/35166354/MySuper-Fact-Sheet. Korporaal, G. (2010) “MySuper a good idea that simplifies saving for retirement”. The Australian, [Internet] 6 July 2010. Available from: http://www.theaustralian.com.au/business/opinion/mysuper-a-good-idea-that-simplifies-saving-for-retirement/story-e6frg9of-1225888222529. McDonald, S., and Daley, G. (2010) “Australian Pension Industry Needs Lower-Fee ‘MySuper’ Fund, Review Says”. Bloomberg [Internet], 5 July 2010. Available from: http://www.bloomberg.com/news/2010-07-05/australian-pension-industry-needs-lower-fund-fees-government-review-says.html. SBS. (2010) “PM pledges low fee super scheme”. World News Australia [Internet], 1 August 2010. Available from: http://www.sbs.com.au/news/article/1316342/PM-pledges-low-fee-super-scheme. “Supercharge Your Super”. (2010) Industry SuperFunds. [Internet] Available from: http://www.industrysuper.com/understanding-super_supercharge-super.aspx. Read More