In brief
The Productivity Commission has released an issues paper inviting submissions on the criteria that should be used to assess the efficiency and competitiveness of Australia's superannuation system. This will be of interest not only to superannuation trustees but also to service providers, including fund managers, who may be put under greater scrutiny. Submissions are due by 20 April 2016. Partner Michelle Levy and Senior Associate Simun Soljo look at the issues paper.
Defining the objective
The Commission was asked by the Federal Government to conduct this study to implement a recommendation from the Financial System Inquiry (FSI) in 2014.
The Commission rightly points out that '[w]hat is efficient ultimately depends on what you are trying to achieve: the system objective(s)'. It notes that the Government is conducting a separate process to define the objective of the superannuation system (our Update is available here). The principal objective being considered in that review is the one put forward by the FSI: to 'provide income in retirement to substitute or supplement the Age Pension', in addition to various subsidiary objectives.
The Commission has gone its own way and defines the objective for the purposes of the study as 'delivering the best outcomes for members and retirees'.
Whatever may be said about the effectiveness of 'enshrining' the objectives of the superannuation system in legislation, it would be preferable for the same objectives to be used when assessing the efficiency of the system and so it is odd that the Commission is proposing a different objective, and especially where that objective seems to beg the question – what are the best outcomes for members and retirees, and are they different?
Superannuation system
The Commission is required to look at the 'superannuation system'. It has interpreted this broadly to include service providers such as custodians, administrators, investment managers, insurers, consultants, actuaries and advisers providing services to trustees. These service providers should take an interest in the study. Depending on how the Commission frames the criteria for assessing efficiency, their role in the superannuation system will be subject to periodic reviews by the Commission. This will be particularly important to those service providers who are identified as sources of inefficiency and cost.
Assessment criteria and indicators
The Commission notes the difficulties in identifying good criteria for measuring the efficiency and competitiveness of the system. The system is complex and there are various ways it can be assessed.
While the focus has often been on financial measures such as fees, costs, and investment returns, it seems the Commission may also look at more difficult criteria such as 'the extent to which the superannuation system contributes to a person's financial security over their life cycle' and 'the level of consumer engagement with the superannuation system'. The Commission notes the obvious difficulties in measuring such things.
It suggests that competition may not always serve members' interests in the superannuation system – fund portability can distort asset allocation, and providers may compete on irrelevant product features that add little value. The Commission says that it will focus on a range of criteria in assessing whether competitiveness is resulting in efficiency, which may include evidence of economies of scale being achieved and downward pressure on fees over time.
Making submissions
Submissions are due by 20 April 2016 and the Commission will release a draft report in August 2016.
Next steps
This study is only the first stage of the work the Government has asked the Commission to do to implement the FSI recommendations.
Stage two of the Commission's work will be to develop alternative models for allocating default fund members to products. We may yet find ourselves with a very different default superannuation system. The Commission proposes to commence this work in the second half of 2016 with a view of finalising it by August 2017.
The final stage will be a review of the efficiency and competitiveness of the super system to begin after July 2017, having regard to the criteria formulated in the first stage study being done now.