19 August 2017
The government is thinking about whether, and how, to turn the Future Fund into a national default superannuation fund. They should get on with it — it’s a good idea. Not that it would be simple, or uncontroversial.
For a start the Future Fund doesn’t want to become a national super fund and accept retail money, for fear of losing its status as a sovereign wealth fund and all the immunities that go with that, although it is interested in managing the money.
And the nationalisation of the juiciest part of the superannuation industry (default) would be furiously resisted by all sides, with the semi-socialists in the unions and ALP resisting no less furiously than the finance sector capitalists and the political right.
And yet … Australia’s superannuation system is a gravy train for an army of rent-seekers and a dreadful mess for those it is supposed to serve.
We have a choice of funds, but in reality two-thirds of employees are herded into industry and bank-owned funds based purely on deals between employers and their unions and banks, deals that have nothing to do with the retirement needs of employees.
If it’s a unionised business, the union’s industry fund will usually be mandated in the enterprise bargaining agreement as part of the workplace conditions and therefore compulsory for the workers. If it’s not a unionised workplace, the fund will probably be the bank, using the leverage of the overdraft.
What’s more, every time workers change jobs, they end up in another default fund unless they take action to sidestep the new employer’s union or bank deal and assert super fund choice. Most don’t bother and end up with multiple funds — and fees. The employee gets to find out in 40 years whether the result of a succession of employers’ cosy deals with unions and banks were good ones.
The Productivity Commission recognised in its draft report into the super industry in May that there is “market failure”, caused by “paternalism … and historical overhang”, and proposed four options, all designed to improve transparency and competition. The final report is due soon and presumably will repeat the options.
As I understand it, the government is reluctant to go down this path, either because it fears the hated industry funds will end up winning since their performance is better than the bank-owned ones or, worse still, the banks end up winning because their sales culture is more aggressive, or both.
The fundamental problem is there is too much variety and choice in a service paid for now but delivered in decades. More information and competition won’t help because it is impossible to make any kind of choice about a fund when the funds themselves say that past performance is not a guide to future performance.
Retirement saving is not a financial service like banking, which is paid for and delivered concurrently: you can see immediately whether you are getting a competitive interest rate or good service. With super you don’t know for decades.
In the absence of any basis for making an informed choice on behalf of their workers, employers naturally go with convenience — they slide super into the industrial arrangements or the banking relationship. The question is how to fix this when the usual solution to everything — competition and choice — won’t work. Increasingly, it’s clear the answer might lie with the Future Fund, which was set up by the Coalition government and is beloved by it. In fact it’s probably the only fund the Coalition does like. It is also one of the nation’s best-performing funds, returning 7.8 per cent a year over the past 10 years, including the global financial crisis. The average balanced superannuation fund return, according to ChantWest, has been 4.8 per cent over the same period. The difference in retirement outcomes is staggering. Someone saving $500 a month for 40 years and earning a return of 4.8 per cent would end up with $724,360. At a return of 7.8 per cent, the same savings plan delivers $1.6 million.
In other words, as things stand, the average super fund member in Australia still has to rely on the age pension when they retire; if the Future Fund were used instead, and going by past performances, the pension would hardly be needed at all, by anyone. Most peoples’ lives, not to mention the federal budget, would be transformed.
So the urgent question is: how can the Future Fund be used for default superannuation?
Easy. The government should create an agency to collect the money and employ the Future Fund to manage it. The National Superannuation Fund would manage member services, payments and liquidity risk and the Future Fund would be required to manage this money in the same way it manages the government’s money now. The Future Fund itself would retain its all-important sovereign immunities.
The bigger, more difficult, question is whether the NSF would be the only default fund — a quasi-nationalisation of the default sector — or just another option, a sort of default fund.
I think it would be far better if it were the former. Inserting the Future Fund into the system as yet another choice would just make things worse, and employers under pressure from unions and banks would ignore it. But of course, the outcry if that happened would be something to behold.
Default superannuation is Australia’s great gravy train, one of the greatest in the world, probably in history, at least since the East India Company’s government concession was dissolved in 1874.
And that’s the heart of the problem: it’s a 9.5 per cent personal income tax that’s handed over each month to the private sector. It is time the government kept that money, instead of handing it over to the private sector to be fought over.
Alan Kohler is publisher of The Constant Investor
Comment by Save Our Super:
We wonder how long such a fund would withstand political meddling for ‘visionary’ objectives yielding “inestimable benefits” (Stephen Conroy on the NBN).