John Brogden

The selection process by the Fair Work Commission (FWC) for default superannuation funds under Modern Awards will cost superannuation fund members a staggering $400 million if it is allowed to proceed.

Laws put in place by the previous Federal Government require the FWC to assess all MySuper products that apply to receive default contributions and then replace every single fund in every Modern Award.  As early as 1 January 2015, each Modern Award must have from two to 15 default MySuper products.

New research by Rafe Consulting for the Financial Services Council shows the superannuation arrangements of at least 2.25 million working Australians and 100,000 employers will be thrown into turmoil if the Fair Work Commission is allowed to complete its review of default superannuation terms in awards.

It is the first research to analyse the systemic risks that superannuation members and employers face if the FWC process is not reformed.

Rafe estimates this will cost consumers and employers a massive $400 million due to duplication of fees, insurance premiums and employer search costs.

He says within two years fund members would be $150 out of pocket due to the cost of duplication of fees and premiums. Additional costs which will have no benefits for consumers. Costs which undermine years of reform aimed at stripping unnecessary expense from superannuation.

John Brogden, CEO of the FSC said: “The default superannuation system needs to be reformed as a matter of urgency.”

“The consequences of not making reform are far-reaching,” he said.

“These unnecessary costs to employers and employees may be incurred as early as 1 January 2015 unless the Government acts to reform the process before the FWC review is completed.”

The Financial System Inquiry interim report released last week made a point of commenting on this issue. It observed that “the selection of default funds in awards largely reflects precedent and is not subject to a competitive process.”

In the broader context, the Murray Review focused on driving costs lower to increase the adequacy of Australia’s retirement savings.

Chant West data released this week demonstrates that FSC members have outperformed industry funds over the last three and  five years. Opening up the default market to competition will enable more Australians to enjoy the benefits of their outperformance, forcing industry funds to lift their game.

“Superannuation funds that offer competitive products and provide good service to their members have nothing to fear from competition.

Mr Brogden also said: “The closed shop of default superannuation is a risk not just for individuals who will have lower savings in retirement as a result of less competition, but for the Government which will ultimately bare the cost of lower fund balances in retirement through paying more in Age Pensions.”

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John Brogden

The Full Federal Court last week upheld a challenge by the Financial Services Council and determined that the Fair Work Commission Expert Panel for the selection of MySuper default funds in Modern Awards is invalid.

The Federal Court declared that:

1. The decision by the President of the FWC to appoint himself to Expert Panel is not valid; and,
2. The Expert Panel is not correctly constituted.

John Brogden, CEO of the Financial Services Council said: “The Federal Court found the FWC Expert Panel lacked the number of superannuation experts required by law.”

FWC President, Iain Ross was also found to have acted outside his legislative powers by appointing himself to the Expert Panel.

“We have argued from the beginning that the Expert Panel was conflicted and then incorrectly reconstituted,” Mr Brogden said.

“The Federal Court has today upheld our position.”

“We want an open, competitive process which allows every APRA-approved MySuper product to compete for default superannuation contributions.”

“A genuinely competitive market will lead to more transparency, lower fees and better services for employers and employees,” he said.

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Douglas Latto

The Corporate Super Specialist Alliance (CSSA) disputes that making any MySuper fund a default fund will result in unnecessary costs and expensive red tape.

“We actually think the opposite is true,” says CSSA President Douglas Latto. “If any MySuper fund can be a default fund then most employers will not be forced onto the market in search of a new provider; they will elect to stay with their current fund. This means there would be no employer search costs and no red tape.”

Mr Latto says that at the moment some funds are under multiple Awards and each Award has a different default fund requirement. “This means employers may currently be paying to a number of different funds because the Award forces them to have different defaults for different groups of employees,” he says. “If any MySuper fund could be a default fund, employers could consolidate into the preferred fund amongst the funds they are contributing to. This would reduce time and red tape for the employer because they would then only have to choose one fund for their whole company.”

The CSSA also believes that it is not appropriate for the Fair Work Commission to be responsible for selecting default super funds for inclusion in industrial awards.

“With the greatest respect, we do not think the Fair Work Commission has the expertise or experience to do this kind of work. We are giving responsibility for millions of dollars of consumer retirement savings to people who have no expertise in choosing funds,” he says. “CSSA advisers take years to hone their skills, to make their selections and to understand how products work.”

Mr Latto also said that under the new MySuper rules only registered organisations can submit on modern awards and this presents a conflict of interest.

“Registered organisations are bodies like unions and employer groups,” he says. “When these organisations make their submissions they are highly likely to support their own funds. If any MySuper fund could be a default fund, this conflict of interest would cease to exist.”

Allowing any MySuper fund to be a default fund would also see the return of a fair market and a level playing field, he says.

“We utterly reject the concept of a ‘quality filter’ which narrows the universe of default funds down to a mere handful,” he says. “If the marketplace is reduced to just a few funds, people are forced to go into them. This is not only uncompetitive but also completely removes innovation from the marketplace because there is simply be no need to innovate.”

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John Brogden

The Financial Services Council briefed government and Treasury yesterday on the excessive costs associated with the Fair Work Commission process for selecting MySuper default funds and is calling for the end of the FWC’s role in selecting superannuation funds in Modern Awards.

John Brogden, CEO of the Financial Services Council said: “Australia’s superannuation industry is paying $45 million just to comply with the Fair Work Commission default fund selection process with no benefit whatsoever.”

“The system has delivered more red-tape and unnecessary regulatory costs for employers and the super industry,” Mr Brogden said.

“MySuper funds are approved in a detailed process by the prudential regulator, APRA. The role of the Fair Work Commission is a duplication of an existing process by the appropriate body.”

“Ultimately, it is consumers who pay the price.”

The FSC’s submission to Treasury on superannuation reform condemns the multi-staged FWC process for selection of default fund products for MySuper as anticompetitive and biased to superannuation funds owned by unions and employer organisations.

“The current default fund selection process explicitly favours superannuation funds owned by unions and employer organisations which are only parties eligible to make submissions to the Commission during the second stage of the selection process.” Mr Brogden said.

“It’s a closed shop.”

“Half of the superannuation sector has been excluded from the critical staged of the decision making process which determines whether a fund will be named in a Modern Award.”

“It is completely unacceptable that consumers’ best interests are being overlooked in favour of sectional interests.”

“We are calling on the government to commit to a genuinely competitive default market and to bring an end to this outrageous waste of members’ money.”

“We also urge the government to disband the Fair Work Commission default fund selection process as a priority,” he said.

Mr Brogden also said: “True competition will result in lower fees and innovation in the default superannuation market.”

The FSC also said the government should intervene in the Fair Work Commission hearings this week to seek to delay the process until its review of the default arrangements is finalised.

“Otherwise, superannuation funds will be forking out members’ money unnecessarily.

The FSC surveyed members and calculated that compliance with the current default fund regime for generic MySuper products will cost superannuation funds $45 million.

In addition, the separate FWC process for tailored MySuper products will cost superannuation funds $38 000 per application. This can equate to massive costs for large superannuation funds which can have several hundred employer specific plans.

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