So toxic has much of Australia’s superannuation industry become that some at the very top of the government think the Productivity Commission hasn’t gone far enough.
The commission wants to unpick the link between super funds and jobs, meaning everyone would need only one fund for life that they could choose from a dropdown menu of the top 10 (or pick another fund if they want to, or set up their own).
It can be thought of as a way of saving the house, chopping away some of the rotten wood. The alternative, being seriously considered by ministers including Financial Services Minister Kelly O’Dwyer, would be more like burning it down. It would be to set up a single government-run default scheme to which everyone would belong for life, until they decided otherwise.
If it were well run there would be little room for funds run by the scandal-plagued banks and AMP, and less room for industry funds.
The national default scheme would operate like the government-run Future Fund, which invests billions to fund payouts from now-closed public service superannuation schemes.
It might even outsource some of its work to the fund. But it would be much bigger; perhaps as big as $1 trillion, and eventually several trillion, compared to the Future Fund’s $141 billion.
Like the age pension, its payouts would be provided by the government and funded by tax. But, unlike the pension, the contributions wouldn’t be called a tax, just as super contributions aren’t called tax at the moment. And what’s paid out would depend on what was paid in, meaning the highest earners would get the most, unlike the pension, which is meant to be the other way around.
(Going further and abolishing government-mandated superannuation altogether and just paying everyone the pension would be the next logical step, and would easily pay for itself given the cost of the super tax concessions, but as far as I know I am one of the few people suggesting it, and I am fairly sure no one in government is.)
Lying behind the idea is the realisation that the bank-owned funds are far worse than the headline figures presented by the Productivity Commission suggest, and that the banking royal commission is about to make this clear.
What is already well known is that the bank-owned funds perform poorly. Over the past decade the largely bank-owned "for profit" funds have produced annual returns of 4.9 per cent compared with the industry funds' 6.8 per cent and the Future Fund’s 8.5 per cent. Over a lifetime this would mean a typical retail fund paid out less than half as much as a typical industry fund.
The banks have got people into their poorly performing funds by paying their staff commissions, by paying advisers commissions and by buttering up employers with offers of good banking terms.
But those extra costs don’t come anywhere near explaining their poor performance. The commission’s intriguingly named 'Technical Supplement 4: Investment Performance Methodology and Analysis" provides hints. It says retail funds produce annual returns 0.9 per cent worse than would be expected given their asset allocation strategies, and industry funds produce returns 0.2 per cent better given their strategies.
But they are different strategies. As a matter of policy the retail funds have adopted approaches that give less weight than the industry funds (or the Future Fund) to the asset classes that have been shown to perform the best over the long term: things such as toll roads and well-tenanted buildings.
It’s partly because of cost. Being for-profit funds, and charging (hefty) administration fees, they don’t want to use up those fees on the cost of inspecting and directly investing in buildings. It’s cheaper to buy a share index, and cheaper still to buy government bonds.
If your own institution is selling them at a good price for it, so much the better. And shares are more liquid than buildings, which means bits of them can be easily sold and re-bought; something that’s needed if you are offering thousands of different investment options for people to switch into and out of, each time earning you a fee.
It’s got to the point where some in the Coalition believe it is no longer possible to defend the bank-owned funds. They’re saying that if the industry funds are better because they’ve generally got more scale and take the job seriously, a single national default fund would be better still. As Peter Costello, the chair of the Future Fund and Australia’s longest serving treasurer, puts it, “one default fund could make large allocations and use market power to drive down costs”. There’s one in Canada, and in Britain.
The counterargument, put by Productivity Commissioner Karen Chester, is that a government-run fund would acquire an implicit government guarantee which could make it overly cautious, reluctant to lose money. And she says 27 years of compulsory super has given us something worth salvaging: a modicum of interest in what happens to our money.
It’s far from certain that what she is proposing will get the government’s nod. So bad are the ongoing revelations about the funds that Costello is in there with a chance.