Separating the “cares” from the “don’t cares” in superannuation: Kohler

Sometimes the simplest, most obvious ideas are the best. The Super System Review’s idea for restructuring the architecture of super has the great benefit of simplicity, but whether it’s good or not depends entirely on the detail.

The idea, in essence, is to divide the big funds into two: ‘care’ and ‘don’t care’. The review panel, chaired by Jeremy Cooper, calls them ‘Choice’ and ‘Universal’, but the effect is the same.

Actually, yesterday’s preliminary recommendations would divide super into four types of fund, but two of them – eligible roll-over funds (to be renamed ‘Disconnected’) and self-managed funds – already exist, so no change there.

The real change would be to set up a formal difference between default funds and ‘supermarket’ funds, and the really important detail about that plan, still to come, involves the regulation of fees.

That’s important because, as The Australia Institute’s Josh Fear pointed out in his submission, and in an article for Business Spectator in January, only 10% of workers have chosen a fund since ‘Choice of Fund’ legislation was passed in 2005, and only 2% decide to change funds each year.

Most people don’t care, or at least they don’t choose: they simply go into whatever default fund is picked by their employer. Too often that fund is more expensive than it needs to be because the cost includes pointless ‘advice’ and an equally pointless array of investment choices.

So, if the Cooper Review’s idea of separating the governance of default funds and ‘choice funds’ leads to tighter regulation of the former so their costs are reduced, then that would be a great advance. But yesterday’s recommendations don’t quite do that.

The panel says the ‘universal’ (default fund) member “must be in a fund with a single diversified investment strategy (including a life-cycle strategy) overseen by trustee with traditional duties, insurance offered, but few other ‘bells and whistles’. Limited role for advice because advice is ’embedded’ in the product and no choices need to be made by the member.”

The reporting to these members would be ‘minimal’ and the disclosure would be ‘streamlined’ – perhaps online only.

It should be very cheap indeed – no more than half the average of around 1% that is currently charged. Over the course of a working life, this compounds into a lot of money.

The ‘choice member’ meanwhile would be in a more expensive fund with a ‘potentially unlimited menu of options’, with trustees that have limited liability for the choices of members, and comprehensive reporting and disclosure requirements.

Sounds good, but whether it is or not will depend entirely on how each category is regulated and specifically whether the plan to give the 90% super fund members who are in default funds less advice and less disclosure actually turns into much lower fees.

In my view the price regulation can and should be very intrusive indeed, since we are talking about government-mandated savings going unheeded in to pools that are fully controlled by those who set the prices. And there is no competition at the consumer level because the employer makes the decision.

The most regulated funds of all should be what the panel calls the ‘disconnected’ funds – currently ERFs.

It is a scandal that the government has allowed these pools of lost super to build up in private hands, with fees of 2% or more being charged for doing very little, but with the managers getting away with it because no one is paying attention. You don’t need a Super System Review to do something about that.

As for the other recommendations in yesterday’s preliminary report – or rather non-recommendations – they are mostly not significant.

For example, the panel agreed with several submissions that complained that super fund trustees should be better qualified, but didn’t suggest anything and in fact said it didn’t think there should be a regulatory qualification.

The panel decided not to push for consolidation of funds to be prescribed, believing instead that it will happen anyway, it doesn’t think the government should be involved in telling trustees where to invest, and it doesn’t want to restrict stock lending – although it thinks it should be fully disclosed, including fees, risks and where voting power resides.

It was, in fact, pretty much a ‘one idea’ report – but that idea was potentially a very good one.

This article first appeared on Business Spectator.