Barry Rafe of Rafe Consulting has prepared a report into the new Fair Work Act rules for superannuation, after being commissioned to do so by the HR Nicholls Society.
Rafe has found the changes to be anti-competitive in that they entrench the industry funds and are biased against new entrants to the market. He said the changes will achieve the opposite effect to what the Productivity Commission intended, which was that:
“[T]he selection of default products for awards should be merit rather than precedent based, and should encourage improved performance through competition”.
Of the listed default funds in modern awards, 50% are industry public offer funds and a further 20% are industry non-public offer funds. Rafe concluded that existing default funds will be embedded purely on precedent and will have a compelling argument to extend their listing across all awards.
He said the maximum of 15 funds per award is anti-competitive, particularly because many industry funds share back-office capabilities and “have organised themselves into purchasing blocks".
While industry funds were innovative when they appeared and have helped to move the super sector forward, the industry has now matured and they have lost their competitive advantage, said Rafe. But with a maximum of 15 funds per award, those that are new and innovative will have trouble achieving the default status over those with a proven track record.
Many employers will be forced to move their employees to a fund that is inferior, if they don’t have the resources to apply for their current arrangement to be approved.
“This does not appear to be an outcome that is in the employee’s best interests,” said Rafe.
He raised concerns that people on the expert panel may have strong industry fund or union links and place unnecessarily high hurdles on employers in proving that their option is superior. Not only would they struggle to have their case heard by an unbiased decision maker, but there is no requirement for an on-going assessment of the list of funds in awards.
The report findings don’t come as a surprise to CSSA Treasurer and corporate financial adviser Gareth Hall.
“If you design a product called MySuper to be a default superannuation fund, then it’s completely illogical that you would want to have any other process involved to determine which MySuper fund is suitable for an award. It just defeats the whole purpose of having MySuper in the first place.”
Hall is worried about the impost on employers, saying that they will not be able to continue in relationships that they may have with a fund that previously covered all their employees and offered tailored insurance.
“In my personal experience with my employer clients, they don’t have any choice now. Even if their existing arrangement with a provider is superior to that provider’s MySuper option, their new contribution has to go into the MySuper. So members are today paying more, as a result.”
He says that many product providers are using a product that might be cheaper but could also be completely indexed-based fund, which is a very different product that is cheaper to run. Hall thinks many members would have had access to cheaper indexed-based options under their previous fund that would probably have been cheaper than the option they are now in under MySuper.
Advisers in the space will struggle, as they might not be able to make contributions for the client into the fund they have established for them. This will affect corporate advisers more, as retail advisers can get their clients to sign a choice form to have their super paid into their current fund.