Looking good? New ‘best in show’ proposal for super funds

To help super fund members understand the proposal, SuperGuide has put together a simple explainer:

• Employees will receive a top 10 list of low-fee, high-performing super funds and they can select any fund on the list (or any other super fund including an SMSF).
• Employers will have no involvement in selecting an employee’s super fund.
• An employee’s choice of super fund will not be limited by any enterprise or workplace agreement covering their employment conditions.
• If an employee don’t choose a super fund within 60 days, super contributions from their employer will ‘default’ or be paid into one of the funds on the shortlist, which will be selected sequentially.
• An independent, expert panel will choose the shortlist. Super funds on the list must meet a clear set of criteria and be likely to deliver the best outcome for fund members over the long term.

Pros and cons of a top 10 list

Although the suggestion sounds sensible and would be welcomed by many employees confused by the idea of choosing their super fund, the Productivity Commission’s recommendation has proved to be very controversial.

According to the Association of Superannuation Funds of Australia (ASFA), the recommendations would “materially transform the industry and undermine the widely acknowledged strength of the [super] system” and “dramatically change Australia’s retirement income landscape”.

Although it sounds serious, there are sensible arguments on both sides.

Benefits of a ‘best in show’ list

1. Simplifies fund selection for new employees or people with little knowledge about super.
2. Selecting a top-performing default fund should give fund members a higher account balance when they retire.
3. Provides role models and motivates poorly performing super funds to lift their game if they want to be included on the top 10 list.
4. Helps reduce the problem of employees holding multiple super accounts and paying multiple fees.
5. Avoids employees being placed into a super fund chosen by their employer if they do not actively make a selection.
6. Only one choice of super fund is needed, as employees can then retain their super fund when they move jobs.
7. Likely to accelerate the merger of super funds.
8. Gives employees confidence they are selecting a super fund likely to perform well in the long-term.

Disadvantages of a top 10 list

1. Risks a small number of super funds receiving the majority of default super contributions.
2. Potential for reduced competition in the super industry and the creation of barriers to product innovation.
3. Best performing super funds change significantly over different time periods (for example, in the past year compared with over the past 10 years).
4. Super funds with higher returns will dominate the list, while fund members may be more interested in fee levels, value for money or fund governance.
5. Lack of a competitive tender to get onto the list means there will be little pressure on super funds to cut their fees.
6. Could affect the way super funds allocate their investments to achieve higher short-term returns.
7. Removes the linkage between industries and their particular industry super fund (for example, HESTA and employees working in the health sector).
8. Removes the involvement and protection of the industrial system (including the Fair Work Commission and trade unions) from the selection process for a default super fund.

Want your own top 10 list?

Given the controversy and opposition from the super industry, the ‘best in show’ concept is unlikely to see the light of day for quite some time – if ever.

But you don’t need to wait for a government appointed panel to see a list of top performing super funds, or learn which one has the lowest fees.

Checking out a few of these SuperGuide articles is a great way to find out more about who’s who in the super industry and how they are performing.