The Australian, October 13, 2017
Peter Costello has lobbed a grenade into the Coalition’s long-stalled superannuation reforms, arguing that the flow of billions of dollars in workers’ compulsory contributions had given funds controlled by banks and unions a huge advantage, and the money should instead be invested by the government.
In a speech in Melbourne, the former Treasurer and current chairman of the Future Fund urged the government to “show some interest in managing (super) in a cost-efficient way”.
The government has tasked the Productivity Commission to come up with ways to prise default super contributions out of the hands of union-backed industry funds.
Mr Costello criticised the efficiency of compulsory superannuation, a system established by the Keating government in the early 1990s, which now requires 9.5 per cent of workers’ earnings to be diverted into private accounts that are collectively worth more than $2.3 trillion, and can’t be touched until they retire.
The sector, which critics claim is inefficiently run, is on track to earn $23bn in fees this year.
“There is a fair argument that these compulsory payments should be allocated to a national safety-net administrator — let’s call it the Super Guarantee Agency,” Mr Costello said.
He suggested the Canadian Pension Plan Investment Board, which manages $C317bn ($325bn), offered a better model.
Mr Costello stressed that individuals should have the right to choose their super fund — a reform introduced by the Howard government in 2005 — but “reality” suggested many didn’t. Consolidating contributions in a central fund would create “a bigger pool with economies of scale and access to the best managers”, he said.
About two-thirds of superannuation fund members stick with the default fund they are initially allocated; fewer than 5 per cent of members actively switch funds, according to the Productivity Commission.
Mr Costello, who said he was speaking in a personal capacity, said the $133bn Future Fund, which has returned almost 8 per cent a year on average over the past decade — more than 50 per cent more than the median balance super fund — could take on the role of national safety-net administrator. “This would end the fight between the industry and the profit sector over who gets the benefit of the default funds … neither has been able to attract the money, which exits by reason of government fiat, voluntarily,” he said. ”It would be in the interest of all, except of course the (fund) managers, and those interested in using administration fees for other purposes.”
His comments come as the Turnbull government — led by Mr Costello’s successor and protege in the seat of Higgins, Financial Services Minister Kelly O’Dwyer — tries to bed down legislation to put more independent directors on super fund boards. At the same time, the Productivity Commission is considering ways to inject competition into the management of default fund contributions, with a final report due by next June.
The scrutiny has set off a furious argument between for-profit retail funds and union and employer-association-backed industry funds, which together manage about $1.1 trillion of the total superannuation pool, over which offers better value.
“The system has created an industry, which has certainly delivered benefits for those in it,” Mr Costello said.
About 400,000 “first-timer” employees make about $800m in annual super contributions a year, according to the Productivity Commission.
“This is such a valuable stream of income, mandated by the state,” Mr Costello said.
The commission’s draft recommendations, released in March, include auctioning off the right to manage default contributions, which the super industry uniformly opposes, or creating more stringent criteria that pay more attention to cost.
Mr Costello, who is also chairman of Nine Entertainment, said the flow of compulsory contributions had eroded discipline in the banking sector, which has become the largest in the developed world as a share of the economy.
“Banks never had to fear a flight of Australian investors,” Mr Costello said.
He suggested it was “unhealthy” that Australians’ retirement incomes were so dependent on the returns of the four big banks.
“There would not be another western country where the stock exchange is so dominated by financials and in particular by the main banks — the quadropoly,” he said.
Mr Costello noted that banks, overwhelmingly the big four, made up a quarter of the ASX200 index by value.
“You can see why an air of impregnability and complacency has seeped into the management in Australian banks. Market discipline is negligible,” he said.
Employers divert their workers’ contributions into one of about 110 MySuper funds, a designation created by the previous Labor government for funds that met certain minimum criteria in order to accept default super contributions. In June such funds managed just under $600bn.
Last year their expenses came to 0.84 per cent of the value of the assets, according to analysis by Rice Warner Research, compared with about 0.70 per cent for the Canadian Pension Plan over the same period.
Some large US pension plans are managed at a cost of less than 0.1 per cent.
The Abbott government’s financial system inquiry in 2014 concluded the Labor reforms had not made superannuation “operationally efficient”.
The average super balance of super members in their early 60s was under $140,000 in June last year, Mr Costello said.
“This is not a system in its infancy,” he said.
“We are now starting to get people who have spent nearly their whole working lives in it.”