Government to open super fund default provision to competition

THE most contentious of the Murray report's superannuation recommendations, that industry funds lose their monopoly on "default" fund provision, has been accepted by the government.

The chairman of the financial system inquiry, David Murray, is "very pleased" with the government's decision to immediately start work on a plan to dismantle the Fair Work Commission's role in overseeing how employers and unions negotiate employees' default superannuation fund.

And self-managed fund trustees have been let off the hook. They will still be able to borrow to invest in property as the government disagrees with the Murray report that borrowing inside super be banned.

There has been some finger-pointing at DIY super fund trustees borrowing to invest in property as a reason for rising property prices in Sydney and Melbourne.

The Murray report recommended a ban on borrowing for reasons of financial stability, not property prices.

The Murray report said the global financial crisis highlighted the benefits of Australia's superannuation funds largely not having borrowings.

"The absence of borrowing enabled the superannuation sector to have a stabilising influence on the financial system and the economy during the crisis.

"Restricting leverage in the sector will be important for mitigating future risks."

The government says while there is anecdotal concerns about these borrowing arrangements, it does not consider the data sufficient to justify a ban.

The Council of Financial Regulators and the Australian Taxation Office will monitor leverage and risk in the superannuation system and report to the government after three years.

SMSF Owners' Alliance executive director Duncan Fairweather said the decision to continue to allow self-managed funds to borrow was sensible.

"While borrowing carries some risk, it is not of the scale that justifies banning it," he said.

The government move to open up default fund provision to competition will mean industry funds are likely to respond with a campaign to head off the changes by highlighting how industry funds have outperformed retail rivals.

Compulsory super payments go into default funds if employees do not choose one.

Most employees end up in a default fund chosen by their employer, or specified in an industrial award or agreement under the auspices of the Fair Work Commission.

That means industry super funds are usually specified in awards as the default fund providers.

Industry Super Australia chief executive David Whiteley said the government should put the interests of 5 million industry fund members before the commercial interests of the banks that had been "relentlessly lobbying to remove consumer protections for default super funds".

He said the government's decision meant consumers could miss out on the benefits of high-performing funds and left the door open for banks to distribute "substandard" default products.

"We've known for some years that the big banks are after everyone's super and are putting pressure on the government to let them at it," Mr Whiteley said.

The government will have the Productivity Commission "immediately develop alternative models for a formal competitive process for allocating default fund members to products".

By having the Productivity Commission involved, the government may have the issue put off until after the next federal election.

The government agrees with the recommendation that super funds improve their governance.

However, the government will not pursue further measures beyond the legislation introduced recently, but not yet passed into law.

This requires superannuation boards to have a minimum of one in three independent directors, including an independent chairman.

This measure targets industry funds, which usually have an equal number of directors: those nominated by large employers and those backed by unions.

While most industrial awards allow workers to choose any fund, some awards limit compulsory super to one fund.

The government has agreed to make changes to allow employees to choose any fund.

There has been concern that super members focus too much on their account balance rather than the lifestyle to be supported in retirement.

The Australian Securities and Investments Commission will work out how income projections in retirement can be included in super fund members' annual statements.

The government also agrees that funds should offer more income products to members in retirement; such as annuities, where a fixed amount is paid to the retiree over a set period.

Funds do not generally offer income retirement products because of possible tax disadvantages.

The government will consult the financial services industry and a framework will be developed in conjunction with the government's upcoming tax white paper and retirement income stream review.

Last, the government agrees with the inquiry recommendation to enshrine the objectives of superannuation into legislation and report publicly on how policy proposals are consistent with achieving these objectives in the long term.

Sydney Morning Herald