According to the commission’s report, “the process could be overseen by the governor of the Reserve Bank of Australia (as committee chairman), with the chairman of the Australian Competition and Consumer Commission and the Parliamentary Budget Officer. The consumer representative could be decided by the selection committee chairman.”
Unfortunately, flicking the highly contentious decision tohighly regarded individuals such as RBA chief Philip Loweand ACCC boss Rod Sims doesn’t solve the problem of the inherent conflict between knowledge of the business and bias.
This inherent conflict means that finding enough well-qualified candidates with a deep and up-to-date understanding of the highly specialised superannuation sector to sit on the expert panel will prove exceptionally difficult.
According to the commission, “appointed panellists should be free of direct conflicts of interest, and seen to be so by the public”. This emphasis on political neutrality means that many people who have direct and recent experience in the industry — either from working in industry funds, or in the retail sector — will automatically be excluded from being appointed to the expert panel.
Now, it’s possibly arguable that individuals who have worked at a high level in the super industry — and who possess the requisite knowledge and industry experience that you’d hope for on an expert panel — are less likely to be conflicted after they’ve been out of the industry for five or so years.
So perhaps they could recruited to sit on the expert panel after a certain period of time has elapsed. The problem is that forcing people to wait for years before they’re eligible to sit on the expert panel also means that by the time they get around to choosing the best-in-show shortlist, they’ve lost touch with current industry trends.
But the commission’s recommendations regarding the expert panel get even weirder.
“To strike the right balance between expertise and independence, not all members would need to have a high degree of expertise in super,” the report says. “Some could be accomplished individuals with experience in collecting and evaluating evidence and advice, but who are also able to see beyond it (such as academics).”
That opens the door wide for retired public servants and former regulators to join the panel, even if they have only the most rudimentary knowledge of how the complex super industry works.
And academics, with their often far-fetched and untested theories of how financial markets ought to behave, will also be given an opportunity to influence how the country’s superannuation savings are directed.
The problems with the commission’s recommendations, however, run even deeper.
Not only will the expert panel be required to attempt the daunting task of choosing 10 super funds that are likely to produce high returns for members over the long term, they’re also being asked to take into account the effect of their selection on overall competition within the super sector.
According to the report, in coming up with its shortlist, “the panel should always seek to ensure a competitive dynamic exists between funds, without compromising the integrity of the ‘best-in-show’ list”.
Now, this raises an extremely thorny issue for the expert panel. It’s likely that if anyone today were trying to come up with the 10 super funds that have the greatest probability of delivering the best outcomes for members based on past performance and fees, all the funds on the list would be industry funds.
But the expert panel may decide that competitive dynamics dictate the inclusion of some for-profit retail super funds on their shortlist, particularly since the industry funds are already on track to become the dominant players in the country’s retirement savings system within the next two years.
Indeed, to ensure competitive tension in the super industry and to give new entrants a choice regarding the type of fund they join, it’s possible the expert panel may decide that a certain number of slots on their shortlist should always be allocated to for-profit retail funds, even if their investment performance has consistently lagged that of their industry-fund rivals.
Such a development would be a huge relief for the $600 billion retail super fund industry, whose reputation has been left in tatters after the Hayne royal commission exposed egregious failures to manage conflicts of interest. They’ll be hoping that the commission’s concern for maintaining a “competitive dynamic” in the super industry might even offer them a way to get back into the game.
Including retail funds on the best-in-show shortlist also would be welcomed by the Morrison government, which is clearly anxious to find a way to stymie the seemingly unstoppable flow of retirement savings into the union-friendly industry funds, which are expected to control $1 trillion in super savings by 2024.
Indeed, theMorrison government is so unnervedby the growing market and political clout of the industry funds that it’s even contemplating looking closely at whether it should allow public-sector funds, such as the $149 billion Future Fund or the $47 billion Commonwealth Superannuation Corporation, to offer low-fee super accounts.
But increasing the participation of government-owned funds in the country’s super industry is fraught with risk. Savers are likely to flock to such government-backed funds because of perceptions that they’re safer than rivals.
This, however, could lead to problems when these funds go through inevitable periods of underperformance. Aggrieved members of government-owned funds could apply political pressure on the government of the day to top up their returns to compensate them for this poor performance.
Since the Keating government introduced compulsory superannuation in 1992, successive governments have always rejected arguments from government-backed funds that they be allowed to expand their membership base because of fears that new members might assume the funds’ investment performance was guaranteed by the government.
And even though the commission argues that government-owned funds should be allowed to compete for inclusion in the shortlist, it does acknowledge there are risks involved.
Their participation in the best-in-show process, it says, would “potentially raise competitive neutrality concerns, and concerns about the potential risk to current and future taxpayers in the event of poor performance (which might encourage them to adopt a more conservative investment strategy than might be sub-optimal for members).”