The Australian Government Tackles Superannuation

The government has today accepted virtually all of the recommendations of the expert panel behind last year’s Financial System Inquiry. Clearly, we can argue about some, and people would prefer to pick and choose depending on their predilections, but rather than allow the reform process to be unpicked by stealth, the government has opted to support its experts. That is a welcome change.

The government has today accepted virtually all of the recommendations of the expert panel behind last year’s Financial System Inquiry. Clearly, we can argue about some, and people would prefer to pick and choose depending on their predilections, but rather than allow the reform process to be unpicked by stealth, the government has opted to support its experts. That is a welcome change.

The inquiry had three main issues to deal with: the safety of our banking system in the light of the global financial crisis, the increasing importance of the superannuation industry to the whole financial system, and how new technologies and related innovations might impact the system. While the banking issues are well understood the other two pose new challenges for Australia.

Inquiry chair David Murray and his colleagues focused heavily on superannuation. This is appropriate since the superannuation sector is now a major part of the financial system. By the time of the next inquiry, it may even manage more assets than the banks.

The one recommendation rejected by the government in its response to the inquiry, Recommendation 8, intended to limit the ability of superannuation funds to borrow. The FSI approached this as a prudential issue, worrying about potential risks from leverage within the superannuation sector. The government has rejected the argument saying it may be an important issue in the future but is not now, preferring to monitor what is happening rather than prohibiting it.

The choice not to reject any other recommendations on superannuation is far more important.

The government supports the FSI’s concerns about the efficiency and competitiveness of the superannuation system. It has charged the Productivity Commission with reviewing the current system and suggesting ways in which the system might be more competitive. This will be a major challenge of the superannuation sector and involve them in a lot more policy analysis over the next couple of years.

On the management of retirement income streams, there is a more nuanced approach. It will require funds to develop products and then leave members with the right to choose between these new products and their current choices. The approach will flesh out as part of the two ongoing reviews in the area.

Industry funds will struggle with the next two recommendations: on choice of fund and on governance.

The government has committed to extend choice of fund by removing the deemed choice provisions of some industrial agreements. This does seem sensible policy although it will be criticised. Since most people have choice of which funds their savings will go into, it seems inappropriate to lock other people into a restricted set. It is hard to argue that having more choices will hurt anyone and it could lead to greater competition between funds.

The issue of strengthening governance is also going to up for dispute but should be inoffensive. Rotating directors and having independent directors are normal requirements in the corporate world and, with many funds managing tens of billions of dollars in savings, it seems sensible to allow funds to find the best directors possible. It may also be easier for independent directors to recommend the amalgamation of funds, badly needed and should produce significant benefits for savers.

Can the government make the superannuation more competitive in the expectation that it will produce better outcomes for savers? Clearly, the answer is yes. The superannuation system has evolved over time, driven by rules and by changes in rules. Its size is a product of rules and regulations. Steps to make the system more transparent, to allow greater choice, and to enhance the professionalism of management can expect to produce better outcomes for savers.

The politics of the government’s response is sensible. The Productivity Commission will be cheering. It will have a new stream of work and come back into the centre of government policy analysis. This is a very healthy development.

Super members the winner in sensible financial inquiry response is republished with permission from The Conversation