The superannuation industry, unions and the Labor Party would vigorously oppose a government default fund taking away money that currently flows into retail and industry funds.
But some independent analysts support a government fund to reduce fees, lift returns and reduce conflicts of interest evident in private funds, if appropriate governance safeguards are put in place.
Public service model
Dr Gruen, chief executive of Lateral Economics and a former economic adviser to Labor treasurer John Dawkins, said it was “obvious” that people in government-compelled super should have access to a low-cost, high-quality, public wealth management fund like public servants already do, to help level the playing field against for-profit super funds.
“In light of complex and misleading marketing of financial products every Australian who wants to access those government services should be able to do so, not just a few select Commonwealth government employees who are lucky enough,” he said.
“It’s unfair and inefficient not to.”
A spokeswoman for Industry Super Australia, which represents industry funds, panned the idea.
“The temptation for politicians to use a single fund to pay for short term policy fixes may be too great.”
“Placing the nation’s entire super savings in one fund, however well governed, would carry risk.”
Renewed government interest
The Turnbull government considered a similar proposal about two years ago.
Cabinet minister Kelly O’Dwyer was a staunch advocate for the Future Fund to be given a consumer mandate. She argued internally to colleagues at the time many retail and some industry funds were failing to deliver adequate returns for people’s retirement and money managers were being enriched from other people’s government-compelled retirement savings.
Finance Minister Mathias Cormann opposed the proposal because it was akin to “nationalising super”, according to a former Turnbull government member.
Government sources said the PC’s exposure this week of industry failures and the royal commission were catalysts for renewed interest at the most senior levels in government. It comes amid recognition among Liberals that government-mandated superannuation was not a properly functioning or competitive market.
Potential existing government super entities include the sovereign wealth fund to manage the pension liabilities of public servants, known as the Future Fund, the Commonwealth Superannuation Corporation, which manages $47 billion in super for federal public servants and defence force personnel, or perhaps even state-based schemes such as the Queensland government’s QSuper.
The Productivity Commission said that a government-owned fund should not be precluded from being an option that new workers could be nudged towards on a “best in show” shortlist of 10 top performing funds, chosen by an expert panel of financial regulators.
Treasurer Josh Frydenberg has taken an interest in the PC noting that a government-owned fund could be included on the default fund shortlist, according to sources.
He said this week the Liberals support “choice” in super, including via self-managed superannuation funds (SMSFs).
Productivity Commission opposed
The commission rejected a government “monopoly” fund that all workers would be automatically defaulted into if they didn’t choose a fund, along the lines of what Mr Costello and Ms O’Dwyer had proposed.
Mr Costello is chairman of Nine, publisher of AFR Weekend.
The PC said the biggest risk of all default contributions being allocated to a government-owned fund was that in the event of poor performance there could be significant political pressure on the government to “top up” returns for members and taxpayers could be put at risk.
A single default fund would also fail to harness the benefits of competition for better member outcomes, it said.
Brendan Coates, economic policy fellow at the Grattan Institute think tank, said a government-owned fund was a reasonable option if retail and industry funds couldn’t agree on how to fix default super.
“As long as we have the right institution to do it and it’s set up in the right way,” he said.
“You would have to manage expectations against the government stepping in with a guarantee on returns in a market downturn, but there is probably already an implicit public underwriting of existing large retail and industry funds.”
Canada, Sweden and many other countries provide a government default pension fund.
As well as potentially saving super members billions of dollars in fees, a government-fund would have the political advantage for the Liberals of slowing huge inflows into industry funds that provide unions – and by extension the Labor Party – with board seats, economic power and money.
Industry funds have on average outperformed for-profit retail funds owned by the banks, AMP and other commercial institutions, which have suffered huge reputation damage and money outflows due to the royal commission.
Industry superannuation funds are on track to overtake SMSFs to become the dominant players in the retirement savings system within the next two years and are poised to top $1 trillion by 2024, according to financial consultancy, Rice Warner.
The situation is still very fluid and any government decision would be made after the royal commission delivers its report to the government on February 1.
Mr Costello in 2017 expressed public support for the government playing a more active role in managing superannuation in a more cost-efficient way than industry and retail funds.
“This is my personal view: instead of the government arbitrating between industry funds and private funds, there is a fair argument that compulsory payments, the so-called default payments, should be allocated to a national safety net administrator, let’s call it the Super Guarantee Agency,” he said in October 2017.
“It would be a not-for-profit agency which would set up its own investment board like the Canadian pension plan,” he said, arguing there would be “huge economies of scale” in the new agency.
The Future Fund delivered above-average returns of 9.3 per cent in 2017-18 and 7.9 per cent annually since inception in 2006.
While a government-owned fund appears at odds with the stated free-market ideology of the Liberal Party, because superannuation is government-compelled and some funds are delivering poor returns for members, some on the conservative side of politics believe a low-cost and credible government injection of competition is warranted.
If the option was pursued before the election, whether the Future Fund or another public fund became a sole default fund for workers or simply an option for savers to opt into would need to be determined.
The Future Fund, founded by Mr Costello, invests to cover the unfunded cost of pensions for public servants.
But it does not currently invest on behalf of retail investors and a move to allow this would mark a revolution in Australia’s compulsory-savings system.
The Future Fund’s original main fund has grown to $149 billion.
The Future Fund also invests the assets of four other special purpose public asset funds; the $14.6 billion DisabilityCare Australia Fund, the $9.5 billion Medical Research Future Fund, the $3.9 billion Education Investment Fund and the $3.9 billion Building Australia Fund.
Sweden set up a government-owned default scheme in 1999 for individuals who did not choose a fund. Initially about 70 per cent of new savers joined the fund, but by 2011 nearly all new savers defaulted into it.