Fair Work super dispute – who wins in the long run?

Bismarck is reputed to have said (inaccurately it is now believed) that the law is like making sausages – you never want to see them made.  To that we might addthe setting of approved product lists (APLs) – a bitterly contested process where much is at stake.

This is the easiest way to understand the contention around today’s nomination deadline for super funds to be considered for inclusion in industrial awards.

The concept of an APL is well understood by retail market participants, whether fund platforms, advice licensees, or asset managers.  Securing a quality rating such as “investment grade” or similar from a Morningstar, Lonsdale or van Eyk is not sufficient to win the business of most advisers.  In addition, a supplier has to win a slot on the adviser licensee’s APL in order to receive support.

It’s a winners-take-all process in which those lucky enough to secure an APL slot secure the lion’s share of the available business.  APL slots are highly coveted and competition to secure them when reviewed is intense, particularly with the larger advisory licensees.  Existing APL slots are defended at all costs, and attackers will go to extraordinary lengths to secure one.

It’s therefore hardly surprising that we are seeing a similar contest with respect to the award nomination process given that a year ago, we observed that theProductivity Commission effectively turned awards into super fund APLs.

The main beneficiaries of the status quo are not-for-profit funds – principally industry funds and public sector funds.  Not-for-profits want to retain the Fair Work Commission Expert Panel, which will essentially choose an APL for each modern award from the MySuper products which nominate.  On the other side are the retail funds, which want the panel to be scrapped, and for any MySuper fund to be automatically eligible for inclusion.

This gives us the following summarized positions:

Retail argument: MySuper creates a level playing field. Retailers have also invested heavily in new lifecycle solutions which are particularly suitable for default members. The Expert Panel is not qualified to add any further value above APRA’s approval, its composition appears unbalanced, and the proposed time between reviews is too long.

NFP argument: Not all MySuper products are the same and therefore the Expert Panel filtering mechanism is required. Retail funds have only achieved fee parity by moving to a passive investment approach – which will prove lower performing compared to NFPs maintaining an active approach with exposure to unlisted assets. Given that most of the big retail funds are owned by banks, the banking relationships may be leveraged to encourage employers to select a retail rather than NFP product.

So how do the positions stack up?

– If MySuper is not a sufficient quality standard to receive award based contributions, what’s the point of it?

– As it currently stands with just two members, the additional filtering value of the Expert Panel looks questionable. The panel process does not look much like what was originally indicated, as described here.

– The argument that industry funds have a persistent performance advantage over retail funds is also problematic, if not circular, which we explored here. 

– On the other hand, a two-step selection process of MySuper and Expert Panel is not dissimilar to the APL processes of many of the adviser groups owned by the big retailers, as described above.

– And the removal of the Expert Panel, to the effect of a MySuper approval being sufficient for award inclusion, would amount to a backdoor implementation of Coalition policy to de-link super and awards.  The APL would be the 100 or so MySuper products approved so far (though not all in practice).  

The entrenched positions of the combatants on this issue are only to be expected.  There’s not much common ground here.  Yet that does not necessarily point to the ultimate winners from deregulation of super and awards, if and when it occurs.  Yes, retailers would gain ground, which you would expect given how under-represented they are in this wealth segment.  And yes, not-for-profits would certainly feel the competitive pressure.

But the main losers are likely to be small to mid-sized not-for-profits, already under pressure as member numbers start declining and net cashflow dries up.  Larger not-for-profits could turn out to be winners if they play their hands well.  Not only do they enjoy the benefits of incumbency, better cashflow, and increasing brand recognition, the large not-for-profits are the likely consolidation destinations of those small to mid-sized not-for-profits which are forced to throw in the towel and merge.  Some could end up bigger and stronger than before, despite the removal of award APL advantages.