Not very PC – MySuper as an awards buster?

We’ve never been fans of MySuper. As blueprint for a low cost default option for compulsory contributions, it has always seemed a largely pointless duplication of what already existed.

This view is reinforced by the absence of widespread product development to build new MySuper products. By and large, not-for-profits are simply rebranding their existing defaults as their MySuper product.

We will see new low cost retail MySuper products, in the style of BT Super for Life or AMP Flexible Super. Many will be based on high usage of passive components, but some will feature active portfolios as in the case of BTSFL, making them hard to dismiss as cheap and nasty.

While MySuper has reinforced cost based competition, it wasn’t the spark – the arrival of low cost retail products had more to do with FoFA, which resulted in retail prices gapping down as commissions were unbundled.

In fact the only practical application that we could see for MySuper was that it became a common standard for competing for industrial award based contributions. Awards determine the destination of much of the ~$60 bn pa in employer contributions. They are a key driver of the growth of industry funds (which now receive over $20bn pa from this source), and have been a key objective of retail funds, which have found it difficult to access this part of the market.

So if MySuper became a common standard for competition for award contributions, this could have a huge, albeit unintended, impact. That scenario is now a step closer after the release of the Productivity Commission (PC) draft report into Default Superannuation Funds in Modern Awards. The draft report has two major conclusions:

– Any MySuper product should be able to be considered for listing on an award.

– The way in which MySuper products are selected for listing needs to be moved to an expert panel either within, or external to and independent of Fair Work Australia.

The report discusses some secondary criteria for selection but overall these do not favour any particular type of competitor.

That the PC landed in this place should not be considered surprising. But what does it mean?

Strictly speaking, nothing – yet. The draft report is a precursor to a public inquiry into defaults, with submissions closing in August. But clearly it creates an expectation that the Government’s economic advisory agency will recommend that awards are opened up to competition for all types of MySuper products.

In this event, it is then down to the Government to decide whether to implement the final recommendations at all, and if so, how. The devil is in the detail of course – implementation could change the status quo dramatically or very little.

The reality is that this is most likely to be a policy decision for the next Government. An ALP government in its final 12 months is unlikely to see this as a priority, to say the least. At this stage, polls suggest we will have a Coalition government by the end of 2013. Given that the Coalition has signalled its discomfort with the status quo, the scene is being set for potentially radical changes to the interaction of awards and super from 2014 onwards.

For retail competitors starved of inflows, this looks like nirvana and offers the biggest boost to its prospects in years. Conversely, it’s a major challenge to industry funds incumbents. Lobbying will be fierce on both sides of the debate.

So while far from a done deal, on a risk management matrix, this is a moderate probability, but very high impact event, that you need to plan for. The big issue is that the major current recipients of award contributions are not used to competing for them, other than jostling for their place on the award. An open battle between MySuper products involving the major retail players would be a very different contest requiring quite different skills for success.

And don’t forget what else is on the calendar for 2014 – auto-consolidation. A potential opening up of awards and auto-consolidation in the same year? Now that would really reshape the industry landscape.