Award default super: where to now?

For a process with so much at stake, the Fair Work Commission (FWC) review of super defaults for the 120 or so modern industrial awards (a cornerstone of Australia’s workplace relations system) has turned into quite the shambles.

Award defaults determine the flow of a significant minority of compulsory super contributions.  It’s not the only determinant; enterprise bargaining agreements (EBAs) are increasingly important too, and for some funds far more influential than awards.  But it is a key competitive construct in super, and changes to super in awards may potentially act as the thin end of the wedge to wider reforms.

Unsurprisingly the review of defaults has been bitterly contested between not-for-profit funds, which are generally the incumbents, and retail competitors which want to break further into this market.

This is also a contest that asset managers should pay more attention to.  They may not be combatants, but they are certainly an interested party.  Changes to the competitive construct have significant implications for cashflow and portfolio strategies, and there is ultimately there is a flow-on effect to the types of mandates which funds will invest in, and whether those mandates will grow over time.

A key point of contention is essentially whether it is sufficient for a product to be MySuper rated in order to receive award default contributions.  The retail position is that this is all that should be required – after all the whole idea of MySuper was to create common standards, so what was the point if insufficient to receive award based contributions?  The not-for-profit position is that a MySuper product is not sufficient of itself – there are many MySuper products, and therefore an extra “quality filter” is needed to whittle that down to what is essentially an approved product list for each modern award.

That quality filter was defined as an Expert Panel constituted by the President of the Fair Work Commission.  The membership of that panel has been beset by difficulties since its establishment, with members removed, a new member added, and finally the President appointing himself.  The argument that the panel remained truly expert has become increasingly thin.

That argument was overtaken last week when the Financial Services Council (which represents mostly retail participants) was successful in obtaining a Federal Court order that the panel had not been correctly reconstituted.  The Fair Work Commission subsequently published a short statement (which can be seen here) which declared that “the Expert Panel as currently purportedly reconstituted will not deal further with [the] matter”.

This left a deafening silence to the obvious question – ok so what next?  And what happens next is a big deal.  Some of the main “what next” paths include:

– In the meantime the status quo prevails.

– The FWC’s statement leaves open the option of reconstituting the Expert Panel (again), continuing with the current process, or possibly even restarting it.  The President previously asked the Government to fill panel vacancies, but there is no sign of movement so far – a thorough process of seeking applications, assessing expertise and possible conflicts, and making appointments, could take many months. 

– Alternatively the Government could fill the vacuum by legislating to remove the role of the Expert Panel and / or enabling any MySuper product as an eligible default for modern awards.  Coalition policy, although vague in terms of what has been documented, is clearly to introduce more competition for super which is directed to a default fund.

– Or it could go even further, seeking to extend that principle to all Australian workplaces and overturning any competition-limiting provisions of EBAs.     

Given what has been published of Coalition policy, we have been expecting legislative action on awards and super as a minimum step.  These developments bring that possibility closer, although as events have demonstrated, the path is highly unpredictable, especially when the Government already has a huge amount on its plate with the Federal Budget and other policy initiatives  in the legislative pipeline.

So many “ifs” and “buts”, the timeframe for any market impact remains the medium term, and it is equally possible that there ultimately is little change in practice.  But “no change” is not an outcome many are betting on – most of the money is on a fundamental reshaping of competition within super in the second half of this decade.