How did Australia, which rightly prides itself on having one of the most stable and resilient economies in the world, end up cleaning up the messy and damaging aftermath of a savage Royal Commission into our financial sector?
Financial services is – and has been for some years – the largest sector in our economy, bigger than mining, bigger than agriculture. We are a nation of suits, not hard hats and Akubras.
The exponential growth of our massive financial services sector all started with compulsory superannuation 27 years ago. Trillions of dollars of Australians workers savings have poured into super funds since 1992. This waterfall of money, compounding into larger and larger lumps every single day, kick-started a financial services sector that grew at a sustained and ever-increasing rate, like nothing we’ve seen before – a mining boom without the busts.
The unprecedented size, power and clout of our financial services sector is extraordinary. Only three other countries in the world have pension systems larger than ours – the US, UK and Canada – and their populations dwarf ours.
The upside of our strong super system is that it gives us a bedrock of financial stability, a pool of liquidity that protected us during global shocks like the GFC and the Asia market meltdown. Is it just a co-incidence that we’ve had exactly 27 years of uninterrupted economic growth – the same number of years we’ve had compulsory super?
The downside is that the system has outgrown its current structure – but the guaranteed inflows provided no incentive to reform outcomes for consumers. Those waterfalls of super money, now almost 10 percent of our wages – kept coming. Some got sloshed over the side of the bucket, but there was always more pouring in.
Amazingly, 80 per cent of Australians still default their super, meaning they make no choice of fund. Every time people move jobs, they are defaulted into yet another super fund. This has left us with the travesty unearthed by the Productivity Commission, the 10 million zombie super funds soaking up $2.7 billion of fees and insurance premiums every year. Reforms to deal with consolidation of this waste are still to pass our Parliament.
While light on super reform recommendations, Commissioner Hayne has sensibly echoed the Productivity Commission in suggesting we stop the problem at the source by making it easier for workers to default once. At last, people will be able to carry their account with them between jobs, like a tax file number, also allowing them choice to change funds if they wish.
This means that when people are defaulted for the first time, we need to make sure we get it right. The out-of-date ties between the superannuation and the industrial relations systems have ring-fenced the default system from market competition and efficiency for too long. The Fair Work Commission chooses which funds are listed in Awards. Today, many of these are poorly performing funds from which there is no escape.
The industrial relations system also encourages poor behaviour from super funds trying to win over employers to use their super fund. Commissioner Hayne called for a stronger framework to ensure funds aren’t “treating” employers with fancy meals or sports tickets to try to win business. Removing employers from the equation entirely is a much more effective way to ensure their choices don’t impact their employees’ retirement savings.
The answer is to create a strong safety-net for consumers, by raising the bar for all funds that want to be considered a MySuper default and letting individuals do the rest. Why shouldn’t individuals be able to choose from a list of all the funds that meet this standard, knowing that there is effectively no wrong choice?
Despite the size of the superannuation system it’s taken a Royal Commission and a Productivity Commission to highlight the fact that members best interests are not served by a system that’s not fit-for-purpose.
Commissioner Hayne’s recommendations, particularly on superannuation, must stiffen the spines of industry and politicians from both sides of the aisle to finally design a compulsory superannuation system that works for all Australians. If we fix super, we go a very, very long way to fixing financial services.