Appendix B: AIST response to Productivity Commission's intended criteria and indicators for assessing competitiveness and efficiency of the superannuation system Issues paper criteria PC - indicators within each assessment criteria PC proposed way to measure and assess AIST summary indicator AIST comment C1. Is there informed member engagement? Financial literacy of members compared to an ‘adequate’ standard (input) C1: PC proposes using member surveys, fund disclosures and case studies to provide evidence. AIST agrees that informed member engagement is theoretically desirable but believes that there is ample evidence that financial literacy is low across large subsets of the population and is not improving (e.g. ANZ 3 yearly survey). AIST has very significant reservations about PC methodology in conducting member surveys for its Stage 2 draft report, and failure to consult on content or methodology for proposed survey addressing this issue. Behavioural economics says education and disclosure are not the answers to market weakness when consumer capacity is low, costs are immediate and any benefits are remote. C1. Is there informed member engagement? Member superannuation and insurance literacy#* (input) C1: PC proposes using member surveys, fund disclosures and case studies to provide evidence. Note ANZ survey doesn't address insurance through super so that will need to be specifically addressed
C1. Is there informed member engagement? Fund expenditure on member education and engagement as a proportion of total marketing expenditure* (input) Research firms; fund disclosures; fund surveys AIST considers this is an ambiguous indicator that depends on the definition of expenditure on member education and engagement, as well as on marketing. It is likely to be difficult to disaggregate data that is specifically targeted for member retention. We also note that it will be difficult to separately identify expenditure on “group” or brand advertising (e.g., in a multiple product financial conglomerate) from product or single super fund marketing expenditure. We are also uncertain what constitutes a “bad” score for this indicator. Is it a high spend? Member retention is needed as proof of competitiveness, as well as scale. C1. Is there informed member engagement? Availability of meaningful and comparable information on fees, product features (including insurance) and risks#* (input) Reviews by others; member surveys AIST endorses this indicator but cautions that member perception of availability of information is likely to be skewed by engagement. Thus not level playing field. Critical that member surveys stratify by characteristics such as age, gender, NESB, income and account balance. Of course, everyone conforms to PDS requirements, but the fact that most don't read those in detail if at all demonstrates how difficult this issue is. Further, difficulty in gaining agreement on RG97 demonstrates fractured industry views. C1. Is there informed member engagement? Fund and product switching costs for members (administrative, search and learning costs) and costs to opt out of insurance (input) Member surveys; research firms The absence of such costs should be a positive indicator, but AIST cautions that administrative fees are likely to be gamed. As SuperStream reforms are bedded down transaction costs should reduce. Learning and search costs are still very high given current disclosure regimes, especially in the Choice environment.
C2. Are active members and member intermediaries able to exert material competitive pressure? Corporate fee discounts (output) Regulator data The presence of fee discounts indicates a competitive market between the banks as suppliers of superannuation services, and employers as suppliers of significant numbers of members/assets which will generate profit to the bank. AIST has no objection to this practice so long as the discounts benefit members and there is no subsequent churn of MySuper members into higher cost choice products. C3. Is the market structure conducive to rivalry? Market concentration at wholesale and retail levels (HerfindahlHirschman Index and market shares of largest providers)* (output) Regulator data Agree with this indicator, although we think it is likely to be of limited use in the super funds sector of the system. The collective market share of the largest firms in the industry is likely to increase in the short term through industry consolidation. In the long term it is desirable that there is a diversity of providers. The HHI will be more relevant in measuring concentration in custody and administration services where the systemic risk is likely to be concentrated though it is unlikely that data will be available in respect of them. C3. Is the market structure conducive to rivalry? Number of institutional funds (input) Regulator data Agree with this indicator. In the short term there is the potential for industry consolidation. In the longer term it is desirable that there is a diversity of providers.
C6. Do funds compete on costs/price? Costs relative to assets and number of accounts by service (investment, administration and insurance services) and by market segment (input) PC proposes using Regulator data; research firms; fund disclosures. Costs tend to be opaque, especially in relation to investment management where downstream costs get netted off. Therefore the indicator doesn’t give a level playing field when comparing direct and indirect investors. C6. Do funds compete on costs/price? Fees relative to assets and number of accounts by service (investment, administration and insurance services) and by market segment (output) PC proposes using Regulator data; research firms; fund disclosures. Fees can lack comparability both due to structure (e.g. flat dollar +% for some, pure % for others) and the netting off of costs and profit margin in underlying investments rather than using explicit fees. Note that any % fee includes an inbuilt escalation factor when FUM increases. PC should actively look for indications of % fees decreasing as FUM increases, or else commensurate increases in services. % fees permit some industry participants to capture the benefits of scale rather than passing them to members.
C9. Is there innovation and quality improvement in the system? Introduction of new methods of service delivery* (output) Fund surveys; fund disclosures; case studies Funds which market on "bells and whistles" and large funds will have capacity and desire to develop "innovative service delivery mechanisms", even if this entails higher cost to members. Information not readily available. Query consistency as to what is "innovative".
E2. Are costs incurred by funds and fees charged to members being minimised, taking account of service features provided to members? Relationship between level of administration fees and quality of member services (output) Research firms; member surveys AIST does not support this indicator as it is ambiguous and requires the Commission making judgements as to what is a “quality service”. Data reliability is questionable, but we note that research houses include quality factors in determining "fund of the year" etc. Equally relevant to SMSF sector but data from accountants etc. will be hard to come by. AIST notes research indicating that there was little evidence that higher fees correlate with better member service and concerns from the Cooper's review that many funds were providing higher levels of service, often unused by the great majority of members, at higher cost. E2. Are costs incurred by funds and fees charged to members being minimised, taking account of service features provided to members? Unused scale economies at fund level* (output) Regulator data; research firms Estimations of unrealised scale benefits are important in assessing overall industry structure. See comments in the main submission. There is a significant international discussion on ‘unused scale economies’. Economies of scale may exhibit a U shaped average cost function. The range of factors that can impact on scale are diverse and there is uncertainty to the optimal size of a pension fund in the international context. Research indicates that many drivers of scale economy and optimal scale may change over time. There is a need for substantive work on the Australian system on optimal scale. AIST believes that this could be an area of future focus for the Commission, but at the current time when research on this issue is still developing this is not a workable indicator.
E3. Do all types of funds have opportunities to invest efficiently in upstream capital markets? Retail investment management costs compared to wholesale (input) Agree with this indicator. E3. Do all types of funds have opportunities to invest efficiently in upstream capital markets? Minimum transaction values (input) Agree with this indicator. The development of online broking services has enabled small investors to transact on capital markets at low cost. E4. Is the system effectively managing tax for members, including in transition? Average effective tax rates across market segments (output) Regulator data; research firms Appropriate only if asset allocations are comparable. However, a very useful indicator of the effectiveness of investment governance across sectors. Need to carve out insurance as a deductible since it is paid for separately. Otherwise, it is a useful and transparent indicator across segments, with data presumably available from the ATO.
E4. Is the system effectively managing tax for members, including in transition? Tax flexibility as a motivation for establishing SMSFs (input) Member surveys Member surveys are likely to generate only self-serving data. The use of LRIVs to gear property, and the relatively extensive investment into private trusts suggests that SMSFs are quite often tax driven. That may be of value to the members of those SMSFs, but detrimental to the public interest at a system level. E4. Is the system effectively managing tax for members, including in transition? Takeup rates of cocontributions and offsets (input) Regulator data Data needed to properly interpret the headline data is unlikely to be readily available. Informative only if there is also information about the household income of those making use of these tax benefits. It is likely that they serve as tax management tools for the relatively wealthy, rather than as a means of enhancing gender equity or providing temporal smoothing in super.
E5. Are other leakages from members’ accounts being minimised? Trailing adviser commissions embedded in choice products and insurance# (output) Fund surveys Agree, but it is unlikely that relevant funds will be willing to disclose much in this space E5. Are other leakages from members’ accounts being minimised? Unclaimed superannuation (output) Regulator data Source of unclaimed super will be relevant. Anecdotally a significant proportion these days is likely to come from the informal workforce, including those who have since departed Australia. E6. Is the system providing highquality information and intrafund financial advice to help members make decisions? Availability of meaningful and comparable information on fees, product features (including insurance) and risks* (input) AIST endorses this indicator but cautions that member perception of availability of information is likely to be skewed by engagement. Thus not level playing field. Critical that member surveys stratify by characteristics such as age, gender, NESB, income and account balance. Of course, everyone conforms to PDS requirements, but the fact that most don't read those in detail if at all demonstrates how difficult this issue is. Further, difficulty in gaining agreement on RG97 demonstrates fractured industry views.
E6. Is the system providing highquality information and intrafund financial advice to help members make decisions? Member superannuation and insurance literacy#* (input) Member surveys, fund disclosures and case studies to provide evidence. AIST does not accept that member superannuation and insurance literacy is an appropriate indicator of whether the system is providing high quality advice. E7. Is the system providing products to help members manage risks over their life cycles and optimally consume their retirement incomes? Asset allocations by age cohort (across different market segments and products) (output) There is a vibrant debate across the superannuation industry on asset allocation as members age. There are a number of different approaches in the market. The presence of different approaches should be considered as an indication that different member preferences are being served in the market. Given the presence of different approaches in the market, an indicator around specific asset allocations by age would be ambiguous in terms of its meaning. In talking of members managing risks over their life cycles, is the PC putting itself forward as second guessing trustees as knowing what asset allocation is best for each market segment, age group and cohort? It is strongly arguable that existing commercial lifecycle products commence de-risking too early, which would clearly be an inefficient outcome. While we would expect to see more conservative asset allocations over the age
E8. Are principal−agent problems being minimised? Quality of investment committee and investment governance processes, including use of performance attribution analysis and risk management (input) This indicator is already covered by legislation and standards. APRA has determined that super funds must establish an investment governance framework (Prudential Standard SPS 530). An investment governance framework is defined as the totality of systems, structures, policies, processes and people to address the RSE licensee’s responsibilities with regard to investments of each RSE within the RSE licensee’s business operations. This includes generating returns to meet investment objectives while managing and monitoring all identified sources of investment risk. An indicator that focuses on “level of skills and standard of performance” is likely to be subjective and is not consistent with APRA’s Investment Governance standard. In relying on research by others, AIST expects that the Commission will have regard to research/reviews supporting the quality of investment processes in profit-to-member funds in Australia and internationally. Note that the relative performance of P2M funds in Australia in generating strong net returns to members demonstrates the effectiveness of their investment governance processes.
E9. Does the system overcome impediments to improving longterm outcomes for members? Introduction of new retirement income products#* (output) We agree with the Commission in stating that “Ultimately, an assessment of the sector needs to go beyond a simple examination of product diversity and levels of uptake, and focus on market and policy barriers to product development and the implication of those barriers for competition and efficiency” (p223, Draft report No. 2)). We note that the interaction of superannuation, tax and social security law has been a significant impediment to the development of retirement income products. Recent rapid policy development in this, aimed at removing disincentives to developing new product types, has opened new possibilities. Work on CIPRs is a prime example. Whether or not funds offer retirement income products and/or have refined them in recent years is a consistent transparent measure and applicable across all funds. It doesn't necessarily yield "level playing field" results, in that funds with younger, low balance demographics will have less demand for them. Small funds will have little capacity to offer them. Aggregated industry data not readily available. APRA does not collect it; it offers only number of pension accounts opened in the reporting year.
E11. Do funds offer value for money insurance products to members? Funds’ use of member information to inform product design and pricing#* (input) Fund surveys; case studies AIST member funds report that they consistently use member data such as age cohorts, account balances and the current investment patterns of members to develop their key investment and insurance strategies. For example, one fund has an over-representation of female members of child-bearing age who take time out of the workforce, and so is particularly mindful of downside protection. Other funds provide varying insurance defaults tailored to the needs of members who are self-employed, or those likely to be in casual or contract employment who do not receive employment benefits like paid sick leave. E11. Do funds offer value for money insurance products to members? Comparability of insurance product information disclosed by funds (input) Reviews by others; research firms Agree with this indicator. PC should engage researchers to review insurance disclosures in PDSs. E11. Do funds offer value for money insurance products to members? Average insurance cover by age band and market segment (output) Research firms Tailoring of insurance products by particular member types means that the averages will have little meaning in assessing whether products offered represent value for money.
E11. Do funds offer value for money insurance products to members? Proportion of complaints to the Superannuation Complaints Tribunal which are successful# (output) Regulator data Highly inappropriate indicator for this criterion, unless it is refined to relate only to insurance related complaints. E11. Do funds offer value for money insurance products to members? Number of members that nominate beneficiaries (input) Member surveys; fund surveys; research firms The indicator won't be equal across sectors, in that advised members would be expected to almost always nominate a beneficiary whereas there's not the personal contact at the point of signing up a default member to ensure that this occurs. E12. Are the costs of insurance being minimised for the level and quality of cover? Insurance premiums inside compared to outside superannuation for like policies (output) Insurer disclosures; research firms Agree with this indicator provide that it is benchmarked against minimum service standards for the industry. "Like for like" may be an issue, given that members in commercial retail funds are far more likely to be subject to high cost underwriting than is the case in profit-to-member funds.