The Turnbull government is considering a radical shake-up of Australia's superannuation system that would pit banks and industry funds against each other for the right to manage the deposits of every new entrant for at least two years.
The shift, detailed in an issues paper released by the Productivity Commission on Tuesday, would centralise the decision about which default fund new employees were placed into, taking it out of the hands of employers and making it the result of a national tender.
Calculations by the Grattan Institute suggest it could slice $1.5 billion per year from the fees charged by default funds and put downward pressure on the fees charged by other funds.
Treasurer Scott Morrison has asked the Commission to examine the idea of a formal competitive process, commended by the Murray financial system inquiry as likely to reduce the costs for funds and compliance costs for employers.
In Chile, which has had the scheme since 2010, the firm that won the first national tender charged fees 20 per cent lower than the previous average. The firm that won the second tender, in 2012, charged fees 43 per cent lower. The firm that won the third, in 2014, charged fees 65 per cent lower.
The Commission says existing default fund members would not be required to switch, but would have to be offered the same low fees as new default fund members if they chose to switch.
It says one model would be for the government to choose a single default fund for all new employees for two years, another would be for it to choose more than one fund and assign employees either randomly or on the basis of characteristics such as age.
Grattan Institute productivity growth program director Jim Minifie said his work suggested a national tender could eventually wipe $750 million off administration fees and up to another $800 million off management fees.
Big corporations already run tenders for default funds and get much better fees.
"Let me give you an example. One of the big mining companies put out for tender a very significant amount of employee super, and a retail fund won that it for an investment fee of 0.45 percentage points. That was well below the 0.61 points it charged on the retail market for an identical investment product."
A spokeswoman of the Association of Superannuation Funds said it was considering the issues paper and would be making a submission to the inquiry. David Whiteley, chief executive of Industry Super Australia was opposed to the change, saying it was "hard to justify redesigning a system that has not as yet been given the opportunity to operate".
The Fair Work Commission had been tasked with selecting shortlists of funds from which employers under each award could choose but had not begun the task because Government had not reappointed the required expert panel.
The Commission's paper says the simplest way of constructing a tender would be to conduct a reverse auction awarding the work to the firm offering to charge the lowest fee, as happens in Chile. However, that carried with it the risks that funds would offer "overly conservative investment strategies and poor-quality services in order to lower costs".
These could be overcome by stipulating asset allocation ranges or requiring that funds disclose their true costs as a condition of participating in the tender.
Dr Minifie said a refinement might be to publish the performance of each member's fund on their e-tax form alongside the performance of the winning default funds, inviting them to tick a box in order to switch.
