Default super tender process: We will not be doing it Chilean-style

The Association of Superannuation Funds of Australia (AFSA) has published a research piece that says no to a Chilean-style tender process to allocating workers to a default super fund. 

Alternative models are being examined by the Productivity Commission regarding default super models, learning lessons from other countries and their processes. The Chilean government  introduced a tender process to solve problems we do not have in Australia, whereby there are just a few pension fund providers, and people didn't have access to low-cost funds. 

The Chilean pension system has very few providers in the market,  with people not having access to low-cost options. Our system is far more competitive, with many funds and choice of fund being one of the latest rounds of security for members, to ensure we have a fair system.  

The Chilean system would inevitably result in funds developing products that focus on lower fees, but at the expense of long-term returns and a loss of key services like advice. Overall, this would mean worse outcomes for our superannuation system and Australians. The range and quality of products would decrease over time. 

In Chile, the system is not delivering on its key promises, which were to increase market competition - since the first tender round in 2010, only one new pension fund operator has entered the Chilean marketplace, with just one pension fund participating in the latest tender round. This indicates a failure. 

Additionally, successive tender rounds have dropped admin fees for those that won tenders, but the rest have remained higher. This means the system has reduced some fees, but not all. Considering the system relies on fees, those  that win the tender are incentivised to reduce resources they would perhaps normally have been devoted to investment management and other services. This reduces the overall offering due to a drop in resources for the fund. 

After successive tender rounds, the risks for the funds that win tenders has increased. Fees are pushed down for the tender holder, reducing robustness of the fund and ability to withstand financial shocks, like economic downturns. 

In Chile, all workers entering the workforce for the first time become automatic members of the tender holder, which is conducted every two years. It is based on the fund that offers the lowest administration fees.