If the Productivity Commission made one thing clear in its draft report Superannuation: Assessing Efficiency and Competitiveness, it is that default super can be a ‘lottery’ for many Australians.
Most Australians starting a new job do not select their super fund, leaving the decision up to their employer.
And roughly 30 per cent of employees don’t have a choice, with their fund determined by an enterprise bargaining agreement or the industrial award.
What the Productivity Commission has laid out in stark terms is the disparity between a good default super (‘MySuper’) product and a poor-performing fund.
A 21-year old with a starting salary of $50,000 could end up $375,000 (or 36 per cent) worse off by age 67 if they are put into an underperforming MySuper product as opposed to one of the top 10 funds, the report found.
If all members in underperforming MySuper funds were put into a top 10 product, they would be better off by a staggering $1.3 billion a year, says the Productivity Commission.
The report also noted the difference in performance between not-for-profit industry funds and for-profit retail funds.
Between 2005 and 2016, not-for-profit funds returned on average 6.8 per cent per year, according to APRA data – significantly above retail funds, which delivered 4.9 per cent on average per year.
The outperformance of not-for-profit funds has long been touted by the industry super sector, and the retail sector is always quick to accuse the former of failing to compare apples with apples.
The argument made by retail funds is that many of their members are at a stage in their lives when capital preservation is more important that outsized returns.
To compound matters, about a third of default super accounts (10 million) are ‘unintended multiple accounts’ – that is, funds that are charging a separate set of fees as well as a separate insurance premium.
If there were no multiple accounts, said the report, Australians would be collectively better off to the tune of $2.6 billion a year.
In an attempt to solve the problem and make super less of a ‘lottery’, the Productivity Commission has made several recommendations in its draft report.
First, instead of defaulting into a new fund every time they start a new job, Australians should only be defaulted once – after which they would retain the fund for life.
Second, a single ‘best in show’ shortlist should be created of up to 10 default super products, from which new employees would choose a fund.
The shortlist would be selected by an independent panel of experts who would put a heavy weighting on investment strategy and performance.
The ‘best in show’ concept would have profound ramifications for the super industry, and would end the current process whereby the Fair Work Commission oversees the selection of default funds in modern awards.
For a start, the top 10 performing default funds – over 10- and 20-year time frames – tend to be industry funds.
Being left out of the ‘best in show’ shortlist would be devastating for the worst-performing funds, which would effectively be frozen out of the default market.
It would almost certainly lead to more mergers between super funds, which is a stated aim of both the Productivity Commission’s draft report and APRA.
Both sides of the industry have been cautious in voicing their support for the idea.
Industry funds have embraced the report’s endorsement of their outperformance, but they are firmly opposed to the dismantling of the Fair Work Commission (a Labor-created institution) in favour or an “unproven” new government agency.
Retail funds, represented by the Financial Services Council, were quick to champion the inclusion of more ‘choice’ in default super but were also wary about the proposed independent panel which could become “politicised”.
For the government’s part, Minister for Revenue and Financial Services Kelly O’Dwyer has welcomed the parts of the report that support the Federal Budget measures to consolidate multiple accounts and limit fees and insurance premiums.
But it remains to be seen how the government will respond to the final Productivity Commission report, which has been pushed out due to delays in data collection and consultation “with the timing to be advised”.
It is likely that the final report (and the government’s official response) will come after the royal commission puts superannuation executives in the witness box later this year.
Super is a $2.6 trillion pool of money and will always be fiercely contested by the financial services industry.
The Productivity Commission’s relatively straightforward fixes for unintended multiple accounts and “entrenched underperformers” could deliver a collective benefit of $3.9 billion per year to members.
The entrenched underperformers won’t give up their piece of the super pie without a fight, but one thing is for sure – Australians deserve better than a lottery when it comes to their retirement.
Tim Stewart is the editor of InvestorDaily.
