Australia's superannuation system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees. Structural flaws - unintended multiple accounts and entrenched underperformers - are harming millions of members, and regressively so, according to the Productivity Commission.
Fixing these twin problems could benefit members to the tune of A$3.8bn ($2.7bn) each year. A new job entrant today would have A$533,000 more when they retire in 2064, says the Commission in its report entitled “Superannuation: Assessing Efficiency and Competitiveness” that was released last week.
The report highlights several key points, including:
- While some funds consistently achieve high net returns, a significant number of products underperform, even after adjusting for differences in investment strategy.
- Evidence abounds of excessive and unwarranted fees in the super system. Reported fees have trended down but a tail of high-fee products remains entrenched, mostly in retail funds.
- Compelling cost savings from realised scale have not been systematically passed on to members as lower fees or higher returns. Much scale remains elusive with too few mergers.
- A third of accounts (about 10mn) are unintended multiple accounts. These erode members’ balances by A$2.6bn a year in unnecessary fees and insurance.
- The system offers products that meet most members’ needs, but members lack simple and salient information and impartial advice to help them find the best products.
Insurance is not delivering value
- Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over A$50,000— by duplicate or unsuitable (even ‘zombie’) policies.
- Inadequate competition, governance and regulation have led to these outcomes.
- Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including product proliferation). Many funds lack scale, with 93 APRA-regulated funds — half the total — having assets under A$1bn.
- The default segment outperforms the system on average, but the way members are allocated to default products has meant many (at least 1.6m member accounts) have ended up in an underperforming product, eroding nearly half their balance by retirement.
- Regulations (and regulators) focus too much on the interests of funds and not members. Subpar data and disclosure inhibit accountability to members and government.
- Policy initiatives have chipped away at some problems, but architectural change is needed.
- All trustee boards need to steadfastly appoint skilled board members, better manage unavoidable conflicts of interest, and promote member outcomes without fear or favour.
- Regulators need clearer roles, accountability and powers to confidently monitor trustee conduct and enforce the law when it is transgressed. A strong member voice is also needed.
Commenting on follow-up action on the Productivity Commission's report, Australian Treasurer Mr Josh Frydenberg said, "The government will await the final report of the banking royal commission, which is examining the conduct of super funds and the regulators, before finalising its response to the Productivity Commission report into superannuation." He was referring to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which conducted hearings last year. Its final report is scheduled to be submitted by 1 February 2019.
On 17 February 2016, the government tasked the Productivity Commission to develop criteria to assess the efficiency and competitiveness of the superannuation system and to develop alternative models for allocating default fund members to products.
Superannuation is compulsory for most workers and, with over 15m members collectively owning over A$2.trn in assets, it plays a central role in funding Australians’ retirement.