PC report outlines super changes
The Productivity Commission has issued its report into the $2.8 trillion superannuation sector.
The report carries recommendations that the Commission says will help Australia’s super system adapt to better meet the needs of a modern workforce and a growing pool of retirees.
It takes aim at structural flaws — unintended multiple accounts and entrenched underperformers — which it says are harming millions of members, and regressively so.
“Fixing these twin problems could benefit members to the tune of $3.8 billion each year,” the Commission says.
“Even a 55-year-old today could gain $79 000 by retirement. A new job entrant today would have $533 000 more when they retire in 2064.”
The assessment of the super system revealed a fairly mixed performance across the sector;
- While some funds consistently achieve high net returns, a significant number of products underperform, even after adjusting for differences in investment strategy. Underperformers span both default and choice, and most (but not all) affected members are in retail funds
- 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 10 million) are unintended multiple accounts. These erode members’ balances by $2.6 billion 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
- Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50 000 — by duplicate or unsuitable (even ‘zombie’) policies
The Productivity Commission says inadequate competition, governance and regulation have led to these outcomes.
It found that 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 were shown to lack scale, with 93 (half of all) APRA‑regulated funds having assets under $1 billion.
The default segment was found to outperform the system on average, but the way members are allocated to default products has meant many (at least 1.6 million member accounts) have ended up in an underperforming product, eroding nearly half their balance by retirement.
The Commission also says regulations (and regulators) focus too much on the interests of funds and not members, inhibiting accountability to members and government.
It proposes a range of architectural changes including having the default be the system exemplar.
“Members should only be defaulted once, and move to a new fund only when they choose,” the Commission said.
“Members should also be empowered to choose their own super product from a ‘best in show’ shortlist, set by a competitive and independent process. This will bring benefits above and beyond simply removing underperformers.”