In the third part of the Productivity Commission’s examination following the ‘Murray’ Financial System Inquiry, they reported this week on the efficiency and competitiveness of our super system and proposed a new default super model. They found two fundamental flaws working against member interests.
- Many people have unintended multiple accounts because super relates to a job or employer rather than to the member and;
- There is persistent under-performance by too many funds – one in four funds have persistently fallen short of the mark over the past decade.
These two flaws encumber the retirement savings of young people, workers on low incomes and workers in and out of the workforce. The commission found the super savings of millions were wasting away in under-performing funds, significantly reducing retirement balances. They found union-affiliated “industry” funds delivered 6.8% p.a. average returns compared with 4.9% from bank-related “retail” funds, though some industry funds under-performed. Of the under-performers, 45% were retail funds, 30% industry, 15% corporate and 10% public sector funds.
What could change?
The Commission found that defaulting into a single top-performing fund could lift the retirement balance of the median 55 year old by up to $61,000 when they retire. Someone entering the workforce now could be over $400,000 better off when they retire in 45 years or so. Some members also don’t get value out of insurance in superannuation; and retirement balances can be significantly eroded through duplicated or unsuitable policies. The Commission also called for stronger fund governance rules.
Only 5 funds out of 208 gave the Commission information on their rates of return across all 14 assets classes, with 71% not responding about fees for related parties. MySuper products were legislated 6 years ago aiming for low-cost, simple products employers could choose as a default fund. But the Commission found ‘MySuper’ changes didn’t sufficiently lift the workplace relations constraints that limit fund competition for employers and members.
The Commission Proposal
So, the Commission has proposed an independent, expert panel to select the 10 best performing no-frills superannuation products to act as default super funds. Selection criteria would cover fees, investment strategy and good prospective returns with preference for funds with independent directors; international funds would be permitted to compete with local ones. Though the government has not immediately adopted the expert panel idea, it would remove super from the industrial relations system, breaking union-controlled default money flows through awards and agreements.
The commission estimates 33% of super accounts are unintended multiple accounts. They propose to stop new unintended accounts and insurance policies being created by choosing from a simple quality list of funds. Members would remain with their default fund for life unless they wish to switch. This proposal could lift overall performance of the super system by setting a value/quality benchmark. Legislation is needed to remove super from awards and workplace agreements that now prevent a million people from choosing their own fund.
The commission also criticised the Australian Prudential Regulation Authority and Australian Securities and Investments Commission, particularly regarding missing enforcement action for bad behaviour and the lack of good data for members.
So, what do we think of all this?
What this latest report really shows is that people need to engage early and take interest in their super, controlling it into one robust fund while ensuring adequate life insurance cover.
We often encourage early savers we meet to choose one low cost, well performed industry fund (or public sector fund) as a good place to start accumulating their superannuation. In choosing, care is needed to not chase past returns since a good quality fund with recent poor returns may be just about to come back to trend with a rush. They also need adequate life and income insurance until they’ve saved enough to absorb this risk themselves. Super only provides part of this cover and it’s unwise to duplicate cover with multiple funds – because in a claim, duplicated insurers may dispute their income protection liability, leaving you at risk.
Once people accumulate $300,000 or more, they often contact us wanting more control and strategic input with this larger amount. This is reflected in the average industry fund account balances of $100,000 or so. Apart from strategic guidance, we’re able to create tailor-made super funds that provide better control for them on larger amounts. Note: last September, industry super funds were forced to change how they disclose their fees. So, their fees are now shown rather higher – disclosing costs related to unlisted infrastructure and property investments that can have higher costs but potentially better returns.
We believe in a higher standard of financial advice, free from product bias and conflicts of interest.
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.