Monday, May 28, 2018

The PC's fix for our multibillion super 'mess'

The biggest shakeup in the history of Australia’s $2.6 trillion superannuation system would see new workers able to choose an approved high-performing fund for life, saving as much as $407,000 by avoiding underperforming funds and multiple accounts.

A landmark Productivity Commission review has found that almost one third of default super accounts are chronic underperformers, actually costing members more than if they had invested in the underlying assets themselves and paid management fees. Another third, some 10 million, are unintended multiple accounts whose extra fees and duplicate insurance policies cost members $2.6 billion per year despite decades of government programs aimed at encouraging members to consolidate accounts.

“The government’s efforts are about sweeping up some of the mess. We want to do that as well, but we also want to stop the mess reoccurring,” said inquiry chairman and Productivity Commission deputy chief Karen Chester.

The Commission finds that “absurdly,” many accounts are tied to jobs rather than members, forcing Australians to accumulate accounts as they switch jobs unless they make active decisions to merge them.

Some of the insurance policies they accumulate are “zombies” unusable because of rules that prevent people claiming more than one income protection payout.

It wants all new workforce entrants to be shown a dropdown menu of up to 10 "best in show" top performing funds when they apply for a tax file number. The 10 would be chosen by an independent panel every four years. Employees would be free to choose a fund not in the top 10 or to make no choice, in which case they would be randomly assigned to one of the 10 best performers.

Laboratory experiments conducted for the Commission showed that 95 per cent of people presented with the drop down menu made a choice, either for one of the top 10 or for another fund they knew about, or for a self-managed fund.


The changes would remove the power of the unions, employers and the Fair Work Commission to assign default funds through industrial awards and enterprise bargains.

Indicative calculations by the Productivity Commission suggest that the “overwhelming majority” of the top 10  would be employer and union-controlled industry funds, as they perform much better than bank-owned retail funds.

But industry funds are also well represented among the 26 worst performing default funds, accounting for 10 over the past decade, compared to the for-profit sector’s 12.

Asked to identify the worst performing default funds, Ms Chester said that wasn’t the point of the report. “If we were to name funds it could make things worse by sparking a run on those funds,” she said. The Commission’s draft recommendations would ease bad performers out of the system gradually.


Almost half a million people join the workforce every year, accounting for $1 billion of super contributions in that year alone, meaning the changes would deprive poorly performing funds of new members, encouraging the trustees to consider whether they wanted to remain in business. Each of the one in seven workers who change jobs every year would also be shown the list of the top 10 and invited to change or consolidate their accounts.

Financial planners would also be encouraged to recommend funds from the top 10 list or to to show reasons why they hadn’t under a rule known as ‘if not, why not?’

Ms Chester said that of all the inquiries she and her fellow commissioner Angela McRae had worked on, this set of recommendations produced the “best bang for buck”.

“It could be worth 3.9 billion per year. I don’t think you can overstate the impact.” she said.

The Commission believes its analysis of Australia’s superannuation system is a world-first. “As far as we know, nobody in Australia nor anybody internationally has previously assessed the performance of a superannuation or a pension plan system,” Ms Chester said. “One of the reasons it is hard is that there are more than 40,000 super products, a number that makes it hard for consumers to make decisions.”

“We took the stated asset allocation of each MySuper fund and compared its performance to that of the underlying assets, making allowance for fees. It gave us a measure of whether the fund managers added or subtracted value. Astonishing, around a third consistently subtracted value. All were default funds.”

The Commission wants the list of MySuper approved products scaled back by up to one third and the poor performers removed. “The limbo bar has to be significantly heightened,” Ms Chester said, adding that she was not aware of any funds that had ever applied for MySuper authorisation that had failed to get it.

Only 114 of the 208 funds surveyed by the Commission responded, and only 5 were able to detail their net investment returns by asset class.

“I don't think you can overstate our professional disappointment with the content of the responses to the questions that really mattered,” Ms Chester said. “It constrained in doing our analysis. We will be writing to all those who haven’t properly responded on Tuesday morning asking them to complete their homework so that we can complete our analysis.”

Financial Services Minister Kelly O’Dwyer backed the Commission saying the funds that had not properly responded were showing “contempt for the Australian people.

“This is a government mandated system. They are thumbing their noses at millions of Australians, she said.

The Commission had backed the government’s determination to end multiple insurance policies, consolidate super accounts and reunite members with their lost super.

Its ideas were clever and would need to be carefully considered by the government. The Commission’s report is a draft and will be followed by a final report with firm recommendations by December.

In The Age and Sydney Morning Herald