Australians are bamboozled by a superannuation system that leaves them billions of dollars poorer

Photo by Scott Barbour/Getty ImagesPeople wander through a maze of mirrored panels at the National Gallery of Victoria.
  • The Productivity Commission says Australians are being bamboozled by the $2.6 trillion super system, losing them billions every year in high fees, low returns and expensive insurance.
  • Structural flaws, including multiple accounts and entrenched underperformance, harm a significant number of members, mostly young and lower-income Australians.
  • Most, but not all, underperforming funds are in the retail segment.
  • One in four funds underperform, leaving some with almost 40% less to spend in retirement.

Australia’s almost 30-year-old compulsory superannuation is an outdated and structurally flawed system and sucks billions of dollars away from members each year, leaving many with substandard balances in retirement, according to an investigation by the Productivity Commission.

The report, Superannuation: Assessing Efficiency and Competitiveness, says too many are getting subpar returns at a substantial cost to their income and well being in retirement.

“The system suffers from two structural flaws — unintended multiple accounts and entrenched underperformance,” says Karen Chester, Deputy Chair of the Productivity Commission.

“Australia’s $2.6 trillion super system has become an unlucky lottery for many Australian workers and their families. The system is working well for many members, but not for all.”

Default funds, those into which employee super is paid unless they name another fund, are currently tied to the employer.

Many end up with another account every time they change job. A third of super accounts, or about about 10 million, are unintended multiples. The excess fees and insurance premiums paid by members on those accounts add up to to $2.6 billion every year.

“These problems are highly regressive in their impact, and they harm young and lower-income Australians the most,” says Chester.

“Most members are in funds that deliver good investment returns, but millions of members are in funds that persistently underperform — over one in four funds.

“Over an average member’s working life, being stuck in a poor-performing default fund can leave them with almost 40% less to spend in retirement.”

The commission says fixing entrenched underperformance and multiple accounts would lift retirement balances.

For someone aged 55 now, the difference could be up to $60,000 by the time they retire. For those just starting in the work force, they could be $400,000 ahead when they retire in 2064.

The commission has proposed a package of changes.

Members should be put into a default fund only once, when they start working.

They should also get to choose from a list of high-performing funds that have been identified by an independent and expert panel. And existing members should be able to readily switch to these funds.

And the commission says super funds need to do more to provide insurance that is value for money. Some get what’s known as zombie insurance policies they can’t claim on.

“And, as in other parts of the financial system, governance needs to improve — trustees of underperforming funds should be merging with better performing funds. And the best people with the right skills must sit on the boards of super funds,” says Commissioner Angela MacRae.

“All members should be able to engage with their super without being bamboozled.

“Members today face a confusing proliferation of products, some 40,000 options, and information they don’t understand. It’s hardly surprising that many end up in a bad product.”

Fixing the problems of unintended multiple accounts and entrenched underperformers could benefit members by $3.9 billion each year.

There’s a big difference between the top and bottom performing super funds, according to analysis by the Productivity Commission:

Source: Productivity Commission

In the decade to 2017, the top 10 MySuper products, all of them not-for-profit funds, generated a median return of 5.7% a year, well above the median of 4.7%.

Over the same time, 36 funds performed below the benchmark portfolio. And 26 underperformed by more than 0.25 percentage points and generated a median return of 3.9% a year. About 1.7 million member accounts and $62 billion in assets were in these underperforming funds.

The 26 underperforming products were made up of 12 retail, 10 industry, three corporate and one public sector funds.

A typical full-time worker in the median underperforming MySuper product would retire with a balance 36% or $375,000 lower than if they were in the median top 10.

If all members in the underperforming MySuper products had been in the median top 10, they would have collectively been better off by $1.3 billion a year, or about $770 each on average.

Australians pay more than $30 billion a year in fees on their super, excluding insurance premiums.

An increase in fees of just 0.5% can cost a typical full-time worker about 12% of their balance, or $100 000, by the time they reach retirement.

And the funds with the biggest fees typically have lower returns.

Total fees as a percentage of assets are on average about 1.1% but have been falling as a percentage, as this chart shows:

Source: Productivity Commission

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