Australians entering the workforce would be up to $533,000 better off in retirement under plans handed to the Morrison government that would weed-out scores of under-performing superannuation funds and force regulators to focus on the interests of consumers.
In its final report into the superannuation system, the Productivity Commission argues people in their mid-50s stood to gain up to $79,000 in retirement from changes that would put both the industry and retail sectors under increased scrutiny and competition.
Admitting some funds are likely to exit from superannuation altogether, the commission has proposed a system that would drive perennial under-performers out of the market with millions of Australians potentially moved into stronger funds.
The commission has strengthened a series of proposals from its original draft report into the superannuation sector, which has $2.7 trillion in assets under management.
One of the biggest moves by the commission is a plan to force all APRA-regulated funds to carry out an annual outcome test across their portfolios.
If investment options fell short of their stated benchmark by more than half a percentage point a year over a rolling eight year period then the fund would have 12 months to sharply lift performance.
If that failed, the product would have to be withdrawn from the market and the super fund member moved to a better performing option. The new system would start from the end of next year for MySuper products.
Up to 2017, 17 MySuper funds covering 1.6 million members and holding $57 billion in assets averaged at least a quarter percentage point their own benchmark returns over the previous 13 years.
The commission estimates getting out of the bottom 25 per cent of funds delivers an average gain of $188,000 to someone entering retirement.
The Productivity Commission has retained its earlier proposal to overhaul how new workers are given a default super fund.
About 450,000 people with $1 billion in super contributions enter the workforce for the first time every year. These people would be offered a top 10 “best-in-show” list of the nation’s best performing funds. This fund, unless the person decided to move their retirement income to another fund, would stick with the worker through life.
The list would be chosen by an expert panel, a proposal that prompted concern that it may be loaded with representatives from a particular part of the superannuation sector or with certain political views.
The commission has proposed the panel be chosen by a group at arm’s length from the government of the day, with the commission suggesting the Reserve Bank governor, the head of the Parliamentary Budget Office and the chairman of the Australian Competition and Consumer Commission plus a representative of consumer interests.
The Productivity Commission has also stuck with its proposal to make insurance through superannuation opt-in for people under the age of 25. Insurance would also end on accounts where no contributions have been made for at least 13 months, with the commission finding insurance was effectively eating away the balances of these “accounts.
Some accounts to lose up to $50,000
The commission estimates some accounts lose up to $50,000 because of duplicate or “zombie” unsuitable policies.
Reducing duplicate super accounts, slashing the impact of insurance fees, increasing competition and getting people into better performing funds is estimated to deliver a $3.8 billion a year benefit to fund members.
For a person taking their first job today and retiring in 2064, the commission believes the changes will give them up to $533,000 when they leave the workforce. For a 55-year-old, the changes could see their retirement nest egg up to $79,000 larger.
The commission has also become more aggressive between its draft and final report in relation to fees.
It now wants trailing commissions for financial advisers in the superannuation sector to be banned as soon as practicable while fees would be done on a cost-recovery basis so as to prevent cross-subsidies.
In a sign the commission wants whichever party wins this year’s election to go even further, it has also recommended an independent inquiry into the total retirement incomes system.
This would canvass the role of superannuation, the age pension, how they interact with each other, their impact on federal finances and the impact of the current $450-a-month threshold for the superannuation guarantee.
It wants the inquiry to be done ahead of the next planned increase in the super guarantee which is due to increase to 10 per cent from 9.5 per cent in mid-2021.
Treasurer Josh Frydenberg said the report had found the current superannuation default system was outdated with millions of unintended multiple accounts and too many under-performing funds.
“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 said.
“Getting the superannuation system operating as effectively as possible, maximising returns and operating in the best interests of all members is not only important for its 14.8 million members but for the health of the Australian economy overall.”
The commission has also backed the production every two years of a “state of superannuation” report by APRA and ASIC that would review the performance of the system including fees, low-balance inactive accounts and the choice outcomes tests.
Separately, a report would be done every 5 years into the effectiveness of the MySuper and outcomes tests to ensure they are meeting their objectives.
Every decade, the government of the day would commission an independent public inquiry into the superannuation system including a review of the “best-in-show” process to ensure it is working as intended.
In a proposal that will cause problems for the Labor Party and the union movement, the Productivity Commission wants the term of any workplace or enterprise agreement that restricts choice of funds to be invalidated.
While that will anger the ALP, the retail super sector will face a tough battle to woo new members with the commission confirming most under-performing funds are for-profit.
Regulators the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission also come under pressure to change from the commission, which argues both need to focus on those who have money in super.
“Regulations (and regulators) focus too much on the interests of funds and not members,” the commission found.
Business Insider Emails & Alerts
Site highlights each day to your inbox.