Overhaul to boost superannuation savings by $3.8bn

Reforming the super sector would boost retirement savings by $3.8bn a year, according to a Productivity Commission review.

Financial services royal commissioner Kenneth Hayne received the PC report before Christmas and is likely to adopt some of the recommendations.

Ridding the superannuation sector of persistently underperforming funds, clamping down on the proliferation of multiple accounts, and letting workers choose funds from a simple list of top performers would boost retirement savings by $3.8 billion a year, according to a landmark Productivity Commission review.

The sweeping blueprint to drive better outcomes in the $2.8 trillion super sector piles further pressure on the government to adopt the central proposal put forward by its key economic policy adviser, finding that allowing new employees to choose from a list of the 10 best super funds would boost retirement balances by an average of $165,000 over a lifetime.

The proposal, first put forward in the PC’s interim report in May last year, has so far received limited support from the Coalition and Labor, amid concerns it would reduce the more than 200 regulated funds in the market and constrain competition, while breaking the link between the super system and the industrial relations movement.

However, new job entrants would have their balances boosted by more than $500,000 by the time they retire if all proposals were adopted, including forcing tougher regulatory standards on funds, forcing the prudential regulator to revoke the licences of “chronic underperformers”, and carving off the “default” process of allocating the savings of dis­engaged workers from the enterprise bargaining system.

Even older workers would benefit from the proposals, with a 55-year-old expected to collect an extra $80,000 by retirement if the government takes up the plan for boosting returns and forcefully exiting fee-gouging funds across the sector.

The 722-page report, due to be released today, is a taste of the likely recommendations to be put by financial services royal commissioner Kenneth Hayne, who is due to hand his final report to the government this month.

 

The former High Court judge and his solicitors received the PC report before Christmas and are likely to adopt some of the recommendations as their own.

The review was steered by PC deputy chair Karen Chester, who joins the Australian Securities & Investments Commission as deputy chair at the end of the month, where the urgency for tougher standards for regulators will be taken up.

Josh Frydenberg described the report as “vitally important” and said it revealed the “structural flaws” in the super system.

“The default system, the Productivity Commission finds, is outdated, resulting in millions of unintended multiple accounts,” the Treasurer said. “There is also the persistent underperformance of a number of superannuation funds, which is a result of a lack of effective competition, member disengagement and regulators that the Productivity Commission finds need to be more focused on members’ needs.”

Because of a lack of competition, Australian savers pay some of the highest fees in the world — totalling more than $30bn a year. Five million members, accounting for $270bn worth of assets, are trapped in under­performing MySuper funds, despite them being legally required to charge low fees. Over a lifetime, the cost of being in an underperforming fund can be a difference of $660,000.

The PC has proposed stronger enforcement of underperformers, by requiring the Australian Prudential Regulation Authority to force the exit of funds that have lagged over an eight-year period if they fail to turnaround performance in 12 months.

“Such consolidation involving the exit of chronic underperformers is long overdue and should be welcomed,” the PC said. “Indeed, that is the raison d’etre of the changes: to significantly reduce the incidence of member harm by lifting fund performance and, where funds cannot achieve this, to encourage and, if necessary, compel mergers or exits.”

While Coalition MPs have taken issue with the best-in-show list of top performers proposal, amid concerns it could result in funds “herding” to game the system, or reduce choice in the default sector, Labor is also wary the proposals would impact on the flow of money into the tail of small union-and-employer-backed funds.

At present, the industry fund sector takes the lion’s share of default super, where the savings of the least-engaged members are managed, thanks to deals negotiated through enterprise bargaining agreements.

This pool is worth about $1bn a year in contributions from first-time workers. But the PC has rebuked the concerns in its final report. “A best-in-show list is critical to improving member outcomes,” the PC said. “Lopping off the tail alone would produce better outcomes, but not the best outcomes.” Unshackling the default funds from the employer and allowing members to move into a super fund chosen from a shortlist of best funds would weed out underperforming funds and deliver higher balances.

Fund selectors would be ­appointed by a panel comprising the heads of government agencies such as the Reserve Bank.

While policing underperforming funds out of the system would lift savings by $188,000 over a lifetime, allowing new workers to ­access a non-binding list of best-in-show funds would nearly double the benefit by an extra $165,000. Adding in the prospect that members are not defaulted into underperforming funds, the PC expects retirement balances would be boosted by more than $900,000.

The proposed panel to select the best funds — unlike the Bill Shorten-appointed Fair Work Commission default super expert panel that was abolished in 2014 after the wealth management industry complained it was not ­independent — would be set up at arm’s length of government but accountable to it.

To further ensure independence, panel appointees would follow those procedures used to appoint the independent Parliamentary Budget Officer, which requires the sign-off of both the presiding officers of parliament and approval by a parliamentary committee.

The panel’s decision would focus on which funds were likely to continue to deliver high net _returns and account for a fund’s governance standards, products and risk profile, and would be subject to judicial review.