This little piggy needs a big stick

The Productivity Commission’s choice of the humble pig to sell its superannuation reforms yesterday was apt.

The commission employed cartoon pigs in various guises — dressed in top hats, in mud, et cetera — to ram home the message that super is siphoning billions of dollars a year in unjustified fees and insurance premiums from unwitting fund members’ savings.

Twenty-five years of compulsory superannuation has created a massive trough, worth $30 billion a year, attracting snouts that have grown huge and resistant to the sorts of changes the commission proposed yesterday.

It’s extraordinary that a household with a combined $250,000 in super pays about $2750 a year in fees — probably more than for electricity and gas combined — based on the average level of fees charged in 2017 (1.1 per cent). A third of super member accounts are unintended, costing members more than $2.6bn a year in excess administration costs and insurance premiums. And fund members face a bewildering 40,000-plus investment options.

The commission’s 571-page report is testament to the power of vested interests. It’s been obvious for years that compulsory super exists mainly to enrich the industry and provide tax-minimisation opportunities for higher-income earners. It’s done little to curb Age Pension outlays and a lot to erode confidence in the tax system.

Yet little has changed in practice, despite review after review. Five years on, the Labor government’s MySuper reforms have failed, doing little in practice to reduce fees or improve returns.

A least the commission avoided flying pigs in its report, which could have raised questions about its confidence whether anything much will change this time.

The commission’s lengthy diag­nosis is correct. And its core proposal to nominate a list of 10 “best in show” funds — picked by a panel of ­experts — would, over time, make funds more efficient and competitive.

But it surely over-estimates the willingness and ability of individuals to choose a super fund, especially when they are young, even from a streamlined list. Fin­ancial literacy is, and always will be, shockingly bad. The human brain isn’t changing any time soon.

The commission found that almost 60 per cent of members did not understand their fees and charges, while about 40 per cent lacked an understanding of basic investment options and terms such as “growth”, “balanced” and “conservative”.

“The ordering of the (short-listed) products would be randomised for each employee to remove ordering biases,” the commission said, referring to a new list from which employees would choose their own fund.

If the Productivity Commission’s confidence in people’s ability to select one of a handful of funds is (rightly) so low that the funds’ names must be randomised so as not to ad­vantage the fund at the top, then a­­ ­­no-frills, government-run fund should be an ­option. Without a powerful buyer of funds-management services with a big stick, the industry has little incentive to become more ­efficient.