Great superannuation rip-off exposed

Some Australians could retire with an extra $400,000 under draft Productivity Commission proposals for the biggest super reform in three decades.

The biggest shake-up of the $2.6 trillion superannuation sector for three decades would unshackle the retirement system from workplace bargaining agreements, end the proliferation of multiple ­accounts and rip $1 billion a year in contributions out of under­performing funds, under the proposals of a draft Productivity Commission report.

The proposals, if adopted, could give some Australians an extra $400,000 in their nest eggs over the course of their working lives.

Scenarios: How your super could be affected

After a two-year review, the Productivity Commission has spurned the wishes of the wealth management industry, which wanted the $500 billion default super market to be open slather for all competitors.

Instead, the commission recommends a body be established to help nudge savers into the best-performing funds in the country.

The Productivity Commission’s scathing review of the sector found many savers had been shunted into underperforming funds, others were dudded by rampant fee gouging, there was a lack of competition among big default funds, and too much money was being spent on bells and whistles, such as smartphone apps, in the high-fee retail fund sector.

Financial Services Minister Kelly O’Dwyer yesterday said the commission’s 571-page report had “completely vindicated” the government in its push to cap fees for fund members with low balances.

“Super has become worse than a honey pot; it’s a trough,” Ms O’Dwyer said.

Productivity Commission deputy chairwoman Karen Chester said the super system had ­become an “unlucky lottery” for many Australians and called on the government to stop the proliferation of multiple accounts and prevent workers being defaulted into underperforming funds.

“The system is working well for many members, but not for all,” Ms Chester said.

 

Recommendations to rid the sector of underperforming funds and drive mergers in the union and employer-backed industry fund sector represent a boost to Ms O’Dwyer’s stalled reforms for better governance in the industry super sector. However, some of the biggest industry funds have been shown to be delivering the best outcomes for savers, while the for-profit retail fund sector has been found to be delivering “significantly” worse returns.

More than 100 smaller funds, many union-backed industry funds, will be pressured to merge as, under the commission’s proposals, they will lose out on their share of the $1bn contributed each year by new workers. This will be likely to spark retaliation by industry bodies.

The commission said many fund directors did not have the right skills, and mergers between funds had been scuppered because directors did not want to lose their jobs.

The government has been given a copy of the draft report and the Productivity Commission is expecting reforms to be adopted by 2020. Ms O’Dwyer has already taken aim at fee gouging in the super system, unveiling proposals in the federal budget to cap fees on low-balance super accounts, limit life insurance charged to younger savers and reforms to help consolidate lost and forgotten funds.

About 70 per cent of Australians hold life insurance through their super account, where cover is provided on an opt-out basis.

The proposals aim to end a system that leaves millions of members being defaulted into funds that persistently underperform — a quarter of all funds. The commission also takes aim at multiple accounts.

Productivity Commission deputy chairwoman Karen Chester said the super system had ­become an ‘unlucky lottery’ for many Australians. Picture: Aaron Francis

Because default funds are tied to the employer, not the worker, the number of multiple accounts in the system has exploded as workers change jobs, with one in three accounts now a multiple.

Excess fees and insurance premiums on the 10 million lost and forgotten accounts in the system cost savers $2.6bn every year, ­hitting younger savers and low-income workers the hardest. A typical worker with two accounts will be more than $50,000 worse off at retirement than a saver with a single fund.

Ms Chester said allowing members to be defaulted only once into a super fund chosen from a shortlist of best funds would weed out underperforming funds and deliver far higher ­retirement balances.

“We’ve identified two structural flaws in the system that are a great expense to many members. They’re easily fixed but you have to fix them together,” she said. “You can’t get rid of unintended multiple accounts by allowing members to default only once if you haven’t got rid of the tail of underperformers.”

Adopting the recommendations now would help a 55-year-old save an extra $60,000 by retirement and a young worker more than $400,000.

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.

Instead of the present default funds, the commission’s proposed independent panel of experts would construct a list of 10 or so “best in show” super funds to help guide savers into products that deliver the best returns, don’t ­unnecessarily erode savings through onerous fees and ensure young savers are only defaulted into one account for life.

The proposed panel — 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, outside the FWC and subject to judicial review.