Productivity Commission’s illogical take on super

Josh Frydenberg was wise to releas­e the final report of the ­Productivity Commission into superannuation earlier this month. That has left some space before the final report and recommend­ations of the banking royal ­commission are revealed on ­Monday.

In reality, there was not much difference between the draft and final reports, with the commissioners sticking with the particularly daft idea of best-in-show funds being used as the basis for default superannuation contrib­utions where workers fail to nomin­ate a fund.

There was, however, some interestin­g discussion in the final report about delaying any further increase in the contribution rate, which is now 9.5 per cent, until after a broad review of retirement incomes policy is undertaken.

Among the suggested topics to be discussed were: the net impact of compulsory superannuation on private and public savings; the distributional impact of compulsory super across the population and over time; the interactions between superannuation and other sources of retirement incomes (most notably the Age Pension); the impact of super on public financ­es; and the case for and against the non-indexed $450 monthly contributions threshold.

In truth, we already have the requir­ed information on these topic­s and most of it is not supportive of compulsory superannuation, let alone an increase in the contribution rate.

We know, for instance, that compulsory super will ultimately lead to less reliance on the Age Pension — or at least the full pensio­n — but that the cost of the associated tax concessions overwhelms this fiscal benefit.

One estimate by actuarial firm Rice Warner puts the percentage of GDP devoted to the Age Pensio­n as falling from the current 2.7 per cent to 2.5 per cent in 2038 because of superannuation. Without super, it is asserted that this percentage would be 4.6 per cent.

The trouble with this analysis is that it is partial, failing to take into account the annual costs of the tax concessions associated with superannuation. According to the Grattan Institute, if these costs are taken into account, it is not until 2060 that compulsory super begin­s to pay for itself. And were the costs of these concessions to be recouped, the date is closer to 2100.

We also know that compulsory super is a truly dud product for low-income earners, who are forced to forgo current consumption in order to knock off their full entitlement to the Age Pension when they retire.

This latter effect is akin to a tax, and note that the rate of tax is 50 per cent, given the taper rate in the Age Pension as assets rise above a certain figure. But here’s the real kicker: low-income earners are those most likely to bear the inordinate cost of unwittingly holding many accounts, including accounts with unwanted and useless insurance. There are about 10 million of these multiple account­s, with a third of workers having more than one account.

While there is much emphasis placed on the impact of poorly performing funds on individuals’ final retirement cash balances in the media, the report makes it clear that the much larger gain (about two-thirds) is achieved by removing these multiple accounts.

About $2.6 billion of members’ account balances are eroded each year because of multiple accounts, compared with $1.2bn because of poorly performing funds.

This is where the superannuation funds and Labor are on thin ice. The funds have a vested interest in retaining these multiple funds because of the associated fees and charges.

Labor knows that something must be done but will side with indust­ry super funds rather than support the government’s proposal for the Australian Taxation Office to automatically consolid­ate accounts by merging inactive ones with active ones.

The industry super funds maintain they have plans to facilitate the consolidation of accounts but this does not involve members sticking with their first fund.

Moreover, some of the funds behave unethically when it comes to members’ requests for fund transfers so they can consolidate their accounts.

Until recently, the Retail Employ­ees Superannuation Trust required a certificate from the previou­s employer that the membe­r was no longer employed.

There was no legal basis for this requirement, but it was designed by Rest to make it difficult for members to close their accounts.

The issue of multiple accounts is bound up with the Productivity Commission’s proposal for 10 best-in-show funds into which members who fail to select a fund will be placed.

The idea is that once a worker has become a member of one of these funds, they will retain member­ship in the event of changing jobs. A panel of independent expert­s, including the governor of the Reserve Bank, will select these 10 funds. The competition will be reopened every four years. Modelling suggests that nine of the select­ed funds will be industry super funds, with possibly one retai­l fund making the grade.

Opposition Treasury spokesman Chris Bowen has already dismissed this idea, in line with the opposition of the industry super funds. While it is true that the industry super funds outperform the retail funds on average, there are still some poorly performing indust­ry super funds that are nominated as default funds in a number of modern awards.

The obvious alternative is for the government to create a new default fund, with the Future Fund responsible for asset allocation. (Frydenberg’s idea of adding the Future Fund to the list of 10 funds is just dippy.) It would be the fund into which contributions would be directed for workers who fail to nominate a fund. But note that workers would be perfectly free to nominate another fund.

The commission’s reasoning in rejecting a government default fund was illogical. Poor performance by the fund would have to be accepted by the members which, in all likelihood, would be ­mirrored by the poor performance of other default funds. In any case, the Age Pension sits as a safety net for those super members whose balances are affected by a run of poor performance.

In order to head off the idea of a government default fund involving the Future Fund, the industry super funds have put out some highly misleading figures to try to show that the Future Fund underperformed in comparison with the top-performing industr­y super funds over the past seven years. The gap is quoted as 11.8 per cent per annum versus 10.7 per cent.

But why seven years? Because that was the period that gave the best result for the industry super funds. Make the period 10 years and the Future Fund does much better than industry super funds.

There is a lot of water still to flow under the bridge before the various outstanding superannuation issues are resolved to member­s’ satisfaction, assuming they ever will be.

The Coalition should take the idea of a new government default fund and the measures needed to tackle multiple accounts and unwanted insurance to the election.

The option of killing any furthe­r increase in the superannuation contribution rate should also be flagged.

Labor will seem flat-footed unles­s it can put forward workable proposals to address the inequities in the system which impac­t most harshly on low-paid workers.