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The Productivity Commission handed down its final report on Australia’s $2.7 trillion superannuation industry in January 2019, finding that unneeded and underperforming super accounts are costing members $3.8 billion each year. We’ve rounded up some of the key findings and recommendations from the lengthy 722-page report into a short and simple overview.
The report found that a third of super accounts, about 10 million, are unneeded as members already have a primary super fund. According to the report, these ‘unintended multiple accounts’ are costing members almost $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees. Over time, these accounts can leave the typical worker with 6% (or $51,000) less at retirement. The effects were described as ‘regressive’, with younger and lower-income members most affected.
According to the report, despite retail funds making up just nine of a group of 29 funds identified as underperforming, over three quarters (77%) of super accounts within these 29 funds are in retail funds. In addition, the report states that retail funds have been ‘systematically outperformed’ by not-for-profit funds.
“Evidence abounds of excessive and unwarranted fees in the super system,” the report said. Australians pay over $30 billion a year in super fees, and this is excluding insurance premiums. The report says that high-fee products are ingrained in the system, mostly in retail funds. Interestingly, the report also found that funds that charge higher fees tend to deliver lower net returns after investment and administration fees are taken into account.
The report found that Australians are paying higher super fees compared to those in many other OECD countries. While the report did not discuss specific countries, OECD countries are developed nations like the United States, Canada and the United Kingdom. However, the report does note that part of this could be due to the higher expenses that Australian funds face.
Approximately 12 million Australians have insurance through their super. According to the report, this can provide workers with more affordable insurance than they would be able to get from a stand-alone policy. However, the report also notes that not all members are getting good value from this. For instance, it states that some members end up with their balance eroded by over $50,000 by duplicate or unsuitable policies.
Up to two-thirds of members are put into a default MySuper account when starting a new job. The report noted that while default super funds are necessary in our compulsory super system, this can create an ‘unlucky lottery’. According to the report, at least 1.6 million of these member accounts are currently held in underperforming products. This can have a big impact on retirement – according to the report, if a worker is placed in a bottom-quartile MySuper fund they will retire with $502,000 less than if they had been placed in a top-quartile one.
Based on its findings, the report proposed a raft of changes to Australia’s superannuation system. Notably, it recommended that long-term underperforming super funds be ‘weeded out’ and that new employees should be presented with 10 ‘best in show’ super funds to choose from. If all 31 recommendations were implemented, the report said a 55-year-old today could gain $79,000 by retirement and a new worker could retire with an extra $533,000.
Default super accounts should only be created for people who are new to the workforce or who don’t have an existing super account.
New workers or workers without a super account should be presented with a shortlist of 10 ‘best in show’ super funds to choose from. If no choice is made within 60 days, they should be defaulted to one of the shortlisted funds.
The ‘best in show’ shortlist should be selected by an independent expert panel.
All super funds regulated by the Australian Prudential Regulation Authority (APRA) should undertake annual outcomes tests for their MySuper and choice offerings. If a fund falls noticeably short over eight years on average, it should have a 12 month remediation period or if this is not possible, the fund should be withdrawn from the market with members transferred to better-performing funds.
All super accounts with balances under $6,000 and 13 months or more of inactivity should be automatically consolidated into the member’s active account.
The government should require funds to publish simple, single-page product dashboards for all super products.
The Australian Taxation Office (ATO) should be required to link to the relevant product dashboard on a member’s existing account.
The Corporations Act should be amended to ensure the term ‘advice’ can only be used in association with ‘personal advice’ – that is, advice that takes into consideration personal circumstances.
The government should evaluate its financial literacy programs, with a view to targeting funding towards effective programs, and defunding ineffective ones.
The government should reassess the need for a Retirement Income Covenant, a code that requires super funds to consider the needs and preferences of their members.
When members reach 55 years of age, the government should prompt them to visit specific pages on the Australian Securities and Investments Commission (ASIC) website and the Department of Human Services website in order to obtain information that could help them in the pre-retirement stage of their lives.
The government should create stronger safeguards for consumers in self-managed super funds (SMSFs), for example requiring specialist training for persons providing SMSF set up advice.
The government should roll out the Consumer Data Right to super. The Consumer Data Right, which is part of the open banking initiative allows banks to share member data with accredited service providers with member consent.
All fees charged by APRA-regulated super funds should be levied on a cost-recovery basis meaning fees reflect the actual cost of providing service. Trailing financial adviser commissions, that is annual fees paid to an advisor over the life of an investment product, should be banned.
Insurance through super should be opt-in for members under 25. Trustees should stop all insurance cover on accounts where no contributions have been made for 13 months.
APRA-regulated super funds should be required to articulate and quantify the balance erosion trade-off determination they have made for members in relation to group insurance.
A regulator task force should be established to monitor the Insurance in Superannuation Voluntary Code of Practice and maximise the benefits it can offer consumers.
The government should fund an independent public inquiry into insurance in super.
APRA should amend its standards for regulating board directors of superannuation trustees.
Trustee boards of APRA-regulated super funds should be required to disclose to APRA any merger activity.
The government should make capital gains tax relief for mergers permanent.
The government should be clearer on what it means for a trustee to act in its members’ best interests.
APRA should focus more on matters relating to licensing and authorisation.
ASIC should focus more on the conduct of super trustees and financial advisers, and the appropriateness of products and disclosure.
The government should clarify the roles of APRA and ASIC in relation to super.
The government should immediately initiate an independent capability review of APRA, and publish the outcome before the end of 2019.
The government should establish a permanent super data working group, comprised of APRA, ASIC, the ATO, the Australian Bureau of Statistics (ABS), the Commonwealth Treasury and the new member advocacy body suggested under Recommendation 28.
The government should fund an independent super members’ advocacy and assistance body.
The government should require ongoing reviews of the super system, by requiring APRA and ASIC to jointly produce a report every two years, commissioning an independent review every five years, and commissioning an independent public inquiry every 10 years.
The government should commission an independent public inquiry into the role of compulsory super in the broader retirement incomes system. This inquiry should be completed before any increase in the Super Guarantee rate.
The government should implement these recommendations by establishing a Steering Group of departmental and agency heads to oversee.