In January 2019, the Australian government’s Productivity Commission, an independent research and advisory body, made public its inquiry report on the Australian superannuation system.
This report brought to a close a three-stage inquiry running from 2016 to 2018. The first stage required the Commission to develop a framework for evaluating the super system’s performance. In the second stage, alternative ways of allocating members to super funds by default were devised. In the third and final stage, the Productivity Commission suggested improvements to the Australian super system. The Commission’s suggestions were based on analysing previous research and collecting fresh data, through five surveys, on super fund performance.
The Productivity Commission’s inquiry into the Australian super system pointed out that, each year, super fund members were losing super benefits due to underperforming investment. Further, it found that members tended to have multiple super fund accounts, possibly due to new super fund accounts created when changing jobs.
According to the Commission, members could realise super benefits potentially worth $3.8 billion if these two factors were addressed. The Commission recommended allocating members to default funds only if they didn’t already have a super fund account. Further, the Commission recommended giving members information about super fund performance when offering them the choice of funds.
What are the key super issues highlighted by the Productivity Commission?
The Productivity Commission found that super fund members don’t receive as many benefits as they could because the funds are insufficiently regulated. Furthermore, super funds aren’t transparently managed and don’t always serve the funds’ members’ interests. It also found that only half of Australia’s super fund accounts have balances exceeding $1 million, which points to inadequate scaling up or merging of super funds.
The Commission also calculated a benchmark value for the returns super funds get from their investments. It found that investments by retail super funds were more likely to yield lower returns. Worse still was that retail funds are also more likely to charge higher fees to its members.
Members also end up footing the costs of super funds, in the form of fees and insurance, to the tune of $2.6 billion due to having multiple super fund accounts. The Commission found that having just one additional super fund account, even unintentionally, could reduce the super fund balance by as much as 6 per cent when the member retires. Not many super fund members are aware of this, though, with only a small percentage keeping track of super fund balances and taking necessary actions. Not surprisingly, many of the more engaged members contribute to self-managed super funds (SMSFs).
What are the improvements recommended by the Productivity Commission?
In total, the Productivity Commission has made 31 recommendations to “modernise” the Australian super system. One of the first recommendations is that the allocation of members to default super fund accounts occurs only once. This allocation could happen for members who don’t choose their super fund when they get their first job.
Further to this, to help new members make informed choices, the Commission recommended that they should be told about the ten best-performing super funds. The Commission also recommended creating the first list of “best in show” super funds by June 2021. Employers could allocate members who don’t choose on their own to one of these shortlisted funds, thereby ensuring that members get the most out of super contributions.
Some of the other key recommendations include:
- Appointing an independent panel of financial experts to shortlist the best-performing super funds.
- Taking steps to eliminate multiple super accounts by consolidating funds with balances below $6,000 which have been inactive for at least one year and one month. Each super fund’s balance could then be transferred to the respective member by the Australian Taxation Office (ATO).
- Benchmarking and independently verifying the investment outcomes of super funds regulated by the Australian Prudential Regulation Authority (APRA) to ensure more standard performance.
- Publishing a one-page product dashboard for all super investment options, and delivering these through online services.
- Clarifying the roles of APRA and the Australian Securities and Investments Commission (ASIC) in regulating the Australian super system.