What you should know about the Productivity Commission’s superannuation inquiry

What you should know about the Productivity Commission’s superannuation inquiry

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:

  1. Appointing an independent panel of financial experts to shortlist the best-performing super funds.
  2. 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).
  3. Benchmarking and independently verifying the investment outcomes of super funds regulated by the Australian Prudential Regulation Authority (APRA) to ensure more standard performance.  
  4. Publishing a one-page product dashboard for all super investment options, and delivering these through online services.
  5. Clarifying the roles of APRA and the Australian Securities and Investments Commission (ASIC) in regulating the Australian super system.

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Learn more about superannuation

Can I transfer money from overseas into my superannuation account?

Yes, you can transfer money from overseas into your superannuation account – under certain conditions. First, you must provide your tax file number to your fund. Second, if you are aged between 65 and 74, you must have worked at least 40 hours within 30 consecutive days in a financial year. (Australians under 65 aren’t subject to a work test; Australians aged 75 and over cannot receive contributions to their superannuation account.)

Money transferred from overseas will generally count to both your concessional contributions limit and your non-concessional contributions limit. You will have to pay income tax on the applicable fund earnings component of any money transferred from overseas. You might also be liable for excess contributions tax.

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.

How do you create a superannuation account?

Before you create a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

How do you set up superannuation?

Before you set up a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

What is the difference between accumulation and defined benefit funds?

A majority of Australians are in accumulation funds. These funds grow according to the amount of money invested and the return on that money.

A minority of Australians are in defined benefit funds – many of which are now closed to new members. These funds give payouts according to specific rules, such as how long the worker has been with their employer and their final salary before they retired.

How many superannuation funds are there?

There are more than 200 different superannuation funds.

How do I change my superannuation fund?

Changing superannuation funds is a common and straightforward process. You can do it through your MyGov account or by filling out a rollover form and sending it to your new fund. You’ll also have to provide proof of identity.

What superannuation details do I give to my employer?

When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You should also provide your tax file number – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

How do you open a superannuation account?

Opening a superannuation account is simple. When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You might want to provide your tax file number as well – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

How is superannuation regulated?

The Australian Prudential Regulation Authority (APRA) regulates ordinary superannuation accounts. Self-managed superannuation funds (SMSFs) are regulated by the Australian Taxation Office.

Can I choose a superannuation fund or does my employer choose one for me?

Most people can choose their own superannuation fund. However, you might not have this option if you are a member of certain defined benefit funds or covered by certain industrial agreements. If you don’t choose a superannuation fund, your employer will choose one for you.

What are ethical investment superannuation funds?

Ethical investment funds limit themselves to making ‘ethical’ investments (which each fund defines according to its own principles). For example, ethical funds might avoid investing in companies or industries that are linked to human suffering or environmental damage.

How do I combine several superannuation accounts into one account?

The process used to consolidate several superannuation accounts into one is the same process used to change superannuation funds. This can be done through your MyGov account or by filling out a rollover form and sending it to your chosen fund.

When can I access my superannuation?

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

The preservation age – which is different to the pension age – is based on date of birth. Here are the six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

A transition to retirement allows you to continue working while accessing up to 10 per cent of the money in your superannuation account at the start of each financial year.

There are also seven special circumstances under which you can claim your superannuation:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia