Managing superannuation is a bugbear for many Australians, but under new recommendations from the Productivity Commission the industry is set for a substantial overhaul.
The landmark review led by the commission’s deputy chief Karen Chester and fellow commissioner, Angela McRae has shown that close to one third of default super accounts persistently underperform, and that 10 million inactive, duplicate accounts cost members $2.6 billion per year.
Under their recommendations new workers would be able to choose a verified, high-performing fund for life, potentially saving over $400,000 by dodging underperforming funds and multiple accounts.
“While the system works reasonably well for some members, it’s become an unlucky lottery that sets the odds against many members,” Chester reported to ABC Radio this morning.
“The impact is highly regressive. It causes great harm to young people, workers on low incomes and workers in and out of the workforce. These are awkward truths that the industry needs to address.”
“The Government’s efforts are about sweeping up some of the mess. We want to do that as well, but we also want to stop the mess reoccurring,” she told Fairfax.
One of the more “absurd” quirks according to the review is that thousands of accounts are linked to jobs rather than members, meaning that people accrue various accounts over their careers unless they take measures to actively consolidate them.
Under recommendations, new employees entering the workforce would be shown a dropdown menu of up to ten top performing funds when they apply for a tax file number. This selection would be decided by an independent panel every four years, and while employees would be free to make a different choice they would at least be armed with helpful pointers from the outset. Moreover, each time an individual switches employers they would be shown the same top ten funds, allowing them to change and consolidate accounts.
If employees failed to choose a preferred fund, they would be randomly assigned to one of the ten highest ranked. Financial advisers would also be urged to recommend these same funds to clients. Such a move would take the power away from unions and employers to set up default funds for their workers.
Given that close to 500,000 people in Australia join the workforce each year, these changes would have a resounding impact on the capacity for poorly performing funds to pick up new members.
Chester said the review’s suggestions were a world-first, providing Australian workers with the “best bang for buck”.
“It could be worth 3.9 billion per year. I don’t think you can overstate the impact.” she said.
“As far as we know, nobody in Australia nor anybody internationally has previously assessed the performance of a superannuation or a pension plan system,” Chester said. “One of the reasons it is hard is that there are more than 40,000 super products, a number that makes it hard for consumers to make decisions.”
She added that the “limbo bar” for which funds receive authorisation from MySuper, needed to be “significantly heightened.” Only 114 of the 208 funds surveyed responded to the review.
“I don’t think you can overstate our professional disappointment with the content of the responses to the questions that really mattered,” Chester said. “It constrained in doing our analysis. We will be writing to all those who haven’t properly responded on Tuesday morning asking them to complete their homework so that we can complete our analysis.”
It’s a position Financial Services Minister, Kelly O’Dwyer agrees with wholeheartedly saying that funds which had failed to respond were “showing contempt for the Australian people.”
Final recommendations from the commission’s draft review will be made in December.