‘Fix the design flaws in super that hurt the vulnerable’

Flaws in the superannuation system have been allowed to proliferate for too long.

‘Fix the design flaws in super that hurt the vulnerable’

A review into retirement incomes was the first major announcement made after the May election by re-elected Treasurer Josh Frydenberg. He was referring specifically to recommendation 30 of the Productivity Commission’s (PC) wide-ranging and three-year-long investigation into the efficiency of the superannuation system.

The PC recommendation is plain and simple: that the role of superannuation in retirement should be evaluated alongside the Age Pension and private savings – the traditional ‘three pillars’ of the retirement savings system – as well as housing and aged care.

The PC notes that these public policy issues have not been subject to a review in 26 years, since they were (partially) considered by the FitzGerald Report on National Savings back in 1993. It goes on to urge future governments not to wait so long between check-ups and to conduct reviews every 10 years.

What is Super Consumers Australia?
Super Consumers Australia at CHOICE is focused on advocacy to improve the super system, particularly for people on low and middle incomes during their working years. There are plenty of other groups that contact members of parliament to advocate on behalf of higher income earners and, frankly, far too many lobbying on behalf of super fund trustees.

Overall, we believe that the superannuation system is strong, but it has some design flaws that needlessly and disproportionately harm people who are already economically vulnerable.

Before the retirement income review considers the big questions, such as the adequacy of contribution rates, the impact of taxation and the balancing act of the so-called ‘three pillars’ of the retirement income system, we should take steps to make our current superannuation system more efficient for everyone.

Fixing the ‘holes in the bucket’ will add hundreds of thousands of dollars in cumulative earnings to people’s incomes in retirement.

We would like to see a Terms of Reference for a retirement income inquiry that specifically acknowledges the gaps and quirks in our super system that affect people on low and middle incomes; terms that explore options to protect savings, such as preventing them being defaulted into (multiple) poor-performing funds, suffering from (wildly) disproportionate balance erosion or being forced to pay for insurance products that either have low value or cannot be claimed on.

The PC has already identified many of these problems and successive governments have tried to take positive steps on some matters through a mix of self-regulation and legislation, but progress is continually slowed, stalled or watered down by vested interests.

Two elephants in the room
The PC identified the two most costly problems in our superannuation system: unintended multiple accounts and entrenched underperforming funds. You can think of them as a pair of elephants – one small and one significantly larger, but both towering over all the other issues that are reducing retirement savings.

The smaller of these two elephants is unintended multiple accounts, where the system is defaulting people into new accounts with different funds when they change employers. This results in additional sets of administration fees and insurance premiums.

The PC modelled that a “typical full-time worker” would be $51,000 worse off in retirement due to multiple accounts. These collectively cost the people who hold them $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees.

About a third of all accounts (around 10 million) in the super system are unintended multiple accounts. Australian Tax Office (ATO) data shows that 25 per cent of people have two accounts, nine per cent have three and one per cent have six or more.

The PC slammed a generation of policy failure for allowing this, stating: “Government and the regulators could and should have acted earlier to identify this costly systemic problem and taken decisive policy action.”

The parliament has recently taken decisive action to reduce the number of unintended multiples, despite some squealing from fund trustees enjoying the passive income. But there’s more to do.

The second elephant is much larger. More than 10 times larger.

Serial underperforming funds are the scourge of our superannuation system, and the PC conservatively estimates that “typical full-time workers” would be $560,000 worse off in retirement if they were stuck in one of these duds for their working lives.

Both the PC and the financial services royal commission urged parliament to stop allowing people to be defaulted into terrible funds, or multiple funds. These recommendations were the headline imperatives of both in much of the media coverage. The PC recommends a ‘best in show’ model to only allow people to be defaulted into one of the very best performing funds; Commissioner Kenneth Hayne recommends that people ‘default once’ and keep their super fund as they change employers.

Super Consumers Australia is adamant that we do not need to wait for a retirement income review before taking action. One of the top priorities of the Treasury ministers should be helping people to move out of poor-performing funds and calmly merging or closing them down.

Other matters

Our current superannuation policy framework is punctuated with other quirks, idiosyncrasies, disincentives, inefficiencies and actual legislative loopholes that are costing people money now. These include:

1. The public can’t identify dud funds.

This might seem odd, but our regulators don’t collect the right data to allow an apples-to-apples comparison of poor-performing funds. The PC described these information gaps as “yawning” and made a raft of recommendations to improve data collection across the super system.

2. There is no ‘purpose’ to superannuation.

This also might seem odd, but previous parliaments have failed to agree on the objective of superannuation (which is one of the reasons for a retirement income review). Do we allow people to reduce tax paid now to take the pressure off future pension outlays? Where should limits kick in, and why? Should the system be designed to ‘smooth the transition’ from income earned while working, to income in retirement? Or should the system be designed to provide a certain level of comfort in retirement? Are we talking chardonnay comfort or the occasional champagne?

3. Payment rules are archaic.

Employers have up to four months to pay super, which means people are forgoing months of extra earnings on their contributions. Super should be paid on a normal pay cycle so employees can reap these earnings.

4. There are no accounting standards.

There are no clear requirements or accounting standards for how funds report their assets, options or what growth or defensive assets mean, making it nigh on impossible to compare hundreds of funds and thousands of products.

In conclusion

Most of these suggestions have been identified repeatedly in various parliamentary inquiries, departmental and regulatory reviews and, over the past five years, in the Murray Financial Systems inquiry, the PC inquiry into superannuation and the financial services royal commission.

Legislation and amendments have been introduced, sometimes repeatedly, but have been rejected or have lapsed.

These ideas have been shoved around, mainly by disagreements between superannuation funds, insurers, employer groups (large and small), accountants and tax advisers. Never mind the losses to consumers.

Addressing the two big elephants in the room – unintended multiples and entrenched underperformance – and tidying up our existing super system would put more money into people’s super balances immediately, particularly people on low and middle incomes.

More

Super Consumers Australia is the people's advocate in the superannuation sector, protecting the interests of low- and middle-income people in Australia’s superannuation system. It was founded in 2013 and received government funding for the first time in 2018.

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    COMMENTS

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    Blinky
    7th Nov 2019
    11:13am
    Super works x those who have A LOT of super, i.e. $ 700.000 or more because they DO NOT have to depend on the stupid and ever- changing rules that apply to pensioners who get a government pension and who are forever being treated as third-class citizens and threathened with scary changes to the pension system which are, usually, detrimental.
    You see? There are three categories of 'pensioners."
    A. The "independent pensioner," the one who has enough money in super, investments, real estate, etc and who does not receive a govt pension.
    B. The low-income people, who have none of the above and receive a FULLpension.
    C. The middle class Aussie worker. The one who managed to have a little super, e.g. $ 300k more or less, has a home, a car or two and receives a modest income from his super fund.
    These guys are the worst off of them all because:
    A. They do not have enough money to be in group 1 above n they need a govt pension.
    B. Because they have "too many assets" i.e. a small super, a small bank account, some furniture in their homes and yes, they are "rich enough" to own a car and maybe even their own home, which they are forever blamed for!!
    C. If these pensioners have a small super say $300k or so, plus the above-mentioned assets, they will only receive a part pension as the govt will take $3 out of every $1000k they may have over the very low existing asset threshold which seems to indicate that ALL PENSIONERS MUST BE POOR!!!
    D. These is the group of pensioners that any changes to the pension and superannuation systems must address.

    Groups 1 and 2 are not really affected, but people in Group 3 are because their livelyhoods are forever being threatened by greedy treasurers, financial consultants or other "gurus" who come up with new ideas on how to balance the budget n save the govt some money.

    The existing super system works x Group 1, leave them alone. They are not a burden to the govt and they mostly invest their money Australia.
    The pension system x Group 2 is also working n may need but a little tweak to improve it a bit.

    For the pension n super system for Group 3 to work, all they need to do is to:
    A. Exempt the first $200000k from the asset test, or
    B. Increase the asset test to $600000k and
    C. Go back to reducing the pension by $1 instead of $3 for every $1000k people may have over the existing assset test.
    VeryCaringBigBear
    7th Nov 2019
    2:34pm
    Wrong the group that is worse off are those with just too many assets to get any welfare (OAP). Many of these people are earning a lot less than the pension and have no benefits.
    Horace Cope
    7th Nov 2019
    11:22am
    I have written before that employees should be allowed to nominate their super fund and that employers have to comply. This will go a long way to reducing multiple super accounts. I also believe that the default system for an insurance product should be "opt-in" rather than the current system of "opt-out". A partial change to this has been made but I don't believe the change has gone far enough.
    TREBOR
    7th Nov 2019
    11:57am
    Without casting any aspersions or creating difference between industry or commercial - the under-performing funds should either be abolished or absorbed... unfortunately some are deliberate under-performers due to their real position as nothing but a cash flow for their real owners - the operators of the fund... who, of course, never miss out on their fees ...

    That may also drag in a number of self-funds - we've had more than one on here complaining that they don't even get the equivalent of pension... so the question is - why stick with it?

    Sadly - and much as I despise over-centralised anything since it tends to wield too much power over the individual - it seems the only answer is a single 'roof' super fund for all ...
    Horace Cope
    7th Nov 2019
    2:02pm
    The fly in the ointment appears to be a lack of transparent reporting, TREBOR. Even when we see a comparison on this site when they give the top 10, there is an uneven reporting giving some broad based Vs balanced. We need legislation to compel all super funds to report each investment choice as well as the total return.

    I believe that people should always have a choice even if they choose a high charging, low return fund or, indeed, their own super fund with all of the pitfalls. An old saying that you can't legislate for idiots may apply and good luck to those who don't care enough about their super to ensure a return on the investment.

    Lastly, I agree that having one fund overseen by government might work in theory but what safeguards will there be to stop any government using the funds for their own purposes. There was a Premier who "borrowed" millions from the super fund run by the state in the '70's and it was never returned.
    TREBOR
    7th Nov 2019
    3:08pm
    'overseen' - from a distance... that's the way... I've long advocated a one-stop shop out of the hands of politicians and their business mates and cronies.. and under the oversight of an elected board ......

    Tough call, I know...

    Yesterday I alluded to the NeMeSiS (National Minimum Superannuation Scheme) concept (my idea) - where in, in keeping with Social Securiity legislation past - every individual of working age and having left school, has a minimum amount placed every fortnight into an account in their name - not in that of the government as SS was... so that 'government' could not 'resume' it into 'consolidated revenue' and then say it never existed.... as they did with the SS fund.

    That would ensure that, at the very least, every individual in retirement would have a super fund that, hopefully, would provide an adequate retirement living.

    The current shemozzle of hundreds of funds is obviously not working... and it seems to me - in my humble way - that a single fund would have more 'clout' in investment markets, and in opportunity for aiding government, through loans, with infrastructure.

    That's better than setting up a fund held by government, who then steal it for their projects anyway.

    He who sups with the government is advised to do so with a long spoon ......
    TREBOR
    7th Nov 2019
    3:10pm
    Sorry - make that:- 'shemozzle of hundreds of funds and multi-layered pension requirements and payments' ...

    I'm not perfect....
    fairplay
    7th Nov 2019
    2:06pm
    Blinky, well written ! with the exception of group B ..getting the full PENSION does not necessarily mean people are poor, perhaps income poor, but could potentially have a house worth in the millions, particularly if they live on the eastern seaboard.The value of your home in fairness needs to be included in the asset test ( of course the current asset test would have to be revised considerably to take this into account).Where is the fairness that someone with say 823k in super( as part of a couple) and lives in a modest home receives no pension and someone with a home worth in the millions with little super can receive a FULL pension and leave a large inheritance at the end.A crazy system !
    Aggle
    7th Nov 2019
    4:54pm
    fairplay, I agree with your comments. I think I needed you backing me up when I commented on an article on Facebook, when I suggested our houses should be included in our assets. You would have thought it was me changing the law. I received lots of abuse and name calling ( more from women than blokes, I might add ) and all sorts of excuses why it shouldn't happen, most of them pretty lame ones at that. Your example is exactly why our homes should be classed as part of our assets.
    fairplay
    7th Nov 2019
    5:28pm
    Aggie, i can understand why some would be aggrieved, lets be fair some could argue that they bought their property 50 years ago, however assets are assets.Government after Govt have just added to the mess and come up with a piecemeal approach. I have no doubt the system could be changed to make it fairer for everybody. The system does not take into a/c how some have lived frugally, planned and saved on lower salaries vs those who have earned much more and have not managed their finances in the same manner, but are due a full pension....of course life circumstances will be different for everyone ie no. of children,divorce,sickness etc etc, but the size of your assets is a common denominator and to pay a couple 36k a year who have say 3 million in assets(expensive property) vs NIL to someone who has less than half of this figure (just because their split of assets is different ) is really quite silly.
    Mary
    7th Nov 2019
    6:05pm
    Aggle. you want to include my home in the assets test? Well it already is. I get a lower threshold on assets before my pension is reduced than a renting pensioner does. Why is it so hard for some to understand that. The other point is that what you propose will not affect Shorten, Albanese, Morrison, Hansen, Di Natale et al. It will not affect any of our top end of town. It will not affect any one that is comfortably rich whom will never claim a pension. It will not affect anyone living in a new 5br 3bath home in regional areas. What you propose is that someone like me with a 2 br fibro shack in middle Sydney should lose their part pension while all above are not at all affected. Why would you support that? are you a capitalist? Are you a liberal party stooge?... because imho you are posting like one.
    Rae
    8th Nov 2019
    11:26am
    The fairness is in the opportunity I suppose.

    Anyone could have upsized the house time after time instead of saving into income producing assets and received the full aged pension and concessions worth around $800 000 anyway.

    That people actually figured this out and did it isn't surprising.

    We could look at incomes over the decades and ask why a large number of people didn't achieve much at all and why they missed the opportunities and if supporting them is fair to those who scrimped and saved.

    Or why people manage to become so jealous and vindictive when others achieve more than them.

    What would be fair is treating everyone exactly the same regardless of failures or successes and then supporting those suffering real adversity a bit more to ease the suffering but that isn't close to what is happening is it?
    GeorgeM
    7th Nov 2019
    2:19pm
    So what's stopping the successive Labor & Liberal Govts from fixing this mess over such a long period of time? Must be their own personal vested interests, I think. Liberals (and Labor) may be helping their rich mates (including themselves) to continue reaping the massive tax benefits they get out of this badly designed Super system. I remember Shorten was Minister for Fin Services and Superannuation - did he do anything to fix it? What a bunch of dodos we keep electing!
    A simple quick decision must be to stop the Tax benefits from Super going to the wealthy (e.g. reduce the no-tax limit to $600K Super, tax everyone above that at Marginal Rates) - massive ongoing Revenue awaits any Govt willing to do this!

    Also, clarify the "purpose" of Superannuation - should be only to "Supplement" not replace Age Pension - that will also support the notion that Universal Age Pension is a better solution as a base-level security for all retirees with all able to save and earn as much as they can above that, and Govt can also then step out of people's lives.
    TREBOR
    7th Nov 2019
    3:11pm
    Well said, George and Blinky and Horace... and other good comments...

    Keep after 'em, boys..... and girls....
    Captain
    7th Nov 2019
    7:13pm
    Universal pension for all over 65, then tax every dollar that is earned above that amount at whatever rate is applicable.

    I also advocate a full review of our tax system (out of the hands of politicans as they will advocate for whatever is most advantageous to them). I believe that getting rid of a lot of the tax loopholes will force all companies to pay their fair share of tax.