Fixing super’s flaws

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.

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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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