Superannuation: why we stick with the duds

An under-performing super fund can cost you about 13 years’ pay over a working lifetime.

How to spot a dud super fund

Susan Thorp, Professor of Finance, University of Sydney

Picking an under-performing superannuation fund can cost you about 13 years’ pay over a working lifetime - roughly the value of an apartment in Melbourne or Sydney.

High fees alone can delete two years’ pay, and poor investment performance can account for the rest. These are just some of many disturbing calculations made by the Productivity Commission in its landmark assessment.

After more than 25 years of compulsory super, numerous attempts to improve competition, and multiple reviews and inquiries, material differences in superannuation fund performance persist.

Around 5 million super accounts are in chronically under performing funds. The resulting damage to retirement incomes is “nigh impossible to overstate” according to the Commission.


Read more: Productivity Commission finds super a bad deal. And yes, it comes out of wages


Why do so many of us pick super funds that lose earnings by sub-standard management and high fees?

One reason is that many of us actually don’t choose a fund – we let an outdated default system choose for us. Another is that if we do try to choose for ourselves, we face a complex decision, often hidden in a morass of product information, calculators and forms.

Defaults date back to union times
The start of compulsory super in Australia was in industrial claims by unions in the late 1980s for benefits in the form of employer contributions. In 1992 responsibility for ensuring employers paid super was transferred to the the Australian Taxation Office. But the early ties to the wage setting system, and unions and employer organisations, persist.

At present, workers who do not choose their own superannuation fund are given an account in the (default) fund chosen by their employer, commonly from options prescribed in workplace agreements. Consequently, workers often acquire a new super account with each new employer, from a set of funds decided by various industrial agreements.


Read more: How changes noted in the 1992-93 cabinet papers affect our super today


This default fund arrangement means that: first, many people are losing savings to redundant fees and insurance premiums as they change jobs and acquire multiple accounts; second, that vulnerable workers such as women, gig-economy workers, casuals and young people are most affected; and third, that competition for members can be dulled by entrenched relationships between employers and funds.

There is no doubt the default system needs a complete renovation. We should not tolerate multiple fees and charges and persistent underperformance in a system where workers are forced to save.

The Commission wants best-in-show defaults
The Commission proposes that members only ever hold one (default) account, supported by a centralised, online service such as myGov. When people change or add jobs, their super contributions would go to their current active account, unless they decide otherwise.

More controversially, the Commission argues for an expert-selected, shortlist of funds to help new workers pick the first one.

If new workers don’t choose a fund for themselves, they would be (sequentially) allocated to funds on the short-list. The industry fears that the short-list could cause excessive concentration, trickery in order to get on the list, and the demise of good funds that just miss out. The Commission reasons that competition to be on the list will raise fund performance and save defaulting members billions.

Any short list is too long if members don’t have the information they need to make a sound comparison between superannuation entities.



Production Commission video outlining its draft report released in May 2018.


Because we are very bad at fine print …
The report recommends funds publish “simple, single-page product dashboards for all superannuation investment options”. In fact, the Securities and Investments Commission is developing a one-page dashboard for MySuper default products, but dashboards can be hard for members to find (hidden behind a lot of “clicks”), difficult to compare, and challenging to understand.

Experiments to assess whether super fund members would be able to detect an under-performing fund using the dashboard, if the under-performance appeared gradually over a period of “years”, show serious weaknesses.

In one experiment, participants noticed rising fees, and would switch funds to avoid them, but would tolerate low returns for very long periods. One of the main items on the dashboard is a graph that’s designed to show historical investment performance against the fund’s target. However, experiment participants rated the graph as hard to use because of its complication.

…and find it hard to understand risk
Most concerning was how poorly participants understood information about risk. It is hard to overstate the importance of a grasp of investment risk to a sound comparison of superannuation funds. About 70% of default account balances are invested in risky “growth” assets that earn higher average returns by accepting higher variability of returns.

Unfortunately, the industry (and regu


Read more: The Productivity Commission inquiry was just the start. It's time for a broader review of super and how much it is needed


latory) rules mean risk information only shows the likelihood of negative returns, not the range of possible returns. Fewer than 20% of participants in the experiment were able to answer simple comprehension questions about the risk information correctly.


Read more: HILDA Survey reveals striking gender and age divide in financial literacy. Test yourself with this quiz


The Commission rightly recommends the dashboards be simple and effective, that they promote comparisons and be easy to find at critical times for decisions.

But it’s also important to realise many workers, especially young or new workers, are unlikely to be able to use the dashboards to choose well. It’s why we need good defaults.


Read more: The Productivity Commission inquiry was just the start. It's time for a broader review of super and how much it is needed The Conversation


This article is republished from The Conversation under a Creative Commons license. Read the original article.

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    COMMENTS

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    danielboonjp
    19th Mar 2019
    10:13am
    Australian 'Ethical Fund' are thieves.

    Told me they would not offer life insurance after I turned 65 ... then stole life insurance premiums from my final payout when I was 66.
    danielboonjp
    19th Mar 2019
    10:15am
    There is a clear corporate government theft ...
    LNP (Peter Costello) stole money from the Pension Fund to fund politicians (Labor said nothing)
    Now super funds, insurers and banks openly steal money from everyone, not just the aged
    MICK
    19th Mar 2019
    10:16am
    You are discussing predominantly RETAIL FUNDS.
    High fees are but the start of bad performance and those who lead a company from the top end of town are frequently after big pay packets with little care about returns to members.

    I hope these funds are publicly named although likely only the Industry Funds will suffer that fate if there are any which fall into the category. We'll see as time goes but we all need to remember the Banking Royal Commission.
    The Commonwealth Bank has already said it is now not going to sell its wealth arm for some time. That means never and banks are already getting back to business as usual. Expect the same from the superannuation industry.
    Ted
    19th Mar 2019
    10:34am
    There is another issue here not discussed. We are in a dud fund paying us a small income stream with one of the organisations criticised at the Royal Commission. We took this out before 1 January 2015, thus most of the deemed income is not counted. The problem is we are also on an aged pension and if we seek to move to another fund then all the income will be deemed and we will lose a large part of the pension.

    You could call this ‘locked into a dud deal by the Government’.

    There maybe a case to allow the many of us in this situation to make one change before a given date, Yes, legislative change will be needed but it may be the only way to prevent some people gradually becoming poorer because of legislation. I am not crying poor here just pointing out an unintended issue with the pension legislation, the issues have really only gone to light since the RC. Yes, maybe I should have taken more care but like many I foolishly trusted a financial adviser and only since the RC have realised how much that has cost me.
    Seadove
    19th Mar 2019
    3:34pm
    I was under the impression from what I have read on here that once you move your money in to the pension phase and receiving an income stream you are not able to change funds. Happy to be corrected if this is wrong.
    Rae
    20th Mar 2019
    7:40am
    Nothing you can do as you are locked in. Those income streams are now deemed at illusionary rates. Nothing can be done about that either. Everyone else had the opportunity to change portfolios or retirement plans but not income stream purchasers.

    I doubt many will buy income streams in the future as they are very risky due to the legislation changes not being grandfathered.
    jackie
    19th Mar 2019
    11:08am
    Super funds are all about making money for themselves not their customers. There should be a Royal Commission into the lot. They are a scam.
    Tom Tank
    19th Mar 2019
    11:31am
    Try an industry fund as they are not for profit and have better returns than a retail fund. Contrary to some comments they are NOT controlled by the unions but do have a union rep and an employer rep on their board of trustees. No super money goes to a union.
    Tom Tank
    19th Mar 2019
    11:31am
    Try an industry fund as they are not for profit and have better returns than a retail fund. Contrary to some comments they are NOT controlled by the unions but do have a union rep and an employer rep on their board of trustees. No super money goes to a union.
    Rae
    19th Mar 2019
    4:25pm
    The returns have turned negative. It's the market. Not much you can do about it when forced to pay into a scheme.

    Going to be some real unhappy people when statements finally start turning up.
    Jannie
    19th Mar 2019
    12:02pm
    Does anyone know if MLC is worth a try?
    Sundays
    19th Mar 2019
    1:57pm
    You’d be better with an industry fund that has low fees and good returns. Do a bit of research but something like Hosplus or QSuper (for Qld Govt employees but will now enrol anyone)
    Seadove
    19th Mar 2019
    3:31pm
    Stay away from MLC and do as Sundays suggests and make sure you go for an industry fund.
    JoshG
    19th Mar 2019
    5:26pm
    I invested $90,000 in 72Options sometimes ago with little knowledge about Binary Options. It was accumulated money from my Retirement Plan and Social Security. After investment, withdrawals turned impossible, I was denied access to my account, my emails to the support team was left without reply. I was left terrified, not until I got in contact with a funds recovery expert agent at fundsrecoverydome(AT)protonmail(DOT)com whose contact I got from somewhere on the internet. I'm very glad I did so cause I got all my funds back without request for upfronts. I just want everyone that has suffered to similar binary option scams from retirement investment planning recently or not to get their hard-earned money back soon.
    Rae
    20th Mar 2019
    7:44am
    Glad you got your money back. It is sound advice to never invest in something you don't understand. Or with an unknown provider of services.