Profit-to-member superannuation funds outperform retail counterparts by an average 23 per cent, leading to calls for annual performance testing for all super funds.
The Australian Institute of Superannuation Trustees (AIST) analysed data from the Australian Prudential Regulation Authority (APRA), finding profit-to-member funds, which include industry, corporate and public sector funds, returned an average 7 per cent per annum over the last five years, while retail funds returned 5.7 per cent.
“A one or two percentage differential in annual investment returns has a huge impact on the financial outcome for members in retirement,” said AIST chief executive Eva Scheerlinck.
“It should be legislated that every super product is subject to annual performance testing. Any exclusion simply lets underperforming funds escape scrutiny and eats away at member returns.”
Yahoo finance reports that an industry fund member who had $100,000 in super at the beginning of 2016 would have $146,000 on average by the end of 2020, while a retail fund member starting with the same amount would have $133,000.
Ms Scheerlinck wants the government and regulators to address underperformance across all of superannuation.
“The government’s Your Future, Your Super legislation – currently before Parliament – stops short of doing this, with the legislation only prescribing that annual performance testing apply to default MySuper products, which, on average, tend to be the better performing funds,” the AIST said.
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The Conexus Institute think tank says the proposed legislation “will push superannuation trustees to choose short-term investment strategies over long-term options that generate higher returns for members”, the Australian Financial Review reports.
Super funds will be ranked, with products that return less than 0.5 percentage points below their benchmark per year over an eight-year period classified as underperforming. From July, funds that fail the test will be required to inform members they have underperformed. Funds that fail the test twice will be banned from accepting new members.
Conexus boss David Bell says this will lead funds to develop investment strategies that ensure a high likelihood of passing the test. He believes the tension between delivering returns and risk-taking puts trustees of funds in “a very difficult situation”.
“In our view the (Your Future, Your Super) performance test does not align well with managing portfolios in the best interests of members,” the report said.
“We think many trustees will discover that portfolios designed to pass the performance test may have lower expected returns, be less effectively diversified, and bear more risks than portfolios constructed in the absence of the performance test.”
Superannuation minister Jane Hume says the “underperformance tool” will simply “weed out those that are not doing a very good job”.
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But Robyn Jackson from The Tax Institute told accountantsdaily.com.au that the entire superannuation system needs a reboot.
“Decades of adding layers of new rules, including some notable attempts at reform, has resulted in a superannuation regime that is convoluted, inefficient and continues to confound all users of the system. The current design of our superannuation law is so lacking in its ability to provide a sustainable retirement regime that the rules need a major overhaul, not another tweak.”
She says the system is a “labyrinth of complex legislative amendments, policy changes and voluminous quantities of provisions, regulations, rulings and legislative instruments”.
“Indeed, the current design of our superannuation law is so lacking in its ability to provide a sustainable self-funded retirement regime that perhaps an overall revitalisation of the superannuation rules is needed,” Ms Jackson wrote.
To illustrate, she lists 16 limits and thresholds and caps that make superannuation rules “almost unnavigable”.
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Amongst other things, The Tax Institute suggests the overhaul of contributions caps and thresholds; rethinking the taxing point in the life cycle of superannuation; and the removal of restrictions on yearly contributions. They want older people to be able to contribute for as long as they want and for workers under the age of 18 to be eligible for super.
Ms Jackson says individuals “should be allowed to rebuild their superannuation balances (without any limits up to a lifetime cap), in order to safeguard and not place an unnecessary burden on the government pension in the future”.
“Individuals are best placed to contribute to superannuation when they are older, their mortgages are paid off, their children have left home, they have moved into higher-paid roles at work and have, generally, a higher disposable income than younger workers.”
The Tax Institute also believes the current regime fails our most vulnerable workers, and many women who will retire with 42 per cent less superannuation than men.
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