A draft report released yesterday by the Productivity Commission (PC) outlines four methods for preventing the accumulation of multiple superannuation accounts by workers as they change jobs.
The proposals suggest that many Australians would benefit from a share of $150 million worth of unnecessary fees on duplicate accounts. And having fewer funds would also help workers keep track of their retirement nest eggs.
The Productivity Commission found that account proliferation was “one of the superannuation system’s worst systemic failings and warrants more than the incremental remediation to date”. In 2014, the Financial System Inquiry (FSI) said addressing the issue could increase superannuation balances at retirement by around $25,000 (based on assumptions of 37 years of work with an average of 2.5 accounts over a person’s working life).
Some of the recommendations include cutting the number of potential default MySuper schemes (the current default super system that provides low-cost and simple super products for employers to choose as their default super fund) from more than 100 to just five and allowing a system of tenders and fee-based auctions for default super. The report also proposes that employees should only ever receive one default superannuation account when they first join the workforce.
Consumer advocacy group CHOICE welcomed the proposals, with CEO Alan Kirkland suggesting they go a long way to addressing a fundamental flaw in Australia’s superannuation system.
“The existing system sees many Australians defaulted into a new super fund every time they start a new job,” Mr Kirkland said.
“For young people, many of whom are part-time and working multiple jobs as part of the ‘gig economy’, multiple accounts are having a devastating impact on retirement savings.
“Trying to fix this by getting people to consolidate their super accounts hasn’t worked. We need to stop the problem happening in the first place.”
However Industry Super Australia was scathing about the proposals, suggesting they focused on the wrong area and were more likely to send workers from high-quality workplace defaults, towards underperforming retail funds.
Industry Super Australia CEO David Whitely said the proposed changes could undermine the best performing parts of Australia’s super system.
“The PC’s proposals will shift the balance from a system that safeguards consumers with high quality workplace defaults to one focused more on employee choice, which better suits the profit-driven, bank-owned retail funds,” Mr Whitely said.
“The Productivity Commission approach focuses heavily on the first super fund a person joins – this will place banks in the box seat when a young person opens their first bank account and they cross-sell a super fund at the same time.”
The review into default superannuation was ordered last year by Treasurer Scott Morrison, after criticism of the overall system from David Murray, the former Commonwealth Bank chief executive who chaired the FSI.
Listen to Productivity Commission chairman Peter Harris discussing the proposed changes on ABC’s AM program.
You can read the full Productivity Commission report here.
There is little question that too many Australians have multiple superannuation funds. People moving into different jobs creates a massive pool of workers with multiple funds which can make it difficult for them to keep track of their different accounts.
We already know that the Australian Tax Office (ATO) is sitting on nearly $12 billion in lost and unclaimed super accounts – and that says nothing about the number of people who are losing money through excess fees and charges from keeping multiple accounts open.
The Productivity Commission’s proposal to lock an employee into one default super account (unless they make an active choice to change accounts) goes most of the way towards solving the problems created by having multiple accounts.
However, the other changes suggested by the Productivity Commission – limiting the number of default funds and products available – seem less convincing.
The current MySuper default arrangement is not under attack for placing employees in poorly performing funds, so there is little to suggest that locking employees into one default fund will reduce that fund’s performance.
Limiting the choice of default superannuation products requires either the government or the employer to shortlist from the current providers and this could be problematic.
It seems the current Government has ideological problems with the better performing industry super funds and may even favour retail funds, which deliver lower returns. The Government having the power to select members of a governing body to oversee which funds were worthy of making the shortlist requires a pretty big leap of faith and doesn’t seem necessary given that the current system isn’t broken.