The days of Aussie workers having multiple super accounts could come to an end under a new default superannuation system proposed by the Productivity Commission.
In their draft report exploring alternative default models for super, the Productivity Commission (PC) proposed a structural change that would see workers given a default super account only once in their working life.
This could boost super accounts by around $25,000 at retirement, according to the report.
Under the current system, employees who don’t nominate a super fund are assigned a new default super account each time they change jobs.
With two-thirds of super members relying on default super funds, this has resulted in many Australians having lost super and unnecessarily paying fees on multiple accounts.
An average of 1 in 4 super accounts sit idle (no contributions for at least 12 months), according to Rice Warner research.
PC Chair Peter Harris said that despite a 25-year history of delivering “reasonable returns”, there are “structural faults” in default superannuation.
How MySuper Funds Performed Over The December 2016 Quarter
“These changes are not about the tax or contribution rules for super. They are about how to help the least informed members – those new to system, who fail to make any choice about where their money goes,” Harris said.
“Unlike 25 years ago, today many more employees are part-time, and there is a greater propensity to change jobs, with much less a job-for-life nature to the workforce. The super system should reflect this.”
The draft report also put super fund fees and returns (performance) in the spotlight.
PC Deputy Chair Karen Chester said the new models could make default super “simpler and easier to compare” and allow for “lower fees and better performing products”.
4 alternative models
The PC report proposed four different models to help make it easier for employees to identify better performing super funds:
- Assisted employee choice: Provide a ‘shortlist’ of 4-10 ‘good’ default super funds to employees and create a system of ‘product accreditation’ to allow for easy comparisons.
- Assisted employee choice (with employee protections): When employees don’t choose a super fund themselves, employers choose for them from one of two filtered lists under this model.
- Multi-criteria tender: Super funds compete with each other for rights to a share in a default pool by submitting tenders against certain criteria including past performance, fees, and quality of service.
- Fee-based auction: Super funds compete for default status by bidding against each other on fees.
What happens next?
The PC’s latest report is just Stage Two (develop alternative models for default system) of the Turnbull Government-commissioned review of the competitiveness and efficiency of the superannuation system.
This review came about in response to the recommendations of the Financial System Inquiry.
After the final Stage Two report is released in August, Stage Three (review the efficiency and competitiveness of the current super system) will commence.
Minister for Revenue and Financial Services Kelly O’Dwyer said it is premature for the Government to make comments on the proposals at this draft stage.
“The Government will consider its response in the context of the final report of Stage Two and further Stage Three work,” O’Dwyer said.
“I encourage all interested stakeholders, especially young Australians, to continue to engage with the Commission through consultation on the draft report, to provide insights into the merits and feasibility of the alternative models proposed.”
Industry vs Retail: How both sides reacted
Retail: FSC Backs Productivity Commission’s call for competition
Representing the retail side, the Financial Services Council (FSC) highlighted that the PC “resoundingly rejected” the current system that “directs consumers towards union-dominated default funds”.
“The PC concluded that this 25 year old industrial model has caused the proliferation of excess accounts and sub-scale industry funds that are draining consumers’ retirement savings,” FSC said in a statement.
FSC CEO Sally Loane said through its report, the PC is calling for an end to putting industry self-interest ahead of consumers.
“Competition and choice in super should be available for all Australians. The Government must act urgently to reform the system,” Loane said.
Industry: ISA says proposed changes focussed on wrong target
Industry Super Australia (ISA) said the “untested changes” could “undermine the best performing parts of the system”, adding that the changes fail to address the “cost and poor performance of retail funds”.
ISA chief executive Davie Whiteley said the PC has not provided the evidence that warrants dismantling a successful system.
“Their report does not acknowledge, let alone address, the systemic underperformance of funds offered by for-profit providers,” Whiteley said.
“Hundreds of billions of dollars in savings for millions of Australians are in underperforming and costly retail and bank-owned funds, yet the Productivity Commission’s prescriptions will do nothing about it.”
Alluding to ISA’s current TV advertising campaign against banks “getting their hands” on super, Whiteley said the PC’s proposals shift the focus to more employee choice, which “better suits the profit-driven, bank-owned retail funds”.
Whitely did, however, commend the Commission for “highlighting the need to address the cost of multiple superannuation accounts”, but added that this can be addressed “regardless of default design”.
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