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Productivity Commission recommendations

The Australian Government has asked the Productivity Commission to undertake an inquiry into the competitiveness and efficiency of Australia's superannuation system. The draft report was released on 29 May 2018.

These key points are taken from the Productivity Commission's website:

Key points

  • Australia’s super system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees. Currently, structural flaws — unintended multiple accounts and entrenched underperformers — harm a significant number of members, and regressively so.

    • Fixing these twin problems could benefit members to the tune of $3.9 billion each year. Even a 55 year old today could gain $61 000 by retirement, and lift the balance for a new job entrant today by $407 000 when they retire in 2064.

  • Our unique assessment of the super system reveals mixed performance.

    • While some funds consistently achieve high net returns, a significant number of products (including some defaults) underperform markedly, even after adjusting for differences in investment strategy. Most (but not all) underperforming products are in the retail segment.
    • Fees remain a significant drain on net returns. Reported fees have trended down on average, driven mainly by administration costs in retail funds falling from a high base.
    • A third of accounts (about 10 million) are unintended multiple accounts. These erode members’ balances by $2.6 billion a year in unnecessary fees and insurance.
    • The system offers products and services that meet most members’ needs, but members lack access to quality, comparable information to help them find the best products.
    • Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50 000 — by duplicate or unsuitable (even ‘zombie’) policies.

  • Inadequate competition, governance and regulation have led to these outcomes.

    • Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including the proliferation of over 40 000 products).
    • The default segment outperforms the system on average, but the way members are allocated to default products leaves some exposed to the costly risk of being defaulted into an underperforming fund (eroding over 36 per cent of their super balance by retirement).
    • Regulations (and regulators) focus too much on funds rather than members. Subpar data and disclosure inhibit accountability to members and regulators.

  • Policy initiatives have chipped away at some of the problems, but more changes are needed.

  • A new way of allocating default members to products should make default the exemplar.

    • Members should only ever be allocated to a default product once, upon entering the workforce. They should also be empowered to choose their own super product by being provided a ‘best in show’ shortlist, set by a competitive and independent process.
    • An elevated threshold for MySuper authorisation (including an enhanced outcomes test) would look after existing default members, and give those who want to get engaged products they can easily and safely choose from (and compare to others in the market).
    • This is superior to other default models — it sidesteps employers and puts decision making back with members in a way that supports them with safer, simpler choice.

  • These changes need to be implemented in parallel to other essential improvements.

    • Stronger governance rules are needed, especially for board appointments and mergers.
    • Funds need to do more to provide insurance that is valuable to members. The industry’s code of practice is a small first step, but must be strengthened and made enforceable.
    • Regulators need to become member champions — confidently and effectively policing trustee conduct, and collecting and using more comprehensive and member relevant data.

4 Comments
allan wilson
June 01, 2018

Any super fund that is guaranteed huge inflows of funds on a regular basis should always outperform a fund that has no such inflow, and of course has to allow for potential outflow.
How easy to invest for the long term when you know that no matter what fresh money is coming in the door to handle liquidity issues!
As for sponsoring football clubs etc how does this provide a retirement benefit for the member which I thought was the purpose of superannuation?

We require SGC mandated funds other than the union funds to enable competition; perhaps even the Future Fund.

Personally I would like to know more of the "alternatives" section of many mandated funds which are opaque to say the least and may look good in the current market but could cost some pain for future generations. Some weightings being as high as 30% of the fund.

Daniel Parry
May 31, 2018

"Unhealthy competition" - umm.

I searched the go-to source of all human endeavour's knowledge (Wikipedia) and found no such term as it relates to economic activity.

There were other references to "unhealthy competition" in regards to sociological outcomes (eg teams and workplaces), I will admit but no-one since Adam Smith until the Australian Government invented the term has anyone considered any economic competition as "unhealthy".

Perhaps we can we bring back the Australian Wheat Board or TAA? I mean, really, how many airlines does one country need?

Phil
May 31, 2018

The idea of a "best in show" top 10 list of funds decided by an "expert" panel sounds absurd. If you put together a thousand different "expert" panels (expert in what exactly?), you'd likely end up with very close to a thousand different lists.

I assume they'll essentially outsource to the research companies who already analyse and rate thousand of super funds. My many dealings with these agencies suggests they would take a very dim view of having the results of their work distilled down to a simplistic "top 10".

The list would have to be constantly revised as performance, fees, market conditions constantly change. On top of that, what might be the "best" fund for someone might be totally inappropriate for someone else, depending on individual circumstances.

I expect the panel will comprise the usual suspects: a few union bosses, a few company executives, some former politicians, Gonski and Peter Fitzsimons.

I feel the chill winds of excessive government regulation blowing in. The irony is that ever-expanding regulation increases costs, complexity and bureaucracy, thereby often exacerbating, rather than solving problems (or else solving one, only to accidentally create another).

Mark Hayden
May 31, 2018

A positive of the PC report is the criticism of life-cycle products (“some foregoing higher returns by adjusting asset allocation as early as 30 years of age”). I have long been a critic of these products. They have the ability to “cost” members hundreds of thousands of dollars (but not hundreds and thousands). This insight by the PC will hopefully squash some aspects of the Cooper Review, whereby there was an inference that retirees should cash out from long-term investments to buy annuities. Whilst there is a need to protect against longevity risk there is, on the other hand, a benefit in maximising exposure to the best performing long-term assets. The PC report also said there should not be a MyRetirement default and hopefully this leads to healthy debate in this area.

 

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