Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 256

Young people, not employers, should choose super fund: Productivity Commission

Young people entering the workforce should choose their own superannuation fund, rather than the present system of their employer selecting the fund for them, according to a Productivity Commission report released on Tuesday.

It recommends that these workers should be given a “best in show” shortlist set by a “competitive and independent process.”

Technically - unless a particular EBA or workplace determination restricts the choice of fund - young people, and others who enter the workforce or change jobs are currently able to choose their own fund. In practice, the employer nominates a fund which people are defaulted into if they don’t make a choice. That happens every time someone starts a new job.

The present system has twin risks for a 'default' member - that they default into multiple funds and/or they default into an underperforming fund, according to the Commission in its draft report, “Superannuation: Assessing Efficiency and Competitiveness”.

The government commissioned the report, and is already taking action to improve the superannuation system. In the Budget it announced it was making it easier for people to find their lost superannuation, capping administration and investment fees on low balance accounts, and abolishing exit fees. It is also cracking down on expensive insurance policies being sold to younger people.

Earlier, it moved to change governance arrangements, especially in relation to the boards of the big industry funds, which it regards as too close to the trade union movement. But this has not passed the parliament.

At present the default members are usually directed to an industry fund.

The inquiry found that most, though not all, underperforming products were in the retail rather than the industry segment of the market.

“The default segment generated average net returns of about 7% a year over the 12 years to 2016. Top performers were typically (but not always) larger, not-for-profit funds,” the commission report said.

“For-profit funds as a group, have delivered returns below several benchmarks and significantly below not-for-profits funds. These differences do not appear to be fully explained by fund size, asset allocation or reported administration expenses”.

The commission says that “while the default segment has on average outperformed the system as a whole, and worked well for the majority of default members, it fails to ensure members are placed in the very best funds and places a sizeable minority in underperforming products”.

In these cases there is a “pernicious cost” - a reduction in their retirement balance of 36% or $375,000 for a typical new job entrant today.

Default arrangements should be recrafted to harness the benefits of competition for default members.

The report identifies the key problem currently to be linking the choice of default fund to the employer, rather than to the member.

The best default model would be the “assisted employee choice” model. “It would best harness healthy competition and ‘nudge’ members into the very best products,” the report says. In contrast, assisting the employer to make the choice “performs less well in ensuring employees are placed in the very best funds, due to the inconsistent incentives with leaving the decision to the employer”.

The proposed model would apply to all new workforce entrants - about 474,000 members a year with about $1 billion annual contributions initially. It would also help “many existing default members through extending to them any lower fee offers made in the course of best in show selection, and signalling whether funds are really best”.

Under the Commission’s recommendations, the Fair Work Commission would be stripped of its power of administering the process for becoming a default-listed fund in awards. This would be put in the hands of an independent expert panel appointed “through a robust selection process” and reconstituted every four years.

With the release of the report, the Commission Deputy Chair Karen Chester said: “Australia’s $2.6 trillion super scheme has become an unlucky lottery for many Australian workers and their families. The system is working well for many members, but not for all”.

The system’s architecture was outdated, she said, emphasising the “structural flaws” of unintended multiple accounts and entrenched underperformance.

Chester said about a third of accounts – 10 million – were “unintended multiples”, with the excess fees and insurance premiums paid on those accounts being about $2.6 billion annually.

“These problems are highly regressive in their impact – and they harm young and lower-income Australians the most,” Chester said.

Over one in four funds underperforms. This could lead an average member in the fund over their working life with nearly 40% less to spend in retirement.

“Fixing these twin problems of entrenched underperformance and multiple accounts would lift retirement balances for members across the board. Even for a 55-year old today, the difference could be up to $60,000 by the time they retire. And for today’s new workforce entrant, they stand to be $400,000 ahead when they retire in 2064,” Chester said.

Michelle Grattan is Professorial Fellow at the University of Canberra. This article was originally published on The Conversation

RELATED ARTICLES

The SMSF gaps in the Productivity Commission’s Superannuation Report

How to become a rich old lady

Productivity Commission: super efficiency but at what cost?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.