Australia's Productivity Commission is recommending that superannuation funds be made to compete for the new job entrant component of the default market.
The Commission has recommebded that a 'best in show' list be drawn up to include up to 10 top performers, with simple and comparable metrics to help members choose funds. This will make member engagement easier, especially for new workforce entrants. And comparing fund performance at last becomes a possibility, said Ms Karen Chester, deputy chair of the Commission, at a luncheon last week.
She said, “The ‘best in show’ shortlist will support member engagement, but it does not solely rely on member engagement to work. Those new workforce entrants who fail to make a choice will simply be defaulted into one of the ‘best in show’ funds, determined by sequential allocation. And we learned from our member choice survey that number is likely to be low – some 5% of members.”
Funds will need to compete to be on this ‘best in show’ shortlist, and in doing so extend their best in show offer for new workforce entrants to their existing default members. This would see the benefits immediately spilling over to many existing default members.
Funds will be selected every four years by an independent expert panel set up for the task. And this independent panel should be comprised of experts who can make decisions about what benefits the members.
Ms Chester added, “To guard against poor decisions, the panel’s processes should be transparent, by publishing selection criteria and weights, as well as the reasons for decisions.”
If adopted, the Commission’s model would replace a system whereby the employer chooses a fund for any worker who does not nominate a preference.
Ms Chester said, “Over an average member’s working life, being stuck in a poor performing default fund can leave them with almost 40% less to spend in retirement.”
She said that the Commission had constructed investment benchmark portfolios to measure whether funds are adding value against the market’s performance and to identify where there is long-term underperformance in the system.
She added that while the good news is that most members are doing reasonably well, the system suffers two fundamental flaws that set the odds against many members:
- Members accumulating unintended multiple accounts, and paying billions of dollars each year in unnecessary fees and insurance premiums.
- Entrenched underperformance, not just in the choice segment but also the default segment.
“We found that the odds of being a fund member with these two problems is both too high and highly regressive in its impact – causing greater harm to young people, workers on low incomes and workers in an out of the workforce,” she said.
She elaborated, “We found that one in three member accounts in the system are unintended multiples – that’s about 10 million accounts. That’s because the super system continues to staple the member’s account to the employer and not the worker. So every time a worker changes job, especially for the two-thirds of members who default when they change job, they typically end up with another super account.
“To date, the onus has been on members to proactively consolidate their existing accounts, and we know that many members have failed to do this or left it so late that their balances have been seriously depleted.”
Estimates suggest the unintended multiples collectively cost superannuation fund members who hold them A$1.9 billion ($1.5 billion) a year in excess insurance premiums and A$690 million in excess administration fees — or A$2.6 billion in aggregate each year. Over a working life, an unintended multiple account can leave a typical member with A$51,000 or 6% less to retire with.
The Commission also found that over one in four funds underperformed over the 12 years to 2016. The 20 underperforming funds represent about one-third of the nearly 15 million member accounts in the dataset. About half of the underperformers are retail funds, and a third industry funds.