A scathing report from the Productivity Commission has described the superannuation industry as an “unlucky lottery”, recommending sweeping changes that would see workers steered towards an approved list of 10 default providers picked by an expert panel.
The commission found one third of super accounts in Australia are unnecessary multiple accounts, costing their owners $2.6 billion every year in extra fees and insurance charges.
Many Australians acquire multiple super accounts when they change jobs and end up having their divided balances gradually eroded by fees.
"With default funds being tied to the employer and not the employee, many members end up with another account every time they change job," the commission's deputy chair Karen Chester said on Tuesday.
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The landmark report recommends a new approach where Australians would only be placed in a default fund once, when they start working for the first time.
And instead of the fund being chosen by the employer, often directing the Commission would have an “expert panel” pick the 10 best-performing funds and offer those as default options for new workers.
Financial services minister Kelly O’Dwyer said the report had “blown the whistle” on funds that were not acting in the interests of members.
She said the government was already taking steps to address the problem.
The 2018 Budget, released in May, introduced a new 3 percent cap on fees for funds holding balances of less than $6,000. Exit fees for customers closing an account were also banned.
From July 1, the Australian Tax Office will get new powers to track down inactive super accounts with low balances and “proactively” merge them using data-matching technology.
The ATO crackdown could “reunite” Australians with $3 billion in the first year, Ms O’Dwyer said.
Which funds would make the ‘top 10’ list?
Ms O’Dwyer said the idea of an “independent organisation” to pick the 10 default funds was a “really clever solution” and insisted she was agnostic as to whether they were union-backed industry funds or retail funds offered by financial services companies.
While workers already have the right to choose their own super fund, many are effectively signed up automatically for a new account when they start a new job.
The default option is often an industry fund, nominated through a deal with the relevant union.
The Commission found industry funds were consistently performing better than their retail competitors.
“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 report read.
Labor’s shadow employment minister Brendan O’Connor said he was sceptical about who would sit on the “expert panel,” asked by reporters at Parliament House on Tuesday.
“Who appoints it? Who appoints it? Who appoints it? Does this government appoint the expert panel?” he asked.
He said the report validated Labor’s long advocacy for industry super funds.
The Commission found cost of poor-performing default funds can be severe over an employee’s lifetime. A low-returning fund had the potential to leave the average worker with almost 40 per cent less to spend in retirement.
"Fixing these twin problems of entrenched under-performance and multiple accounts would lift retirement balances for members across the board," Ms Chester said.
"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."
- with AAP
