- Time for change in super industry
- PC ignores the obstacles facing women
- Super industry no longer needs protection
- New broom sweeps clean (but an old brush knows the corners)
- Mock horror is a fool’s cover
- Weak PC analysis on SMSFs
- What is the Productivity Commission Draft Report on super?
- For more information…
- 18 key points from the PC report on super
- How to make a submission
Reading the Productivity Commission’s draft report on the superannuation system reminds me very much of the Hans Christian Andersen’s tale, The Emperor’s New Clothes.
The child in the crowd calls out that the emperor is wearing no clothes, even though the emperor’s retinue, resident sycophants and loyal subjects went along with the charade that the naked emperor was indeed wearing special clothes, clothes that only those who were wise and intelligent, and of a certain social status, could see.
The mass collusion/delusion by the tailors, the emperor and those benefiting from the favours of the emperor led the emperor to walk naked among his subjects, even though the emperor couldn’t see his clothes, his advisers couldn’t see the clothes and his subjects definitely couldn’t see his clothes.
The lone child calling out the truth (that everyone knew already) is not dissimilar to the Productivity Commission calling out the super industry (and the federal government) on obvious failures with the superannuation system.
The Productivity Commission (PC) has produced a draft report highlighting serious issues with the super system; findings which are no surprise to those working in the super space. Every super fund, every super expert, every policy adviser, and nearly every politician already knew the issues with the super system, and the PC’s draft findings are perhaps obvious (and legitimate), but very few in the industry have been willing to stand up and call out the industry and the government, as the PC has done.
The PC has called out issues with the super system that have festered for years, in some instances since compulsory super was introduced 25 years ago, and even before then, when productivity super was introduced more than 30 years ago.
The PC has produced a report with 41 draft findings and 22 draft recommendations, as well having a few things to say about SMSFs (links to those findings and recommendations appear at the end of this article).
Time for change in super industry
In the past, the federal government, the super industry bodies and the super funds themselves have proudly promoted the fact that Australia’s super system is best practice, and certainly it is a pretty good system considering there was no compulsory super 30 years ago, and the super industry essentially started from scratch (with the exception of corporate and public sector funds, and some retail super offerings).
After 25 years however (although only 15 years of 9% Superannuation Guarantee, and 2 years of 9.5% SG) we still don’t have many Australians retiring with the expectation of a comfortable lifestyle (see SuperGuide article How much super do you need to retire comfortably?).
We still have a limited selection of retirement income products giving many Australians with substantial super savings no choice but to set up an SMSF (see SuperGuide article Why Australians leave large super funds and choose SMSFs).
The issue of multiple super accounts, and multiples sets of fees, and multiple insurance policies, remains a huge problem. The federal government claims it is worried about this issue, but simply snuffles lost super accounts into consolidated revenue, and counts it as income in successive federal budgets – doing very little to educate Australians about the steps involved to locate lost super (see SuperGuide articles The easy way to find and consolidate your lost super and The easy way to find and consolidate your lost super).
Sadly, we still have the industry fund sector and the retail fund sector warring over super policies, such as super trustee board representation and which sector controls the default fund market. (The Productivity Commission recommends opening up the default fund market.)
PC ignores the obstacles facing women
Significantly, and what is very disappointing for half of the population, is that the Productivity Commission ignored the fact that the super system is not set up for most women, especially since many women earn significantly less (on average) than men, live longer (on average), and take significantly more work breaks (on average) than men. Superannuation is a work-based benefit that favours the traditional worker, rather than casual or part-time workers, or Australians who have to take time out of work, such as women (predominantly) and other carers (see SuperGuide articles Women and carers ignored by super industry and law-makers and Women and super: How to beat the odds).
Super industry no longer needs protection
The super industry is an unusual beast in that it receives guaranteed cash inflows every month or quarter, on behalf of super fund members who are largely disengaged from their super (apart from readers of SuperGuide of course). After 25 years of protection by government policy, complacency is a term that I suggest describes the super industry.
The fact that the federal government was able to get the January 2017 Age Pension changes through, and the July 2017 super changes through with only a whimper from the super industry, is disappointing to say the least. For the record, SuperGuide was one of the more vocal opponents of the January 2017 changes, and the July 2017 changes, in particular, the reduction in contributions caps, and the introduction of the transfer balance cap (and the nightmare administration requirements) from July 2017.
Noting of course that the PC draft report is not a review of specific super policies, but of the efficiency and competitiveness of the super system.
In the superannuation industry there appears to be a culture of timidness when calling out weakness in super policy or government decisions. Perhaps the reason for the timidness is that much of the lobbying is behind closed doors, and perhaps they fear that if they publicly denounce a government policy, they will not get invited to the consultation table, or if they’re already at the consultation table, that they will not be reinvited.
Unlike decades ago, very few super industry associations talk publicly about problems with the super system, or problems with the super rules. Any discussions with government are generally held privately, and the public are left in the dark, or are handed scraps about the plight of their retirement savings under new rules.
I would argue that the super industry has become mere implementers of government policy rather than change agents on behalf of super fund members, although there are some super funds, and some individuals and organisations still pushing to secure the best interests of members.
Having worked at both ASIC and APRA in the very early days of my career, the early approach to regulating the industry was more collegiate than enforcement, which made sense with new laws and a burgeoning industry, but this collegiate culture has continued long past its use-by date and has slowed progress in all of the areas that the PC has highlighted.
The days of having a quiet word with an offending super fund or organisation should now be long gone, and the days of protecting an industry overseeing a $2.5 trillion investment pool should be over.
New broom sweeps clean (but an old brush knows the corners)
Some sections of the super industry can be hyper-sensitive about criticism, and even more sensitive about any scrutiny of the industry by government or the regulators or media.
Such sensitivity has often meant limited debate and discussion on the areas in super needing improvement. Rather than embracing the opportunity to review itself, some sections of the super industry have attempted to ridicule or discredit individuals, sectors or policies that don’t fit within their agendas.
Although some super funds and individuals are pushing for significant change, more broadly I see very little innovation taking place within the super industry in terms of enabling Australians to create a secure retirement, and perhaps it is not their job anyway.
The super system has been set up as a benevolent structure where fund members are not empowered to take responsibility. For example, default funds definitely serve a purpose especially for younger workers, and less financially literate Australians, but we are talking about working adults, not children.
The disclosure rules are particularly wanting, and I wholeheartedly agree with the PC that the disclosure documents are written to protect the super funds and financial organisations, rather than inform and protect the super fund members.
I consider the super industry was particularly resistant to embracing the digital world, which I suggest is indicative of much of the resistance to change within the broader super and financial services industry.
Of course, we don’t want to lose the experience and expertise of the super industry, but we need to get rid of those stopping the super system (and financial services system) from adapting to new ways of transacting, new styles of employment, and embracing a world where women can enjoy similar super and tax benefits to men.
Mock horror is a fool’s cover
Ironically, in response to the PC report, we now have a cacophony of articles and opinion pieces about how shocking the findings are and all the elements that are so wrong with the super industry, and action must be taken.
Yes, action must be taken. On many of the findings and recommendations announced by the PC, SuperGuide has been writing about these issues for years, and helping Australians minimise the damage of high-fee super funds, underperforming funds, multiple super accounts, lack of guidance on how to secure a comfortable retirement, the plight of women attempting to save for retirement within a system not designed for them, to name a handful.
Anyone who works or writes about the super industry has known these issues exist for a long time, and SuperGuide is one of the few voices that has called out the weaknesses in the super system, and provided information, tools and guidance on how you can navigate your away around those weaknesses.
Weak PC analysis on SMSFs
As an independent observer, and as a former participant of the super policy machine, I agree with most of the findings and recommendations contained in the PC’s report on the super system. The main finding that I am sceptical about is that a $1 million SMSF, on average, is less competitive than having that $1 million in a retail or industry super fund (see SuperGuide articles SMSFs: How much does a DIY super fund cost? and SMSFs: Enough super to justify SMSF running costs?).
Considering SMSFs hold roughly a third of all super money, the PC’s analysis of SMSFs was fairly thin, although it did say that current SMSF regulation was appropriate. Of the 41 draft findings contained in the PC draft report, only 5 of the findings relate specifically to SMSFs. The PC also released 22 draft recommendations, of which only one draft recommendation refers to SMSFs, albeit obliquely (See SuperGuide article What the Productivity Commission says about SMSFs).
Another observation is that the 12-year performance timeframe that the PC used to benchmark the performance of large super funds and SMSFs, included the biggest sharemarket rout since the depression – the Global Financial Crisis – and the timeframe post-GFC also hit investment returns.
What is the Productivity Commission Draft Report on super?
In May 2018, the Productivity Commission released its draft report into the superannuation system, and also its recommendations into alternative models for allocating default fund members to products.
In relation to the efficiency and competitiveness of the super system, the PC was provided with Terms of Reference that included considering the following matters:
- Costs, fees and returns
- Default fund members
- Insurance in superannuation
- Broader financial system
In relation to developing alternative models for allocation of default fund members to products, the Commission was asked to consider the following principles: Best interests, competition, feasibility, credibility and transparency, regular assessment and accountability, and fiscal implications.
The PC made 18 key points (set out below), produced 41 draft findings and 22 draft recommendations. The Productivity Commission is receiving submissions on the draft report until 13 July 2018. Details on how to make a submission appear later in this article.
For more information…
For more information on the Productivity Commission’s draft report on super, see the following SuperGuide articles:
- Productivity Commission identifies 41 major issues with superannuation system
- Productivity Commission and super: 22 draft recommendations
- What the Productivity Commission says about SMSFs
- Investment performance: Mega super funds fail to deliver best returns
- Why Australians leave large super funds and choose SMSFs
- Women and carers ignored by super industry and law-makers
18 key points from the PC report on super
Text below adapted directly from Productivity Commission Draft Report Overview (Superannuation: Assessing Efficiency and Competitiveness), April 2018. Most of the wording remains the same, but structure (including some wording and numbering for clarity) has been added by SuperGuide.
- Multiple accounts and entrenched underperformers. 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.
- Most underperforming super funds are in the retail segment. 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.
- Lack access to quality information. 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 superficial rivalry rather than real competition, exposed risk of underperforming default funds, and too much focus on super funds rather than fund members (see Points 8.9 and 10).
- Not enough competition with default funds. 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 exposes costly risk of defaulting to poor performing super fund. 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).
- Too much focus on super funds and not enough focus on fund members. Regulations (and regulators) focus too much on funds rather than members. Subpar data and disclosure inhibit accountability to members and regulators.
- More policy change is needed. Policy initiatives have chipped away at some of the problems, but more changes are needed.
- New default fund allocation. Introduce a new way of allocating default funds. A new way of allocating default members to products should make default the exemplar.
- Only one allocation of default fund in lifetime, and choose from ‘best in show’ list. 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). 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).
- New recommended model 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.
- Strong governance rules are needed. 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.
How to make a submission
You can make a submission to the PC, preferably in electronic format, by 13 July 2018, by attending a public hearing or submitting a short comment on the inquiry website. Further information on how to provide a submission is included on the inquiry website.
Note: The Commission will be holding public hearings in late June 2018, and further details will be made available on the Commission’s website in due course. The final report will be prepared after further submissions have been received and public hearings have been held, and will be forwarded to the Australian Government at a date to be advised (current chatter is that the final report will be released at the end of 2018).
You can obtain a copy of the full PC draft report, or a briefer overview draft report, from the Productivity Commission website.