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Australia’s current super system is “harming millions of members” through underperforming funds, multiple accounts and excessive fees.
That’s the damning assessment of the Productivity Commission (PC) in a new report containing a number of contentious recommendations, which – if implemented – will see the super industry face yet another upheaval. From forcing long-term underachieving super funds out of the super industry to the creation of a shortlist of funds for new workers to select from, the recommendations could usher in significant change.
Fund members, however, shouldn’t wait for the Government or their fund to act, as there are a number of steps they can take right now to protect their super nest egg and overcome many of the problems highlighted in the PC report.
Note: For a full list of issues and recommendations see SuperGuide articles Key issues and findings raised by the PC report on superannuation and Modernising the super system: Recommendations from the PC report on superannuation.
Background to the Productivity Commission report
The Productivity Commission report originally come from a recommendation made in the 2014 Financial System Inquiry. Subsequently, the Federal Government tasked the commission with holding an investigation into Australia’s super system and it has released several reports on its efficiency and competitiveness, and a new model for how new employees are placed into default super funds.
Problems in the super system
The report highlights a number of areas the Productivity Commission believes need addressing to better meet the needs of a “modern workforce and growing pool of retirees”.
A key problem in the system is multiple unintentional super accounts, with one-third of all super accounts (about 10 million) being held unintentionally. These extra accounts are eroding fund members’ account balances by $1.9 billion a year in excess insurance premiums and $690 million in extra administration fees.
Underperforming super funds are also a major issue, with a significant number of super products underachieving, even after adjusting for different investment strategies. Other problems include excessive fees, inadequate competition, a lack of straightforward information and costly insurance cover for some members.
PC report: 12 recommendations for change
1. Introduce employee – not employer – choice of super fund
The report recommends employees are only placed into a default super fund by their employer when they first start working, or if they do not have an existing super fund. After that they should only move into a new super fund when they choose, not whenever they start a new job. Employers will no longer have any say in the selection of an employee’s super fund.
2. Employees to receive ‘best in show’ shortlist of funds
When starting work, employees should be given a shortlist of 10 ‘best in show’ super funds, so they are ‘nudged’ towards good super products without being forced to pick one. Existing enterprise or workplace agreements restricting an employee’s fund choice will become invalid.
If an employees doesn’t make a choice, they will be allocated to a super fund on the shortlist on a sequential basis. Employers will not be involved in selection of the default fund.
3. Independent panel to develop ‘best in show’ shortlist
An expert panel will be responsible for a competitive process to develop the ‘best in show’ shortlist of 10 super funds. The funds must meet a clear set of criteria and be likely to deliver the best outcomes for fund members over the long term.
The expert panel will be independent and report to the Government, with no panel member staying on the board for more than two terms.
4. Higher MySuper and choice outcome tests
All APRA-regulated super funds (not SMSFs) will undertake an annual outcome test for their MySuper and choice products, requiring them to compare the fund’s investment options with a benchmark portfolio.
Investment options falling short of the benchmark portfolio by more than 0.5% a year over a rolling eight-year period will be given 12 months to improve, or they will be withdrawn from the market and fund members will be transferred to a better performing investment option.
5. Abolish unintended multiple accounts
New legislation will require super accounts with balances under $6,000 and 13 months or more of inactivity to be transferred to the ATO for automatic consolidation with an active account held by the fund member.
This process will include Eligible Rollover Funds, which should all be wound up within three years.
6. Develop member-friendly product dashboards
Super funds will be required to publish a simple, single-page product dashboard for every investment option they offer.
ASIC will publish this dashboard information on its MoneySmart website. Members will receive this information whenever they want to switch their investment option.
7. Clearer definition of ‘advice’ in super
The Corporations Act 2001 will be amended so the term ‘advice’ can only be used by super funds in relation to ‘personal advice’, not information about contributions or switching investment options. Financial advisers and licensees will also be required to disclose the number of super products on their approved product list and how many of these are in-house products.
For more information about the different types of financial advice, see SuperGuide articles What are the different types of financial advice available? and How to find low cost (or free) financial advice.
8. Limit fees and ban trailing commissions
Many super funds may need to rethink their approach to fees in the future, with the PC report recommending all fees charged by APRA-regulated super funds to be limited to only recovering their costs. The current situation where fund members cross-subsidise the costs of other members is to be prohibited.
In addition, all trailing commissions to financial advisers for super products and advice will be banned.
9. Stronger safeguards for SMSF advice
Professionals providing advice about setting up an SMSF will require specialist training. They will also need to give potential SMSF trustees documents outlining ASIC’s ‘red flags’ prior to establishing a fund.
10. Opt-in insurance for members under 25
Younger fund members (aged under 25) will only have insurance cover if they choose to opt-in. Super funds will also stop insurance cover if a member’s account has not received contributions for 13 months, unless the member requests it be retained.
Super funds will also be required to explain why the default insurance premiums and cover are in fund members’ best interests in their annual report. They must also offer a website calculator so members can see the impact of insurance premiums on their retirement account balance.
11. Improved fund trustee boards
The PC report recommends all super fund be required to use a process to assess the performance of the board and individual trustees against the fund’s objectives. They will also need to undertake external evaluation of the fund’s performance and capability every three years.
12. Funding for member advocacy body
Fund members may gain more say in the super industry, with the PC report recommending the Government provide adequate ongoing funding for an independent super fund members’ advocacy and assistance body.
Take action now, don’t wait
Although the Treasurer, Josh Frydenberg, has welcomed the PC report and said the Government will consider all the recommendations, it plans to “await the final report of the banking royal commission, which is examining the conduct of super funds and the regulators, before finalising its response.”
So it may be some time before super members see any real action. Given that, it’s worth considering taking some action yourself.
Getting involved with your super account is a valuable way to boost the amount you have in super when you retire.
Here’s five simple steps to get started:
1. Check if you have multiple super accounts
Consider consolidating your accounts to save on fees and get the benefit of a better performing fund.
Important: Check before closing any super account whether you will any benefits (such as valuable insurance cover), and the cost of any exit fees imposed by the fund.
Learn more in SuperGuide article The easy way to find and consolidate your lost super.
2. Review the performance of your super fund
Compare how your fund is performing compared to similar investment options in other super funds.
For more information on switching your investment option, see SuperGuide article Super control: How to switch your super account’s investment option.
3. Learn more about super
SuperGuide was created to help people understand and navigate the super system. To learn more about how you can boost your super, become a SuperGuide Premium member and access independent expert guides on how much you can contribute, salary sacrificing, tax-deductible super contributions, contributions caps and contributions strategies, best-performing super funds, the latest super rates and thresholds, and other super strategies.
4. Compare fees on your fund
Check how much your fund is charging and compare it to other types of super funds (for example, against a selection of large industry and retail funds).
For more information on what fees super funds charge, see SuperGuide articles 10 key super fund fees: What are they and why am I paying them? and Super and pension funds with the lowest fees.
5. Take an interest in your fund
Ask questions. With the PC report encouraging super funds to refocus on their members, fund members should get active and find out more about their super fund, its investments and how the fund is run.
Attend your super fund’s annual meetings, or interact with it by email or social media. It’s your retirement savings, so make sure you take an interest.
For more information, see SuperGuide article Super tips and strategies for all ages.