Productivity Commission has shown a path to more competitive super and much better results for savers.
Just over three years ago the Coalition commissioned the country’s leading economic advisory body, the Productivity Commission, to assess the efficiency and effectiveness of Australia’s superannuation system.
A system that comprises 15 million members, with $2.7 trillion of assets under management, representing 140 per cent of GDP and 20 per cent of total household assets.
The health of Australia’s superannuation system is fundamental to the strength of the national economy and the quality of life in retirement of every working Australian.
In a 1,000 page report with 31 recommendations the Productivity Commission found that while our superannuation system has served Australians ‘‘reasonably well’’ it requires significant structural change ‘‘to better meet the needs of a modern workforce and a growing pool of retirees.’’
With their proposed changes the Productivity Commission finds that members could be $3.8 billion better off each year. This would leave a 55 year old worker today $79,000 better off in retirement, and a new entrant into the job market $533,000 better off at retirement, or about double what their retirement balance could otherwise be.
The report contains a number of key findings, central to which is that competition is not being fully harnessed.
The Productivity Commission finds that ‘‘neither member engagement nor fund conduct is fully consistent with healthy or effective competition.’’
Around 30 per cent of members have low financial literacy with insufficient knowledge to make informed decisions as to the best available product to suit their needs.
Competition is therefore reliant on fund rivalry. However, rivalry is particularly ‘‘superficial’’ in the default market. Employers are restricted in their ability to choose a default fund to only those that are listed in a relevant award or in their enterprise agreement. This creates ‘‘a barrier to entry’’, reducing competition.
The Commission finds this ‘flaw’ in the system has far reaching impacts given that up to two-thirds of employees when starting a new job do not select a super fund, ending up in the listed default fund.
Their conclusion is that under the current system there is ‘‘little or no competitive pressure on default funds to improve outcomes for members’’ and that the system ‘‘relies too heavily on third party decision makers, thereby ingraining member disengagement.’’
In response the Productivity Commission recommends the establishment of an independent expert panel to select ‘‘a best in show’’ short-list of up to 10 superannuation products. They also recommend the decoupling of default fund selection from the workplace relations system.
The extent of unrealised economies of scale in the system is cited by the Commission as further evidence of a lack of competition, with 93 APRA regulated funds having assets of under $1 billion.
If the 50 smallest funds were merged with the 10 largest funds, members would be $1.8 billion a year better off.
Sadly for members, their long term returns are also not being maximised with relatively high fees, multiple accounts and inappropriate insurance policies eroding their balances.
With over $30 billion in superannuation fees being paid annually, the report finds that ‘‘fees in Australia are high by international standards.’’ A half percentage point reduction in fees could be worth around an extra $100,000 to a typical full time worker in retirement.
Unintended and unwarranted multiple accounts total 10 million or around one in three of all member accounts. These accounts are costing members $2.6 billion a year in unnecessary fees and insurance.
This is driven by a feature of the current system whereby every time a member changes jobs and defaults into a new fund, they end up with a new account.
This feature of linking the choice of default fund to the employer is ‘‘anachronistic’’ and fails to reflect the mobility of workers today who change occupations and industries on a more frequent basis. To deal with this problem the Commission recommends that members default once and that only members without an account be defaulted.
There are 12 million members holding insurance, with about 80 per cent of these policies provided automatically.
In 2016-17, these members paid a total of $9 billion in premiums, including an estimated $1.9 billion on unintended duplicate policies.
The report finds that a number of members have ‘‘policies that are of little or no use to them – including zombie policies that cannot be claimed against’’.
The Commission strongly endorses the Government’s reforms currently in the Senate to prevent inappropriate account erosion by ensuring members receive insurance policies that are suitable for them and represent value for money.
Under our reforms, an estimated 5 million Australians will be able to choose if they want to be covered for insurance rather than paying by default.
Other important superannuation reforms the government is pursuing in the parliament have also been endorsed by the Commission. These include the automatic consolidation of low-balance inactive accounts; caps on fees for low-balance accounts; and tougher penalties for trustees.
It’s time the Labor Party stopped blocking these amendments, listen to consumer advocates, independent experts and support what the Commission calls ‘must have’ common sense reforms that put the interests of members first.
Before finalising our response to this Productivity Commission report the Government will consider the Final Report of the Banking Royal Commission, which is examining the conduct of super funds and regulators.
Given the size and nature of our compulsory superannuation system it is critical that it is operating in the best interests of all 15 million members. This substantial report makes a significant contribution to the future success of the system.
Josh Frydenberg is the federal Treasurer.