The superannuation industry has been put on notice that fees for Australian customers are too high and are hurting retirement savings.

In a major report presented to Treasurer Joe Hockey on Sunday, David Murray, chairman of the Financial System Inquiry and former head of the Commonwealth Bank, said retirement incomes could be increased by 25 to 40 per cent if the full package of recommendations on superannuation was adopted, including lower fees.

The report said super funds could lower fees without hurting returns to members, but fees had remained high despite the increasing size of the industry.

• Read the full report here
• Read the full list of recommendations here 
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“A major concern of the Inquiry is that the Australian system as a whole has been unable to realise the full benefits of scale,” the final report said.

Unless super funds can deliver significant reductions in fees by 2020, the industry should face a restructure to encourage more competition, Mr Murray said.

Lower fees means improved retirement incomes.

However, Mr Murray said consumers were partly to blame for the high fees because they did not aggressively shop around for a better deal on their superannuation.

“A major reason for [high fees] is the absence of strong consumer-driven competition, particularly in the default fund market. This reflects members’ lack of engagement and reliance on employers to choose default funds for their employees,” the report said.

But it added: “If fees and costs could be reduced, net returns, and ultimately retirement incomes, could be higher.”

Mr Murray said the fragmentation of the local industry was also responsible for the higher-than-necessary fees.

“Australia has 294 APRA-regulated funds, most of which have a small asset base and tend to have higher fees than larger funds. In June 2013, around 80 per cent of these APRA-regulated superannuation funds held only around 20 per cent of assets.”

The push for lower fees in the local super industry is likely to put pressure on small retail and industry funds to merge with larger funds that charge lower fees.

The recommendations on fees were part of a package of suggested reforms for the local superannuation industry in the report, which is the first major inquiry into the Australian financial sector since 1997.

Mr Murray also recommended that an agreed set of objectives for the super system be enshrined in legislation to protect the industry and fund members against the tendency of governments to move the regulatory goalposts of the system.

Among the other important recommendations is a proposal to encourage super fund members to take their superannuation entitlements in the form of an income stream rather than a lump sum when they retire.

“The potential gains to members, the economy and taxpayers from a more efficient retirement phase are significant and warrant intervention,” the report said.

Under Murray’s recommendations, if a member does not instruct a super fund how they would like to take their money upon retirement, the fund would assume that the entitlement would be taken as an income stream.

Mr Hockey will now consider the recommendations and announce in mid-2015 which will be adopted by the government.