The Productivity Commission has recommend the default superannuation system be radically overhauled.

In a draft report released Wednesday, the Commission said it wants to change the default contributions system to put workers in a single default scheme in their first job and have them stick with it for their entire working lives.

It also recommended that the current method of linking default funds to industrial awards be abolished — a move it acknowledged would weaken the industry super movement.

Currently, workers who have no preference for where their super is invested are sorted into default funds, which are overwhelmingly run by industry super funds. If they move jobs, they can accumulate multiples of these default funds.

The Commission wants to change this, and has put forward three alternatives: (i) the employer chooses the default fund; (ii) the banks and industry funds compete in an auction or tender for ‘default’ status; or (iii) workers are forced to choose.

The Commission’s argument for change is fee reduction. It estimated that 40 per cent of workers have more than one account, meaning that many have multiple life insurance policies and multiple sets of administrative costs.

By reducing what the Commission called a “proliferation” of accounts every time a worker changes their job, the report estimated that about $150 million in fees would be saved every year.

Productivity Commission chairman Peter Harris told the ABC that despite the compulsory superannuation system delivering reasonable returns over the past 25 years, “structural faults” made default superannuation confusing for workers and their employers.

“Individuals commented that the whole system looks like the scattering of cornflakes on the ground and it’s impossible to pick one up so think I’ll walk right on past it,” Mr Harris said.

“It’s like when you go into a New York delicatessen and there are nine kinds of ham, six kinds of mustard and five kinds of bread, a thousand people in the queue behind you and you just want a ham sandwich.”

The report comes as the federal government continues its campaign to dilute union dominance on industry super boards, and banks seek greater access to managing retirement nest eggs.

The draft report conceded that tinkering with the $2.1 trillion superannuation system was “highly contentious and politically sensitive” given the ongoing war between industry and bank-backed retail funds.

“Opening up access to these members and their contributions is a lucrative proposition for new entrants and a competitive threat to incumbents,” the report said.

In its submission to the inquiry, Industry Super Australia (ISA) said the current default super scheme was “long-standing and effective”, repeating that industry funds on average outperformed bank-backed retail funds.

The ISA submission also said the Productivity Commission needed to provide an “iron-clad” justification for shaking up the default super system.

– with ABC