Australia’s major banks will be one of the key targets of the Productivity Commission’s inquiry into the efficiency and competitiveness of Australia’s $2 trillion superannuation system.

In releasing a 325-page draft report detailing the criteria for its three-stage super review, the commission indicated it will be looking into “vertically integrated” retail super fund structures such as those operated by the big banks.

Members of vertically integrated funds are effectively locked into using bank-owned products and services linked to their fund, such as for investment management and insurance. As such, they invariably pay higher administration and management costs than members of wholesale funds, such as industry-based funds.

Outlining its objectives, the commission said it will assess whether there is a high degree of competition on costs, and whether there is a decline in costs and subsequently fees charged to members over time.

“Maximising net returns (after fees and taxes) is the most important way in which the superannuation system contributes to adequate and sustainable retirement incomes.”

The commission said that over time there had been a decline in the number of institutional super funds due to consolidation as well as the demise of non-public offer, defined benefit corporate funds that characterised the earlier era of superannuation.

“The growing importance of superannuation has meant the system has been subject to a high level of scrutiny, and concerns that the system has not performed to its full potential have lingered,” it said.

But the commission added: “Despite ongoing concerns regarding the system’s ability to efficiently maximise retirement incomes for members, the outcomes for lifetime participants are yet to be seen. While there is a high level of participation for the current working age population, the relative youth of the system means that fewer than half of today’s retirees are currently covered.”

Review recognises putting members first

Industry Super Australia said the commission had rightly recognised that maximising net returns and supporting the best interests of super fund members are the key priorities in assessing the efficiency and competitiveness of the super system.

David Whiteley says there is an opportunity to build on the best aspects of the existing system. Photo: ABC

“Looking after the compulsory super savings of Australians requires funds to be of the highest quality and exhibit undivided loyalty to members. Today’s report identifies that member outcomes, measured by net returns and ultimately how much they have in retirement, have to be the primary focus of a well-designed super system,” said ISA chief executive David Whiteley.

“To fulfill that objective, the system should ensure all Australians, either by choice or by default, end up in funds that are consistently high performing to maximise their savings.”

Mr Whiteley said there was “ample evidence” that many fund members who currently make an active choice of fund are choosing funds that do not deliver the best net returns.

“This is due to an overwhelming and confusing array of funds, high search costs, multiple advice channels and 40,000 investment options, many of which are designed to generate profits for companies not the customer,” he said.

“Where consumers have been inundated with choice there has been little sign of a corresponding drop in fees or better net returns.

“The experience of the last two decades tells us that creating a safety net of high performing default funds to provide a universal level of consumer protection for all Australians will be essential in any redesign of our super system that might be proposed down the track by this inquiry.”

Building on the existing system

Mr Whiteley welcomed the review by the commission into the characteristics that are generating fund outperformance, including the use of scale to drive down member costs, asset allocation with long-term investment horizons, and avoidance of “ticket clipping” by vertically-integrated funds.

“We welcome closer examination of these elements in this inquiry,” he said.

“This is an opportunity to build on the best features of our existing system. However, the wrong design could push more Australians onto the age pension, lead to increasing taxes for welfare and deprive the economy of long-term investment in critical infrastructure and productivity gains.”

*The New Daily is owned by industry superannuation funds.