Retail and bank-owned super fund members are losing out by between $800 million and $1.8 billion over four years because their funds have been slow to move default accounts across to low cost MySuper options, new research has found.
When the MySuper laws were introduced in 2013, funds were given four years to transition default members into MySuper products by mid-2017.
But, the research, conducted by Rainmaker Information for Industry Super Australia, shows that while not-for-profit funds completed the transfer of existing member accounts across to MySuper products within the first year (June 2014), retail superannuation funds are still lagging.
Just 43 per cent of for-profit default funds had moved over to MySuper accounts by June 30 2016.
Funds owned by private financial institutions account for 67 per cent of accrued default balances. As a result the slow transiton to MySuper revealed by Rainmaker is “most likely a deliberate strategy by retail wealth managers,” said David Whiteley, CEO if Industry Super Australia.
“There is a major question as to whether trustees are fulfilling their legal duties to put the interests of members over profits generated by wealth businesses inside the banks.”
The average fee differential incurred in this delayed transition could reduce a typical retail fund member’s final retirement savings balance by around $20,000. In aggregate terms, this translates into $1.4 billion in foregone superannuation savings over 10 years and $2.6 billion over 20 years, ISA estimates.
The report notes that “these impacts can multiply four-fold if the retail MySuper product the member is transitioned into underperforms by 1 per cent – an outcome that has so far found to be the case since the introduction of MySuper in 2013.”
It’s bigger than the default sector
According to ISA, the issue of high fee legacy products goes beyond the default sector. Estimates suggest around a third of assets in the choice sector are also parked in higher cost legacy products, but with no legislative requirement to transfer these members into more contemporary and lower fee products.
The Financial Services Council, which represents super funds owned by the banks and listed wealth firms, said the most significant issue with the MySuper regime was that it had not resulted in an increase in competition in the super sector.
“There is a clear timetable for the transferral, which is eight months away. This is a small part of the equation and it is being resolved,” Andrew Bragg, director of policy at the FSC, told The Australian Financial Review reported.
“The bigger question is: when will there be competition in default super?” he said.
Mr Bragg argued that MySuper was an “unfinished reform” on the grounds that it was designed to introduce low fee products that were easily comparable and would give super funds an even playing field on which to attract default contributions.
New models are being examined
The Productivity Commission is conducting an inquiry into developing models for a formal competition process in allocating default super contributions. Under the current system, about $10 billion of super contributions a year flow to industry super funds through the industrial awards system.
Rainmaker reported that MySuper products were managing $475 billion of super savings, a rise of 11 per cent over the past year. By July next year the figure is expected to be $633 billion, rising to $1 trillion by 2024.
The research house said industry schemes had “in effect fully transitioned” all default super savings into the no-frills MySuper products. MySuper products were on average 20 per cent cheaper than old-style retail workplace funds, Rainmaker found.
“The sooner members transition across to these lower cost products, the sooner they start saving fees,” Rainmaker said.
The New Daily is owned by industry super funds