Changes proposed by the Productivity Commission to the default superannuation system that applies to two-thirds of workers could push more low-income people into high-cost super funds, Industry Super Australia has warned.
The proposals would see the scrapping of current arrangements, where workers who don’t actively choose their super fund are signed up to a default fund by employers from a list decided on by the Fair Work Commission.
They would be replaced by four options, all of which include workers being signed on to, or actively choosing from, a list of between four and 10 funds put forward by a government panel. Some of the options incorporate employees choosing from a wider list of funds which pass minimum standards overseen by regulator APRA.
Industry Super Australia sees this as a potential source of trouble.
“The report considers dismantling the most trusted, high-performing part of our default system while ignoring the elephant in the room, which is the dismal performance of sales-driven retail funds,” ISA CEO David Whiteley said.
While two-thirds of super fund members are in default funds, they only account for 25 per cent of funds in the system, meaning default funds are mostly the preserve of low-income earners. ISA is concerned that if these people are channelled into poor performing funds their retirement balances will be even lower than if they stayed with better performing funds.
Warren Chant, principal of superannuation consultancy Chant West, told The New Daily he had doubts about the proposals. “I don’t think these four models will get much support.”
He also saw aspects of the proposals as unworkable.
“If you are putting up a list of between four and 10 funds then you will be leaving out a lot of funds that are very, very good. There are problems for a government body choosing from a lot of funds when 40 per cent of the equation will be in qualitative measures,” Mr Chant said.
“I just can’t see a government body being able to do that.”
Mr Chant also questioned the Commission’s observation that the super system lacked competition. “We’ve had compulsory super for over 24 years and we can see there’s no lack of competition in the system. Over that time the growth, or what some people call balanced, option has returned 8.2 per cent while the inflation rate averaged 2.5 per cent.”
Jim Minifie, productivity expert with the Grattan Institute, said that the Commission’s proposals could not be judged alone and it “would need to model these against the existing default system”.
The Commission is scheduled to do this later in the year and Mr Minifie said the process would need to be robust to ensure a realistic comparison.
Anther aspect of the proposals is to ensure workers do not develop multiple super accounts through changing jobs. Productivity Commission deputy chair Karen Chester told The New Daily the report’s estimate that workers are paying $150 million in unnecessary costs due to multiple memberships is “the tip of the iceberg”.
Under the proposals “people would only default once” and their default fund would follow them through their career unless they choose another fund.
That issue is important because “people under 25 change jobs about every one-and-a-half years and between 25 and 35 its every two-and-a-half years”, Ms Chester said.
“With 400,000 new jobs created every year” and only about 5 per cent of workers ever choosing to change funds, there were significant gains to be made by the measure, she said.
Mr Whiteley said ISA supported reducing multiple funds but said there were other ways to do it.
* The New Daily is owned by a group of industry super funds