Finance Your Super Superannuation an ‘unlucky lottery’ for many

Superannuation an ‘unlucky lottery’ for many

Superannuation lottery.
Superannuation has become a lottery for millions of workers. Photo: Getty
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Australia’s superannuation system is “an unlucky lottery” for many people and that could be costing workers up to $400,000 over a full working life, according to the Productivity Commission.

In its latest update on the super system, the commission found the number of underperforming default MySuper products had actually increased, cutting back workers’ balances. And the number of outperforming funds had plummeted.

Between 2005 and 2017, 47 funds accounting for 9.8 million members and $448 billion in assets outperformed their benchmarks. But in the 11 years to 2018, these figures actually fell to 26 funds with 7.2 million members and $405 billion in assets, the commission found.

Meanwhile, the number of funds underperforming actually rose from 20 to 27, covering about four million workers and $195 billion in assets. Being in an underperforming fund could cost up to $400,000 over a full working life and even $60,000 for workers aged 55 at the moment who plan to work another 10 years.

“Most members are in funds that deliver good investment returns, but millions of members are in funds that persistently underperform – over one in four funds.”
Productivity Commission deputy chair Karen Chester

Productivity Commission deputy chair Karen Chester said the system suffered from two “structural flaws”: unintended multiple accounts and entrenched underperformance.

“These problems are highly regressive in their impact – and they harm young and lower-income Australians the most,” Ms Chester said.

The Commission also found that not-for-profit super funds outperformed their for-profit counterparts by 2 percentage points over time. That is a significantly greater outperformance than discovered by commercial research houses, as the following table from Chant West shows.

Chant West research chief Mano Mohankumar said the differences could partly result from the way fund administration fees are measured.

“Not-for-profit funds do outperform but we don’t think its by as much as 2 percentage points,” Mr Mohankumar said.

“Not-for-profit funds generally have administration fees 40 basis points below retail funds.”

The commission has a number of plans to fix the system including selecting a limited number of “best in show” super funds that workers will choose once when they join the labour market. After that they will follow them through their careers unless they maker another choice to ensure balances aren’t eroded by the costs of membership in different funds.

Multiple fund membership can erode balances by around $50,000 over a career, Ms Chester said.

The commission also found that Australian super funds had lower administration costs than their overseas counterparts. 

Industry Super Australia (ISA) deputy CEO Matt Linden said “the relative performance of Australian super funds across all fund types is strong compared to their international counterparts”.

He said ISA had concerns about the Commission’s plans to choose a list of “best in show” default super funds.

“It may push up costs because funds could have to boost their marketing spend whether they were ‘best in show’ or not,” Mr Linden said.

The Productivity Commission identified poor investment choices as one factor driving underperformance. Over the 13 years to 2017, funds averaged returns of 6.4 per cent, but this would have been a significantly higher 8.3 per cent if they had ignored the temptation to pick stocks, choosing instead to follow the index with their investments.

And, as in other parts of the financial system, governance needs to improve – trustees of underperforming funds should be merging with better-performing funds. And the best people with the right skills must sit on the boards of super funds, Ms MacRae said.

The New Daily is owned by Industry Super Holdings

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