Finance Retirement This is the superannuation reform that could save billions for fund members, says KPMG
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This is the superannuation reform that could save billions for fund members, says KPMG

The automatic rollover system could see up to $189,000 in extra super over a working life. Photo: Getty
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A young superannuation fund member would be better off by as much as $7560 a year, or $189,000 over a working life, under a proposal recommended by financial consultancy KPMG

Overall the plan would benefit superannuants by a total of $16.6 billion a year, or $416.3 billion over 25 years, KPMG found.

The plan came in response to calls from the Hayne banking royal commission and the Productivity Commission to deal with the scourges of multiple memberships and under-performing funds that are cutting hundreds of thousands of dollars from member balances.

Commissioner Kenneth Hayne, in his final report, recommended that workers be tied to super funds throughout their working lives to avoid the costs of multiple funds.

He called for a mechanism for “stapling a person to a single default account”, however he did not define how this should be done.

Two possibilities

KPMG found that there were two possibilities of making this happen.

One was to staple a person to a particular fund that would follow them through life unless they actively choose otherwise.

A second would would see a member’s balance rolled over automatically into a quality-checked fund suitable for their industry, whenever they changed jobs.

KPMG found that the model of automatic rollover, put forward by Industry Super Australia, would not only eliminate multiple accounts, it would accelerate the weeding out of under-performing funds from the system, delivering greater returns to members.

The damage done by under-performing funds to member balances was highlighted by the Productivity Commission, which found an under-performing super fund could cost a member $500,000 over a working life compared with a high-performing fund.

Billions at stake

KPMG found that automatically combining a person’s super every time they change jobs to an appropriate default fund would accelerate the weeding out of under-performing funds from the system.

That would deliver $416 billion in performance dividends to workers now in under-performing funds (over a 25-year period) or the equivalent of up to $189,000 per person more over their working life.

The gain would be greater for younger people who would be working for longer in the more favourable system as the following graphs show.

The improved outcome for a 25-year-old on $58,000 with $20,000 in superannuation.

KPMG also found that members would benefit by almost $4 billion with the rollover model through the savings from fees and unnecessary premiums under the fund consolidation that would automatically occur.

Over 25 years, that consolidation would deliver members a total of $47.3 billion, compared with $43.5 billion under the alternative fund-for-life model.

How automatic rollovers would boost the balance of a 45-year-old earning $80,000 with a current super balance of $115,000.

“Automatically combining a person’s super when they change jobs will eliminate multiple accounts and connect workers with high-performing funds sooner, delivering hundreds of thousands extra into accounts,” said Matt Linden, acting CEO of Industry Super Australia

“Putting a worker in a single fund for life could see them stuck in a dud, under-performing fund that will ultimately leave them worse off at retirement.”

Fixing the two biggest problems in super

“This report shows the huge efficiency gains that can be made through smart policy. ISA’s plan will fix multiple accounts, weed out under-performing funds and, most importantly, deliver more money for workers.”

The automatic rollover model is based on successful international schemes, such as the New Zealand KiwiSaver scheme.

While headway has been made by government to eliminate multiple accounts through the Protect Your Super changes, more needs to be done, Mr Linden said.

The automatic rollover model would save an extra $9 billion over 25 years on measures introduced in July under the government’s Protecting Your Super package.

The New Daily is owned by Industry Super Holdings

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