New measures unveiled in the budget to monitor superannuation performance will hide the true costs of funds from members, industry participants and federal Labor have warned.
They will also leave the performance of tens of thousands of retail funds unmeasured, leaving members potentially unaware of problems.
The major super reforms will measure fund performance each year, inform members if their fund is a laggard, and bar funds from taking on new members after two years of poor performance.
Measures only tell half the story
Labor’s shadow assistant treasurer Stephen Jones told a conference on Monday the package was seriously flawed.
“There are three big problems with the changes government announced in last week’s budget:
- “They are not measuring all of the charges imposed on members
- “They are not comparing all of the superannuation funds
- “They have failed to put in place critical consumer protections.”
“The result of these omissions is that the very system that the government says is designed to improve retirement savings for Australians could actually see them go backward,” Mr Jones said.
The performance benchmark to be used to determine the laggards does not measure all the costs that make up fund performance, said Matt Linden, deputy CEO with Industry Super Australia.
“It measures net investment returns after investment management costs only,” Mr Linden said.
“It will exclude other costs, including percentage-based administrative fees and ongoing advice fees in the case of many choice products.”
There is a major difference between administrative fees in different fund types.
Not-for-profit industry and public-sector funds have far lower administrative fees than for-profit retail funds. As a result, the true performance of many retail funds will not be measured.
“It makes it easier for retail funds with higher structured administration fees to meet their performance benchmarks,” Mr Linden said.
“This is a massive design fault which runs the risk of enabling funds to divert costs and charges from one line item to another without addressing the underlying problem of high fees,” Mr Jones said.
“In other words, members can and most likely will still lose out from oversized fees. But they won’t be able to tell by looking at the new league table comparing the performance of their fund against other funds.”
Initially, the performance testing measures will apply from July 2021, but only for MySuper default products.
These are the low-cost funds to which members are directed when they join a new employer, if they do not make a choice themselves.
Retail funds fly under the radar
From the following year, the measure will be extended to funds that members choose independently. However, not all choice funds will be included.
“It will only apply to multi-asset class investment options outside MySuper products where the trustee has a significant role in the design, completion and management of these options,” Mr Linden said.
That means a large number of funds that either invest in a single option, like equities or bonds, or funds that are part of a ‘platform’, a large investment base divided up among individual investors, will not have their performances measured.
“There are tens of thousands of funds offered through choice system –many single asset class options and many reside on platforms – and are not trustee-directed,” Mr Linden said.
“So there are vast swathes of retail superannuation products which won’t be subject to any benchmarking or accountability and that’s a very significant worry.”
As a result, members could be locked into funds that are underperforming and not know it, because they won’t be measured.
“The cost to a member on $50,000 a year of a high fee fund would be $100,000 in lost retirement savings,” Mr Jones said.
“The question for the government then is this: Why are they proposing to leave such a massive back door in their measures?”
“I think there are a number of issues with the changes that need to be addressed,” said David Knox, partner with superannuation consultancy Mercer.
“The performance measure will go back at first seven and then eight years.
“The first time the fund is measured, five years of performance will have already happened.
“If the fund has already made changes as a result of performance in the early years, it is unfair to have it reviewed again and maybe members will be told the fund is underperforming when it no longer is.”
Consumer protections were still lacking in superannuation because the government had not implemented all the recommendations of the banking royal commission, Mr Jones said.
“They have not introduced the anti-hawking provisions for superannuation, which were recommended after the royal commission heard harrowing evidence of abuse, deception and exploitation in the mis-selling of superannuation and other products,” Mr Jones said.
“The reforms proposed by the government will create a perfect ecosystem for this behaviour.”
Assistant Superannuation Minister Jane Hume did not respond to questions for this story.
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