The federal government’s Your Future, Your Super Bill, which passed Parliament last week, is the latest in a long line of reforms aimed at reining in Australia’s woefully high superannuation costs.
It’s a worthy goal.
Australians pay more than $30 billion a year in super fees, almost 2 per cent of annual gross domestic product.
That’s more than the $27 billion we spend each year on energy.
There are far too many funds, some six million multiple accounts, and three million members languishing in serially underperforming funds.
There is little competition between funds for members.
Australians are not well informed about their superannuation fund or the fees they pay.
Most do not actively select their fund, and very few switch funds except when they switch jobs.
The centrepiece of the government’s changes is a new underperformance test.
Super funds will now be required to notify their members if they fail to meet a net investment return benchmark by 0.5 of a percentage point a year over eight years.
Funds that fail the test for two consecutive years won’t be able to accept new members until their performance improves, or they merge.
The underperformance test and the other key reform in the legislation – “stapling” funds to members as they change jobs – are both sensible changes that will benefit consumers.
Both were recommended by the Productivity Commission more than two years ago.
Industry funds, which tend to outperform their retail peers, are likely to win out from these reforms.
At first, the underperformance test won’t cover all superannuation products, because the data to do so isn’t yet available. Nonetheless, Treasury estimates that 90 per cent of APRA-regulated funds for those in the accumulation phase will be subject to the test within a year.
Delaying the test until it covered all super funds would have meant leaving members in underperforming funds we can already identify, putting funds’ interests ahead of consumers.
Treasury will consider how to extend the test to include missing funds by July 1 next year.
Members to benefit
Some players worry that super funds will respond to the new test by abandoning more-expensive active fund management in favour of low-cost passive investments.
But Grattan Institute’s 2015 Super Savings report found few asset managers outperform their peers over time.
Those fund managers who genuinely deliver value for the fees they charge should have little to fear.
There will always be an element of rough justice when measuring fund performance, but that pales in comparison to the rough justice frequently meted out to millions of members currently stuck in underperforming funds.
Under the reforms, Australians will be allocated a default super fund only once, when they first start working – a recommendation of both the Productivity Commission and the Hayne Royal Commission.
That fund will be “stapled” to the worker when they change jobs, stopping millions of duplicate accounts being created, and avoiding extra fees that eat away at workers’ retirement savings.
And the government plans to make it easier for members to compare funds via a new Your Super portal.
Sure, there are wrinkles in the government’s plan. An eight-year window for the underperformance test may be too short for assessing fund performance, especially for unlisted infrastructure.
Critics warn that “stapling” will result in some workers being tied to dud super funds for life.
But the whole point of the underperformance test is to weed out those duds, especially by forcing them to lower their fees.
Federal Labor worries that workers who take jobs in risky occupations could be stapled to super funds that exclude those occupations from default insurance coverage.
Which is why Treasury’s new review into such exclusions should ask whether they still make sense now that super funds are no longer tied to particular industries.
‘Best in show’ solution
The real problem with the government’s plans to improve the super system is that they don’t go far enough.
The underperformance test amounts to taking a few bad apples out of the barrel. But it does little to force otherwise average funds to lift their game.
The government should fix the mess once and for all by adopting the Productivity Commission’s recommended reforms to how default super funds are selected in the first place.
Under the commission’s recommendation, Australians would be defaulted into one of a short-list of “best-in-show” funds selected by independent experts (although people would retain the right to choose another fund). “Best in show” would improve returns because funds would compete to make the shortlist and stay there.
Market discipline would come from experts who have the time, resources and expertise to decide which funds to shortlist, rather than individuals who don’t.
Requiring funds bidding to be shortlisted to make the same offer to their existing members would raise the bar even further.
Yes, this would mean more change for Australia’s super sector.
But Australian workers would be winners – and the system is supposed to put their interests first.
Brendan Coates is economic policy program director at the Grattan Institute and co-author of Money in Retirement (Grattan, 2018)
The New Daily is owned by Industry Super Holdings