Australia’s super system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees. Currently, structural flaws — unintended multiple accounts and entrenched underperformers — harm a significant number of members, and regressively so.
- Fixing these twin problems could benefit members to the tune of $3.9 billion each year. Even a 55 year old today could gain $61,000 by retirement, and lift the balance for a new job entrant today by $407,000 when they retire in 2064.
Our unique assessment of the super system reveals mixed performance.
- While some funds consistently achieve high net returns, a significant number of products (including some defaults) underperform markedly, even after adjusting for differences in investment strategy. Most (but not all) underperforming products are in the retail segment.
- Fees remain a significant drain on net returns. Reported fees have trended down on average, driven mainly by administration costs in retail funds falling from a high base.
- A third of accounts (about 10 million) are unintended multiple accounts. These erode members' balances by $2.6 billion a year in unnecessary fees and insurance.
- The system offers products and services that meet most members’ needs, but members lack access to quality, comparable information to help them find the best products.
- Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50,000 — by duplicate or unsuitable (even 'zombie') policies.
Inadequate competition, governance and regulation have led to these outcomes.
- Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including the proliferation of over 40 000 products).
- The default segment outperforms the system on average, but the way members are allocated to default products leaves some exposed to the costly risk of being defaulted into an underperforming fund (eroding over 36 per cent of their super balance by retirement).
- Regulations (and regulators) focus too much on funds rather than members. Subpar data and disclosure inhibit accountability to members and regulators.
Policy initiatives have chipped away at some of the problems, but more changes are needed.
A new way of allocating default members to products should make default the exemplar.
- Members should only ever be allocated to a default product once, upon entering the workforce. They should also be empowered to choose their own super product by being provided a 'best in show' shortlist, set by a competitive and independent process.
- An elevated threshold for MySuper authorisation (including an enhanced outcomes test) would look after existing default members, and give those who want to get engaged products they can easily and safely choose from (and compare to others in the market).
- This is superior to other default models — it sidesteps employers and puts decision making back with members in a way that supports them with safer, simpler choice.
These changes need to be implemented in parallel to other essential improvements.
- Stronger governance rules are needed, especially for board appointments and mergers.
- Funds need to do more to provide insurance that is valuable to members. The industry’s code of practice is a small first step, but must be strengthened and made enforceable.
- Regulators need to become member champions — confidently and effectively policing trustee conduct, and collecting and using more comprehensive and member-relevant data.