Our compulsory superannuation system is definitely world class and the envy of many other countries because of its substantial size ($2.8 trillion) for a relatively small population, regulation and universal cover for most Australian workers.
International reports such as the Melbourne Mercer Global Pension Index usually place Australia in the top four systems in the world and the Willis Towers Watson’s Global Pension Asset study considers the Australian superannuation system to be outstripping other developed countries for growth.
However, there are certain areas where further improvement can be made and the Productivity Commission (PC) was given the task of examining the system in its entirety for structural flaws and making recommendations for improvements. Two main areas of concern (of the 31 recommendations) included unintended multiple accounts which represent one third of all accounts (about 10 million) and consistently underperforming funds.
Unintended multiple accounts
These accounts usually result from members changing jobs and being assigned a new super fund by their employer. Sadly, apathy rules as this could easily be avoided by members providing their preferred super fund and member number to the pay office when they start a new job. The PC proposes to change the default system by having people entering the workforce allocated to a default product once only. These members would be able to choose from a ‘best in show’ shortlist of top performing funds which the PC proposes to publish and this fund would follow them to every subsequent job.
There has been much criticism of the Australian Prudential Regulation Authority (APRA) from all sides of politics for allowing consistently underperforming funds to operate. The view is that APRA should have been proactive in removing underperforming funds as members will suffer a reduced retirement benefit because of their membership in these funds. It has been noted that the majority of the underperforming funds come from the retail sector, or bank run funds. The PC recommends a vigorous Outcomes test for APRA to administer with the ability to shut down consistently underperforming funds. These funds would be ordered to either shut down and transfer members to a better performing fund or merge with a better fund.
‘Best in show’ shortlist
Under the ‘default once’ provision a shortlist of the 10 best performing default funds would be selected by an expert panel and reviewed every four years. Although this measure may sound appealing, there has been some opposition to it from various quarters. The principal objection is that this measure is anti-competitive (the very thing the PC wishes to eliminate) because selected funds would morph into giant funds leaving other funds to wither on the vine. And some of the funds which do not make the initial list of 10 would not necessarily be underperforming funds. Peer comparison and a push to make the top 10 funds could possibly lead to riskier investment strategies while funds not placed in the top 10 would have a sustained disadvantage in maintaining membership and funds under management. While showing concerns about the ‘best in show’ idea Labor Leader Bill Shorten said: “We are up for making sure that for poorly performing funds, they don’t keep getting their mitts on money year in and year out”.
It will be interesting to see how the recommendations from the PC pan out this year and how they are legislated (or not). And some good news for NGS Super members – NGS Super was placed in the top 10 Performing Growth Funds last financial year with a return of 10.5% for its MySuper option.