Commission's super proposals are experimental and high risk
Posted: Thursday 31 May, 2018
How did a report that finds that people are better off in a default super fund end up making a recommendation that teenagers should make decisions about their super which could stick with them for their entire lives?
When you cut through all the noise, it is extremely clear from this week's Productivity Commission report that industry super funds form a safety net for workers that do not choose their own super fund.
And the majority of super fund members – 8 million Australians – do not actively choose their own fund.
That’s why we need the best system for allocating people into a super fund where they don’t choose. Small differences in fees and returns, and the way super is governed, have a big impact.
A wide-ranging review of the super system to ensure the safety nets are working is important.
But while the Productivity Commission’s report provides a 500-page detailed analysis of the system, this analysis bears little or no relationship to the key recommendations around default funds.
There is a very significant disconnect between the evidence and the recommendations.
There is the empirical evidence in the commission report about which sectors perform the best, and there is the chatter.
The commission report finds that not-for-profit funds outperform retail funds.
Its report finds that default funds outperform chosen products' net returns.
The commission report finds that over time, people in high-fee funds do worse on a net returns basis.
In other words, it finds that the not-for-profit funds sector – which includes industry super funds - has the lowest fees and performs better than the bank-owned retail funds.
On the basis of this evidence you would expect the commission to focus recommendations on the structure of retail funds and the choice sector, and finetune what is already working in the default fund sector.
Rather, the commission proposes that a new merit-based selection process determine default super arrangements for workers that do not choose their own super fund.
It recommends that younger workers in their first job be required to choose a super fund for life, from a list of 10 pre-selected funds.
This is experimental, and it is high risk.
Industry Super Australia research shows that two thirds of millennials find it hard to choose their own fund. There is no cohort likely to be less engaged and less informed about saving for retirement than younger members, and particularly teenagers starting their working lives.
The commission has argued that this is necessary to fix the issue of multiple accounts. Yet, Industry Super Australia has put forward a solution to multiple accounts, both in its submission to the commission, and repeatedly to the Federal Government over the past six years.
We don’t need to dismantle a safety net system that is proven to work, in order to remove multiple accounts out of the system.
ISA has proposed that when people change jobs, their old super fund account – which will become inactive at some point – should be automatically consolidated into their new, active account.
Up until now, automatic consolidation of inactive accounts into the active account was difficult due to the lack of reliable and available data available to funds. Technology has changed, however, and this system is now possible.
In the end, there is a disconnect between the empirical evidence presented by the Productivity Commission and the recommendations. The simpler solution would be to restart the merit-based selection process by an expert panel at the Fair Work Commission, as was proposed by the Commission in 2012.