The superannuation sector looks set to be hit by a wave of reforms aimed at overhauling the almost $3 trillion industry comprised of some 15 million members.
The Productivity Commission has released its plan that it says would provide an extra $3.8 billion per year to Australian nest eggs, and add more than $500,000 to a new worker’s super balance over their working life.
Even for an Australian aged 55 today, the reforms could be worth nearly $80,000 extra.
“Structural flaws — unintended multiple accounts and entrenched underperformers — are harming millions of members, and regressively so,” the Productivity Commission’s report diagnosed.
While the Productivity Commission can make policy recommendations, it cannot implement them alone.
Despite the touted benefits, both Labor and the Coalition have been slow to back the recommendations.
While Treasurer Josh Frydenberg hailed it as a “landmark report” on Thursday, he refused to confirm the government’s support.
“We will await the final banking royal commission report before finalising our response to this Productivity Commission report,” he told media.
These are the report’s key recommendations.
Create a ‘top 10’ super list
When employees join the workforce and are prompted to open a superannuation account, they should be presented with a list of the best-performing funds available to facilitate their decision, according to the report.
While an employee doesn’t have to select one of those funds, the information will make it easy to compare those top funds deemed to deliver the best outcomes for members over the long-term.
The list would be compiled by a new independent expert panel, appointed by the government and reconstituted every four years, with no more than half of the appointees able to serve two consecutive terms.
Regularly test funds and punish under-performance
All regulated funds should be required to be assessed each year, and audited at least every three years, to ensure they are delivering for members, the report recommended.
Funds that regularly fall below a benchmark by more than 0.5 per cent on average over an eight-year period would be subjected to 12-months remediation (and unable to accept new members during this period) or withdrawn from the market with their members transferred to a better fund.
Reduce default funds
Currently, employees can choose to open a default fund each time they change jobs, creating a glut of multiple accounts per person.
However, the report intends to combat that by limiting default funds only to those who do not already have a superannuation fund.
Auto-consolidate multiple accounts
In addition, the government could help facilitate the consolidation of accounts, helping cut down on the $30 billion in superannuation fees Australians pay each year.
The government should seek legislation to automatically consolidate accounts containing less than $6,000 and that have been inactive for 13-months or more, according to the report.
This threshold would be gradually increased over time so as to capture all inactive superannuation accounts.
Currently, the report estimates that unintended multiple accounts are paying almost $2 billion in excess insurance and $690 million in excess administrative costs.
Simplify all super options
All super funds would be required to publish a simple, one-page outline of all superannuation investment options.
This information would be accessible to all members and immediately published to the government’s MoneySmart website, allowing Australians to easily compare.
Target financial advice
One of the major issues uncovered by the financial services royal commission was the charging of fees-for-no-service, where customers paid money for advice they never received.
This trend was picked up by the Productivity Commission, recommending that the definition of ‘advice’ provided by a superannuation fund be tightened to only cover personal advice.
Additionally, trailing commissions paid to financial advisers should be banned, the report said.
Set up an independent advocate
A government-funded independent body should be set-up to advocate for superannuation members on an ongoing basis.
With vested interests in the superannuation industry expected to advocate against any major changes, the new body would combat that pressure and solely advocate for members’ interests.
Watch Josh Frydenberg’s statement on the Productivity Commission report above.