Here’s what the Productivity Commission’s proposed changes mean for your super
Young Australians could retire with half a million dollars more if the Productivity Commission's proposed super changes are put into action.
The Productivity Commission has today released its final report into Australia's superannuation system, identifying the major pain points of the current system and its recommendations for fixing these issues. The main concerns identified in the report were the large number of unintended multiple accounts and the large number of funds (particularly retail funds) that are consistently under-performing.
The Productivity Commission has made a number of recommendations which, if implemented, could see young Australians just entering the workforce retire with more than half a million dollars more. These recommendations are also predicted to enable Australians in their mid-50s to retire with almost $80,000 extra in their super.
Make insurance opt-in, rather than opt-out
The report recommends life insurance within superannuation should be on an opt-in basis for all Australians under the age of 25, rather than opt-out. This means that if you're under 25, you'll have to actively opt in to pay for insurance if it's something that you feel you need. Some super funds already do this; AustralianSuper became the first super fund to drop automatic insurance premiums for members under 25 back in September last year.
"Best in show" list of default funds
To combat the problem of a large number of funds consistently under-performing (again, these were found to be mainly retail funds) the Productivity Commission has recommended a "best in show" list of default funds. The list would include the top 10 default super funds based on performance, which will be given to Australians when they first enter the workforce to help "nudge" them into joining a high-performing fund. This will stop people signing up to a poor-performing fund that their employer offers and being stuck with this fund throughout their working life.
The Productivity Commission also believes having a "best in show" list of default funds will help foster healthy competition in the sector as well as motivate funds to keep their costs low and to strive for better performance figures. This aspect of the report has received some criticism, with many industry leaders saying it needs more work.
CEO and founder of leading online investment adviser Stockspot Chris Brycki said this list needs to pay closer attention to fees. "This recommendation will likely embed existing high costs, create incentives to 'game' the system and lead to lobbying to be selected as one of the ten shortlisted funds. We need to reduce costs and improve transparency across all funds, rather than promote existing practices and costs which have resulted from an oligopoly immune from price competition."
"There are also some problems with how this recommendation would be implemented. The selection criteria for the 'best in show' shortlist would be likely to preference funds who have been recent top performers due to risky asset tilts. This is more often mean-reverting, so the super funds at the top of the list over one rolling five year period are not likely to stay there over longer periods unless they are also low-cost funds," said Brycki.
Eliminate the chronic under-performers
The Productivity Commission wants to get rid of funds that are consistently delivering poor returns for members. One way of doing this is to implement some sort of system where all default funds need to regularly prove they deserve to stay in the market. The smaller funds that aren't able to improve their performance might be made to merge with a larger, better-performing fund.
The recommendations in this report still need to be accepted by the government before they can take effect. If you're currently in a high-fee, low-performing fund, compare your options here and consider making the switch.