For a number of reasons, superannuation funds in Australia are providing mixed returns for members. With the recent Productivity Commission (PC) review assessing the efficiency and competitiveness of superannuation funds in Australia, it is timely to explore the reasons behind their performance.
Firstly, there is a significant gap between the relative performance of superannuation funds.
The PC review found that not-for-profit funds tend to outperform retail funds. The graph below, sourced from the PC review, illustrates this in more detail:
The performance levels of super funds changes across the individual funds and products. The majority of the underperformers are in retail funds, and a third are in industry funds. Default funds are also often underperforming.
Another critical factor is that members have unintended multiple accounts. Multiple accounts tend to arise due to a lack of action by employees when they change jobs. If a new employee does not specify a specific superannuation fund they wish their contributions to be directed to, they will automatically go into the company’s default fund.
Having multiple funds means paying fees for each fund which can amount to hundreds of dollars paid each year unnecessarily across the multiple accounts.
Research reveals that to resolve this issue, members who have multiple accounts need consolidate their accounts into one for example: a 55-year-old who has multiple accounts, could gain $61,000 by retirement if they consolidated their accounts. If these multiple accounts are not combined they can erode members’ balances quite severely. According to the PC review, a third of accounts (about 10 million) are unintended multiple accounts. These accounts could undermine members balances by $2.6 billion a year in avoidable fees and insurance.
Another issue which impacts superannuation is the provision of Insurance in super. This is often a product which can be misused and can further undermine member accounts. Unnecessary insurance can undermine retirement balances by $50,000, which again is caused by duplication of accounts, or unsuitable policies and products.
This issue relates to another significant problem: members lack information about their superannuation accounts, and the comparable products available. This is a common problem and results from a lack of clarity and understanding and an inability to truly compare funds as products on a like-for-like basis.
The Productivity Commission Draft Report Overview on, Superannuation: Assessing Efficiency and Competitiveness , also found that members lacked information on comparable products available for members. It stated,
“There is wide variation in performance in the default segment that is not fully explained by differences in asset allocation. About 1.7 million member accounts and $62 billion in assets are in MySuper products that underperformed conservative benchmarks over the 10 years to 2017. This suggests that many members are currently being defaulted into underperforming products and could be doing better.”
According to the PC these issues are caused through poor governance, regulation, and a lack of competition between Australia’s super system.
Members need to have more available information about their superannuation funds. Superannuation funds need to provide insurance that is beneficial and suitable for its members, and there need to be stronger governance rules in place.
To find out more about the Productivity Commission Draft Report Overview on “Superannuation: Assessing Efficiency and Competitiveness” go to their website below;