Why is superannuation in the news so much?
Superannuation | 8/02/2019 |
7 min read
The Australian superannuation industry has attracted plenty of attention in recent months. With a Federal election on the horizon, a report from the Productivity Commission doing the rounds, a Financial Services Royal Commission, and assorted vested interests spinning the facts, it can be hard to cut through all the noise. But what’s really going on with super, and why is it popping up in the papers so often? We’ve gone back to basics with this this overview.
What is the fundamental issue?
The Australian superannuation industry holds about $2.6 trillion dollars in future retirement savings for Australians. That’s a huge investment, and as the sector has grown, there’s been increased scrutiny. Various people are asking if the current system, set up in 1992, is performing like it should be, and if it’s providing the best retirement results for the public.
A Productivity Commission into super was set up in 2016 and released its findings late last year. This is fuelling much of the current discussion, so let’s start there.
What has the Productivity Commission, found?
According to the Productivity Commission, the current superannuation system suffers from structural flaws. These can be grouped into four problem areas.
- Multiple accounts
- Poor investment performance by some funds
- Unnecessary insurance
- High fees in some funds
Let’s look at that in more detail
Okay, according to the commission…
- Multiple super accounts are costing members billions. Too many Australians have more than one super account. In fact, there are 10 million more accounts than there are people. That means extra fees and charges for people with multiple accounts, which will reduce their final retirement balance.
- Retail funds are underperforming. Many superannuation funds associated with banks (aka, the retail funds) are consistently delivering lower investment returns than industry funds.
- Fees are inconsistent. Not all super funds charge the same for their services. Smaller funds (those with less than $3 billion) have high overheads relative to their member base, and people in these funds tend to pay more.
- Insurance isn’t for everyone. 12 million Australians currently have life insurance via their super fund. The Productivity Commission argues that young members with low balances should be able to opt-in for this type of coverage. The commission believes this may help members with low balances and inactive accounts from having their balance eroded.
- Default super can be an ‘unlucky lottery’. Unless an employee nominates a specific superannuation account when they start a new job, they will be placed in that employer's default fund. The problem is there’s about 230 super funds in Australia, and the difference between the top performing funds and bottom quarter is significant.
For instance, the best performing fund averaged 7.4% in returns over the past decade, the worst returned just 3.2%. For the average Australian worker, that's the difference between retiring with $265,000 vs $832,000 - a difference of $567,000 according to numbers supplied by SelectingSuper / Rainmaker.
What’s this I hear about a Top Ten funds list?
There are a number of recommendations to fix the items listed above. One of the more contentious is to create a list of ten 'Best in Show' funds. This would mean people who don’t actively choose a super fund when they start their working life would be defaulted into one of these ten funds.
A panel of independent advisors would be assigned to review super funds and choose a Top Ten list based on various parameters, such as fees, returns, etc.
So far this has only been floated as an idea, and has recieved a lukewarm response from both sides of politics.
How does the Royal Commission fit into all this?
Most retail super funds are owned by the banks, which is why superannuation was included in the Royal Commission into Misconduct in Financial Services. One of the big issues to emerge from the commission was the difference between retail funds and industry funds (especially in relation to fees and returns).
Basically, the industry funds have significantly outperformed the retail funds on all counts. And when it comes to questionable behaviour in their financial planning businesses, it’s been the retail funds that have had to explain themselves.
While some of this can be explained by retail fund's need to look after shareholders and pay dividends, it conflicts with the interests of people experiencing high fees, mediocre returns, and poor financial advice.
Is there a political angle to the arguments?
Industry funds have traditionally been associated with a specific industry sector, e.g. nurses, teachers, miners, etc. So there are political undercurrents to all this involving the major parties, unions, and other industrial aspects we don’t have the space or time to get into here.
But the underlying story is you’re probably going to do better with an industry fund, or profit-to-member fund like Equip.
Where does Equip fit into all that?
Equip operates like an Industry Fund, but we're independent of any specific employers or industry sector. We're defined as a ‘profit-to-member’ fund, which means all profits go directly to our members. That’s good news for members, and is one of the reasons we have been rated Top Ten in Australia for investment returns.
An Equip financial planner can help you make sense of your superannuation and how to plan a better retirement. For more info click here.
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