The industry says we have a ‘world class’ system but who does it benefit. ‘It treats us with contempt. It has known for decades about the cost of multiple accounts.’ Here’s how you can tell the Productivity Commission was spot-on in its assessment of the superannuation system.
Not a single part of the industry, not one, has explicitly endorsed its key recommendation. That’s because it is intended to help us: users of superannuation who depend on the industry.
We entrust it with an extraordinary $2.6 trillion (for reference, Australia’s entire gross domestic product, everything we produce and earn in a year, is $1.8 trillion). And the sum keeps growing as we put ever more into super each year through compulsory contributions, which are set to climb to 12 per cent of our salaries.
Yet it treats us with contempt. It has known for decades about the cost to us (and benefits to it) of multiple accounts. The commission says over a working life the extra admin and insurance charges can amount to an entire year’s pay. Yet behind the scenes its representatives have been lobbying Financial Services Minister Kelly O’Dwyer against attempts to stamp them out.
Australia has an astounding 29 million super accounts and only 20 million teenagers and adults aged 15 or more. One in three of our accounts are unwanted multiples.
The insurance fees are particularly egregious. One in four of us with insurance through superannuation don’t know we’ve got it and are unlikely to claim. Those of us with multiple policies can only claim on one of them for things such as income protection because that’s all the law allows. More absurdly, premiums for policies that include income protection continue to be deducted from our accounts when we are out of work, forcing us to pay to protect income we don’t have.
Many of us (those without specific provisions in our awards or industrial agreements) have had the freedom to choose what fund we want to be in since 2005. But the odds have been stacked against us. Banks have been paying their employees bonuses to switch us into expensive and poorly performing products.
They’ve been paying our financial advisors commissions to do the same thing and providing attractive banking terms to employers prepared to do the same thing. Those of us who try and examine the market are presented with a deliberately large array of more than 40,000 individual products. The commission says the more complex the product, the lower the return the fund selling it is able to offer because the less likely we are to understand it.
So badly do the bank-owned funds perform that, taken together, they deliver their members a shocking 4.9 per cent less than would ‘‘plain vanilla’’ funds offering the same mix of asset classes and facing the same costs and taxes – an achievement that’s almost impossible to explain, although very large fees and using some of the funds as dumping grounds for poorly performing products might form part of the explanation.
In order to find out whether the funds themselves knew why they performed so badly the commission sent out a survey, with reminder letters, to the 208 that service most of the population. Only 114 responded. Among those that didn’t respond were the Defence Force Superannuation Scheme and the AMP Eligible Rollover Fund. One attempted to game the survey by providing its name and address (so that it wouldn’t be included in the list of non-responders) and leaving all of the other fields blank, a performance the commission described as “contumelious’’ – a word that means showing an utter disregard for someone else’s work.
An impressive 81 per cent of the responders said they undertook performance attribution analysis, which means they knew why they were performing as they were. But only five (that’s right, only five of those funds) were able to outline what their analysis said. The rest were either not telling the truth about about whether they undertook analysis or were trying to hide what it showed.
Some of the industry funds performed poorly, too. Some are funds into which people are forced to put their money by industrial awards. So bad are they compared to better funds the commission says over a lifetime the difference could amount to $635,000, or nine years’ pay.
And yet neither Industry Super, the Institute of Superannuation Trustees or the Association of Superannuation Funds has explicitly backed the commission’s key recommendation, and neither has the Financial Services Council, although it has come the closest.
The Productivity Commission wants all Australians joining the workforce to be presented with a dropdown menu of the 10 best performing funds and be asked to pick one. They would be perfectly free to pick from a broader list, or even to pick a fund that wasn’t on a list. And they could stay in that fund regardless of who employed them. An independent panel would refresh the menu every four years meaning funds would compete to stay on it. Financial planners would have to show clients the list as well. Denied an inflow of conscripted or deluded new entrants, the bad funds would close.
Yet their representatives oppose it. They have “expressed caution”, they say our system’s “world class”, they say the Productivity Commission is “badly misguided”.
I reckon it’s got their number.
This article first appeared in the SMH on 31 May 2018.
Peter Martin is Economics editor at The Age