Why Super's Greatest Strength Is Also A Weakness
It is an exciting time when you are starting a new job.
There are new colleagues to get to know, new work practices to learn and opportunities to explore.
It is also a time when you can often end up with a new super fund because if you are not paying attention, as your new employer is required to select a default fund for your super contributions.
The Productivity Commission has recently released a draft report on alternative default models. This is the second of a three stage process and the way default funds are offered is one of a number of inefficiencies within our super system that the Productivity Commission is looking to strip out of the system in the future.
The Productivity Commission inquiry is a direct result of the recommendations out of the 2014 Financial System Inquiry led by David Murray. The Murray inquiry found the superannuation system was not operationally efficient due to a lack of price-based competition in the default market.
Our superannuation system has its roots in workplace agreements – and it has served the system well - but much has changed in both the workplace and the super system two decades on.
For a start, the days when a young person began a job and expected to spend much of their working life with the one employer is long gone. Changing jobs is much more common today than in the early 1990s and that is predicted to increase in the future as globalisation and technological change impacts and disrupts the nature of work.
The objective of Productivity Commission inquiry is to develop alternative methods of allocating default funds – with the objective being a new worker would get a new default super fund once in their life not every time they change jobs and do not actively select a fund.
Why is that important? It is estimated that about 40 per cent of workers in Australia have more than one super fund. That means at least two lots of fund fees and at least two lots of insurance premiums, all of which eats away at account balances and reduces the retirement savings pool of workers.
The Australian super system is rightly regarded as in the top tier of pension systems around the developed world. But its greatest strength – the mandatory contribution regime – is also its Achilles heel in terms of the engagement of individual members.
Which is why the default system is so important to the overall functioning of the system.
The draft Productivity Commission report says there would be about 400,000 new default members each year under the commission’s first-time definition and that represents about $800 million in annual contributions. The important number though is the estimate provided by the Financial System Inquiry that if we reduce account proliferation and lost accounts super account balances would increase by about $25,000.
The Productivity Commission calls out account proliferation as “one of the superannuation system's worst systemic failings” and canvasses the notion of a centralised clearing house that has demonstrated efficiency benefits in the New Zealand system both for employers and funds.
In all likelihood the savings estimate is likely to be on the low side given some of the other efficiency failings the inquiry has called out.
The Productivity Commission work will not be done till next year and then it will be up to the Government to accept or reject their recommendations. The draft report has sparked considerable debate and will inevitably be politically contentious.
It is important to understand, though, that the inquiry's brief is to improve the system for superannuation members of the future. For today's fund members the responsibility is squarely on their shoulders – albeit there is no lack of choice, rather as the inquiry has identified a lack of engagement.
It is also interesting that while there has been plenty of submissions and feedback from the super industry the inquiry has not had the benefit of hearing from super fund members directly – an engagement indicator all of its own perhaps.
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.