The Productivity Commission is proposing a major superannuation shakeup for young Australians entering the workforce.
It has criticised the current system, where workers are placed in a new “default” super fund whenever they change jobs, for being responsible for Australians accumulating multiple superannuation accounts, which is a very inefficient way to manage super savings.
It has proposed giving workers a default super fund only once – when they first enter the workforce – which workers could then take with them wherever they find work, meaning lower fees and the prospect of better returns.
If the commission’s proposals are adopted, super funds would eventually be uncoupled from awards and union-backed funds would lose their special status.
Scott Morrison asked the productivity commission to review the default fund system in February last year.
“The current system’s propensity to create multiple accounts is an egregious systemic failure,” the commission’s draft report says.
“This would substantially reduce the current proliferation of accounts created by repeating the default process every time a worker changes their job.”
The commission’s draft report – released on Wednesday – says the question of how to choose a worker’s default fund could be settled in different ways.
It has proposed four alternative models that use “competitive processes” to allocate default funds.
Model one: assisted employee choice
- Employees choose a super fund themselves from a non-mandatory shortlist of four to 10 high-quality funds. The shortlist would be accompanied by simple information on key features of each fund in a consistent and comparable format.
- A simple, low-cost, “last resort” fund would hold the super contributions of employees who failed to pick a fund from the list.
Model two: assisted employer choice
- Employers choose a default fund for their employees who do not exercise choice.
- This model recognises that some (mainly larger) employers are well-placed to choose a default fund and negotiate favourable arrangements for their employees, while many (mainly small- and medium-size) employers are not and would benefit from some assistance.
Model three: multicriteria tender
- Super funds compete for rights to a share of the “default pool” by submitting bids against criteria such as past performance on net returns and member satisfaction, investments strategy, member services, and fees.
- Five to 10 of the best funds would be chosen by a government-appointed selection body, with the winning funds allocated new entrant default members.
Model 4: Fee-based auction
- A fee-based auction would have funds compete for default status by out-bidding each other on fees.
- Funds would submit a sealed bid to the government-appointed selection body specifying their investment and administration fees on a best-and-final-offer basis, with one to five winning funds allocated new entrant default members.
The commission says the federal government should restrict the proposed default allocation models to new workers entering the workforce, of which there are about 400,000 each year, with about $800m in annual super contributions.
It says this would provide an immediate circuit breaker to start reducing the proliferation of super accounts, particularly among young workers.
It has not envisaged moving everyone in the super system to the new default models because it wants to avoid making the system unstable.
It expects the benefits of the changes to eventually work their way through the system.
“Our new models can make default super simpler and easier to compare, and offer the prospect of lower fees and better-performing products,” said the Productivity Commission’s deputy chair, Karen Chester.
“We have drawn on what has worked well and not so well overseas to address the outcomes default models should focus on today.”
The draft report comes a week after Industry Super Australia (ISA) began a dark new advertising campaign attacking Australia’s major banks, warning workers about the banks’ lobbying efforts in Canberra.
ISA believes the Turnbull government has sided with the major banks over the banks’ attempts to extend their market share of Australians’ super savings.
It says this explains why the government is trying to force all super funds – including not-for-profit default funds – to appoint an independent chair and fill a third of their board seats with independent directors.
Submissions on the Productivity Commission’s draft report will be due by 28 April.
Public hearings will be held in early May, and the final report will be provided to the government in August.
