Productivity Commission super report: A pathway to better retirement incomes

Senate blocked super reform

Of course, the Coalition government spent most of last year trying to push through legislation which would have forced the closure of multiple and low-balance accounts. But it was blocked in the Senate by Labor.

Legislation designed to stop the automatic charging of insurance premiums to young workers who don’t need life cover was also stopped in the Senate.

Not surprisingly, Chester’s report picks up on many of the failings identified by the Hayne royal commission including poor trustee governance, conflicted contractual arrangements with related parties and the use of non-monetary inducements to win default super accounts.

Treasurer Josh Frydenberg’s decision to release Chester’s report ahead of the release in February of the final report by banking royal commissioner Kenneth Hayne is wise. It provides more time for all interested parties to absorb the most comprehensive analysis of super ever written.

“The government will await the final report of the banking royal commission, which is examining the conduct of super funds and the regulators, before finalising its response to the Productivity Commission report into superannuation,” Frydenberg said.

He rightly called on Labor to support the government’s super reformswhich include the automatic consolidation of low-balance inactive accounts; caps on fees for low-balance accounts; tougher penalties for trustees, and measures to prevent inappropriate insurance premiums eroding member account balances.

Chester’s report says unintended multiple accounts are a significant problem. They represent about one in three accounts and annually cost members about $2.6 billion in excess insurance premiums and administration fees. The costs are exacerbated by foregone compound returns.

Since the report was written,Chester has been appointed deputy chairman of the Australian Securities and Investments Commission.She starts her new job on January 28.


Moving away from age pensions

Before commenting on Chester’s report, it is worth repeating comments made late last year by the chief executive of the Association of Superannuation Funds of Australia, Martin Fahy, about compulsory super.

He told the ASFA annual meeting that by 2050, the system will have reduced the reliance on the full or part aged pension to less than 50 per cent. By 2050, the fiscal burden of age pensions will be only only 2 per cent to 3 per cent of GDP.

Fahy said 30 per cent of those aged over 65 are already completely self-funded and about 23 per cent of people aged over 65 have superannuation as their main source of income. “Most importantly, superannuation is delivering retirement incomes far higher than the age pension,” Fahy said.

Time to review super’s role

It is worth keeping these statistics in mind when reading Chester’s report because it would be easy to slip into the misconception that 26 years after compulsory super was created by Paul Keating, it is no longer fit for purpose.

case law

Even when Chester criticises the failure of many super funds to beat their benchmarks for performance over the past 13 years, she admits that the majority of super funds have achieved returns well in excess of inflation.

Chester says we need an independent inquiry into the retirement incomes system. That will gain support from a range of different established critics of compulsory super including those advocating the management of all default super by the Future Fund.

But as Fahy from ASFA pointed out in his speech last year, on a five-year return basis and adjusting for taxation, $1 invested into the Future Fund in June 2012 would have returned $1.67 at June 2017. Comparatively, the average super fund would have returned $1.64.

But it is clear from Chester’s analysis of every aspect of compulsory super that the system has not kept up with significant changes in the way Australians live and work.


It needs to be much more flexible to cope with a workforce where 50 per cent of people will switch industries during their working lives and about 40 per cent will change occupations. Also, Australians are working longer, retiring later and living longer.

Chester’s primary criticism is that many super members have not been served well by those meant to act as a bulwark against poor governance and exploitation of the compulsory flow of money.

The main culprits are super trustees and regulators. In the retail super sector, trustees should have closed down poor-performing funds and shifted members into more cost-effective and better-performing products. But they haven’t done that, and many reman stuck in legacy products.

Regulator’s called out

APRA and ASIC are called out by Chester for failing to police poor conduct in the super industry. APRA cops it with both barrels for its failure to hold trustees accountable and for its failure to demand meaningful data from super funds.

Chester says APRA needs to be given new objectives to ensure it works in the interests of super funds members. This would involve working out a new definition of members’ best interests.

“Given the apparent confusion, and lack of case law, the Australian government should pursue a clearer definition of members’ best interests that reflects the twin principles that a trustee should act in a manner consistent with what an informed member might reasonably expect and that this must be manifest in member outcomes,” the report says.

Regulation could then be conducted through the lens of member outcomes.

“APRA would be a more effective superannuation regulator if provided with an explicit ‘member outcomes’ mandate rather than a traditional prudential mandate,” the report says.

“The main threats to members are likely to be issues of poor performance, excessive fees or poor handling of conflicts of interest by trustees, rather than failure of a fund.

Chanticleer strongly supports Chester’s recommendation that APRA finally be the subject of a capability review. This was recommended by the Financial System Inquiry but never implemented by the coalition government.

APRA’s immediate task is to lift its game in terms of data collection. Poor data has resulted in lack of transparency, making it harder for members to compare products and identify the best performing funds.

Chester’s controversial “best in show” shortlist for default super selection is laid out in a more detailed manner than was evident in the interim report. She has responded to the multiple criticisms of best in show.

The idea is to “nudge” members towards the best-performing super funds. She admits this will lead to a concentration of assets in fewer funds but says this will not reduce competition. Also, she says it will provide an incentive for funds to lift their game.

Employers and the industrial courts would ultimately lose their power over the choice of default super funds. The best in show list would be chosen and monitored by an independent expert panel.


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