The Productivity Commission has issued a draft report on Australia’s Superannuation Efficiency and Competitiveness for public consultation. The report makes recommendations to improve outcomes for members and system stability.
The report’s key findings are that currently structural flaws, unintended multiple accounts (one in every three accounts is unintended) and entrenched underperformers, harm a significant number of members.
The Report’s overall assessment is that fixing some of the worst problems in the current superannuation system would bring substantial benefits. If there were no unintended multiple accounts (and the duplicate insurance that goes with them), members would have been collectively better off by about $2.6 billion a year.
Some of the findings overlap with the Government’s recently announced changes on fees and insurance.
Lack of member focus
The Report concludes that the superannuation system is flawed because it is anchored to the job or the employer, and not the member.
It recommends that:
- Members should only ever be allocated to a default product once, upon entering the workforce.
- Members should also be empowered to choose their own super product by being provided a ‘best in show’ shortlist, set by a competitive and independent process.
- Funds need to do more to provide insurance that is valuable to members.
- Regulators need to effectively police trustee conduct and collect and use more comprehensive and member-relevant data.
The Report observes that although there have been improvements to trustee board appointment processes to better ensure boards have the necessary skills and experience, there is still much room for trustee boards to do better in this area.
It recommends that use of a skills matrix (informed by external evaluation of board performance, skills, experience and knowledge) to guide the appointment process should be considered best practice by superannuation trustee boards.
It recommends that best practice governance for superannuation trustee boards would involve a ‘critical mass’ (at least one third) of independent directors. However, ensuring boards have processes in place to recruit highly skilled and experienced directors is at least as important as the number of independent directors.
The Report found that:
“APRA-regulated funds have delivered investment returns to members over the past two decades (net of all fees and taxes) of 5.7 per cent a year, on average. The majority of members and assets in the system are in products that have performed reasonably well. But there is significant variation in performance within and across segments of the system which is not fully explained by differences in asset allocation. Not-for-profit funds, as a group, have systematically outperformed for-profit funds. While retail funds dominate the ‘tail’ of underperformance, industry and corporate funds also reside in the tail.”