The Productivity Commission released its draft report assessing the efficiency and competitiveness of Australia's superannuation system on 29 May 2018. In response to one of the recommendations from the Financial System Inquiry, the Australian Government had asked the Productivity Commission to undertake an inquiry into the competitiveness and efficiency of Australia's superannuation system.
The Commission undertook this task over a number of stages. AVCAL provided submissions to the Productivity Commission in Stage 1 (September 2016) and Stage 3 (August 2017).
Investment returns - net of all fees and taxes - matter most for members' retirement incomes. 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.
Draft recommendation 2: A single shortlist of up to 10 superannuation products should be presented to all members who are new to the workforce (or do not have a superannuation account), from which they can choose a product. Clear and comparable information on the key features of each shortlisted product should also be presented. Members should not be prevented from choosing any other fund (including an SMSF). Any member who fails to make a choice within 60 days should be defaulted to one of the products on the shortlist, selected via sequential allocation. The ATO should embed the shortlist and accompanying information into a centralised online service.
Draft recommendation 3: The Australian Government should establish an independent expert panel to run a competitive process for listing superannuation products on the online shortlist. This panel should select from products submitted by funds that meet a clear set of criteria (established beforehand by the panel) and are judged to deliver the best outcomes for members, with a high weighting placed on investment strategy and performance. The panel should have flexibility to select up to 10 products, with the exact number at the discretion of the panel based on the merit of each product and what is most tractable for members, while maintaining a competitive dynamic between funds for inclusion. The panel should be comprised of independent experts who are appointed through a robust selection process and held accountable to Government through adequate reporting and oversight. The process should be repeated, and the panel reconstituted, every four years.
Despite regulator endeavour, there remain significant gaps and inconsistencies in how funds report data on fees and costs. This harms members by making fee comparability difficult at best, and thus renders cost-based competition largely elusive.
Superannuation fees in Australia are higher than those observed in many other OECD countries. Fees, including investment management fees, have been trending down as a proportion of assets, from 1.3 per cent in 2010 to 1.1 per cent in 2016. Fees have fallen markedly for retail funds, albeit they remain higher for choice products than the largely unchanged fees for industry funds. Among APRA-regulated funds, the MySuper and SuperStream reforms have likely acted to reduce fees, albeit this is difficult to attribute directly given growth in average fund scale and the impact of other fee drivers. While dispersion of product-level fees has decreased over the past decade, there remains a persistent 'tail' of relatively high-fee (mainly for-profit) choice products with total fees exceeding 1.5 per cent of assets each year. This tail comprises about 14 per cent of member accounts and 15 per cent of system assets.
Higher fees are clearly associated with lower net returns over the long term. The material amount of member assets in high-fee funds (about 10 per cent of total system assets), coupled with persistence in fee levels through time, suggests there is significant potential to lift retirement balances overall by members moving, or being allocated, to a lower-fee and better-performing fund. Fees have a significant impact on retirement balances. For example, an increase of just 0.5 per cent a year in fees would reduce the retirement balance of a typical worker (starting work today) by a projected 12 per cent (or $100 000).
AVCAL will continue to engage with member stakeholders in order to provide the views of our industry. The Commission has invited written submissions in response to the draft report, with responses due by Friday 13 July 2018.
The AVCAL submission in response to the draft report can be read here.