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$500,000 more at retirement: the new plan to reform super industry

Treasurer Josh Frydenberg. Images: Getty
Treasurer Josh Frydenberg. Images: Getty

Australians could be $3.8 billion wealthier at retirement under a new plan to overhaul the superannuation system and take the wind out of the sails of underperforming funds.

The plan, released by the Productivity Commission this morning, would see a new job entrant hold $533,000 more in superannuation by the time they retire.

And a 55-year-old Australian would also stand to gain $79,000 more if the Productivity Commission’s recommendations were accepted.

The report is three years in the making, and could trigger a massive overhaul of the $2.6 trillion super sector if its recommendations are implemented.

The Productivity Commission raised industry eyebrows last year when it first announced its ambitious set of superannuation reforms in its interim report.

Despite the controversy, the proposals outlined in the inquiry report are largely unchanged from the interim edition.

“Structural flaws — unintended multiple accounts and entrenched underperformers — are harming millions of members, and regressively so,” the commission said.

What do they want to do?

Default superannuation accounts would only be created for workers when they first enter the workforce.

The commission found one third of accounts are unintended multiple accounts, and these are eroding members’ balances by a staggering $2.6 billion a year in “zombie” fees and insurance.

Noting this, the Commission argued workers should have only one super fund and called on the government and ATO to establish a centralised online service for members, employers and the government. The service would allow members to open, close or consolidate accounts and facilitate the carryover of accounts when members change jobs.

New workers entering the workforce would choose from a “best in show” shortlist of up to 10 super products.

Workers would be able to understand and compare the benefits of different funds. Members who do not have a fund and don’t make a choice would also be defaulted into one of the 10 products after 60 days.

The shortlist would be curated by an “independent expert panel”.

The Commission said the $533,000 boost is the difference in retirement outcomes between those defaulted into bottom-performing and top-performing funds.

Super funds would take annual outcomes tests for their default options.

Funds that fall short of the outlined benchmarks by more than 0.5 per cent a year on average over a rolling eight-year period would have a 12-month remediation process and if this isn’t possible, the product would be forced to leave the market with members transferred to better performing options.

Funds with balances of less than $6,000 and which have been inactive for more than 13 months would be auto-consolidated by the ATO.

This $6,000 threshold would increase over time unless there is a good reason not to.

Members would have access to a simple dashboard.

Funds would have to publish a simple, single page product dashboard for all their products.

This dashboard would be linked to members’ accounts.

Consider delaying the increase to the amount of super paid.

Currently, employers pay 9.5 per cent of their employees’ salaries as superannuation. This is called the superannuation guarantee.

This figure is slated to increase to 12 per cent, but the Commission advised delaying the increase until an independent review into the retirement incomes system takes place.

Members under 25 would opt-in to insurance in super, rather than opt-out.

As young Australians are less likely to require life insurance, the Commission argued the financial product should be opt-in.

“For some members, insurance in superannuation is of little or no value — either because it is ill-suited to their needs or because they are not able to claim against the policy,” the report said.

“Income protection insurance and unintended multiple insurance policies are the main culprits for policies of low or no value to members.”


The Commission said the superannuation sector is plagued by duplicate accounts, excessive and unwarranted fees and a sheer lack of information that is available to members.

This problem has proliferated in an environment of weak competition, governance and regulation.

“Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including product proliferation),” the Commission said.

While default products tend to outperform the rest of the market, many Australians have still been defaulted into underperforming products – meaning they could lose nearly half of their balance by retirement.

What’s the reaction?

The report will be tabled today in Parliament.

Speaking to ABC Radio National, Treasurer Josh Frydenberg said the report identified “significant structural flaws in the system” and acknowledged the merit in getting Australians into strong funds.

“There is a big idea at the heart of this report, mainly that the default system should revolve around the member, not their workplace.”

Head of advocacy at the Superannuation Consumers’ Centre and campaigns lead at Choice Australia, Xavier O’Halloran said the plan places consumers at the centre for the first time.

“The federal government needs to adopt these recommendations and make it easier for consumers to maintain a single, high quality fund.”

– With AAP

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