Number of underperforming super funds reduced and fees cut under Coalition reforms, thinktank finds
The Coalition’s last round of superannuation reforms has already reduced the number of underperforming funds and cut their fees by an average of 20%.
That is the conclusion of a Grattan Institute submission to the Albanese government’s review of the Your Future Your Super reforms, which urges it to retain a strict test for underperformance and improve the process for selecting default funds.
Passed in mid-2021, the super package “stapled” employees to their existing fund, making it their default and preventing the creation of duplicate accounts as they moved from job to job.
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It also introduced an annual performance test, requiring super funds to inform their members of substandard results.
After Labor won the May election, the new assistant treasurer, Stephen Jones, started a review of the laws to check they don’t “create perverse or unintended outcomes for members” such as discouraging investment in infrastructure.
The government paused the extension of the performance test beyond the basic, low-cost default product MySuper for 12 months.
The Grattan Institute submitted that the performance test had led to under-performing funds merging with better-performing ones.
“From October 2020 [just before the performance test was announced] to June 2022, the number of MySuper products fell by 19, from 88 to 69,” it said.
“Of the 13 MySuper products that failed the first test in August 2021, 10 have merged or are in the process of doing so. The other three have all reduced their fees.”
The Grattan Institute found “members of the 13 products that failed the first round of the test in 2021 are now paying fees around 20% lower than before the test was announced”, saving those members more than $100m a year.
“For a young worker starting out their career in an underperforming fund, the lower fees they now pay will translate into $20,000 boost to the super balance by the time they retire.”
In its consultation paper, the Treasury questioned whether the test should be extended to trustee-directed products and other choice funds.
The Grattan Institute submitted that the expansion should proceed, citing Productivity Commission and Australian Prudential Regulation Authority (Apra) findings of poor performance and high fees in these products.
“Recent analysis from APRA concluded that more than 60% of choice investment options had under-performed benchmarks, with 25% of options delivering very poor returns,” it said.
“Creating carve-outs for certain choice products increases the risk that the performance test will be gamed,” it warned.
The Grattan Institute called for more to be done to force average funds to lift their game, noting those that passed the performance test by a significant margin increased their fees by more than 5% on average.
It called on the government to implement the Productivity Commission’s “best-in-show” process whereby employers must pick a default fund from a highly rated shortlist where an employee does not nominate another fund.
Industry Super Australia (ISA) is concerned that the Your Future Your Super package does not prevent employees from being “stapled” to an underperforming fund.
Despite underperforming funds writing to their members telling them to consider switching, some 90% of members stuck with their fund.
ISA found that the 850,000 members who failed to leave their underperforming super fund lost $1.6bn in 12 months, an average of $1,900 a person.
ISA chief executive, Bernie Dean, said “this is a reminder that there is huge cost to doing nothing if you are in a dud super fund”.