The government’s age pension bill will be weighed by dismal returns in the bank-run superannuation “choice” sector, according to a report from Rice Warner that predicts the cost of savers choosing not to switch into a low-fee MySuper product will cost more than $50 billion over the next decade.
Rice Warner found that if members were to stick with their underperforming “choice” nest egg, rather than a MySuper product, individual savers could find themselves as much as $50,000 worse off at retirement.
Collectively, this would result in a $53bn shortfall in potential super balances over a decade, equal to more than a year’s worth of Age Pension payouts at current rates.
The findings come as the number of super members looking to switch from a bank-run fund to an employer-and-union-backed industry fund surges following the banking royal commission’s inquiry into the $2.7 trillion super sector, which revealed fee gouging and dismal returns in the bank-run funds.
AustralianSuper and Cbus have both claimed to be logging a rise in customers dumping their bank-run funds for their own funds, while Industry Super Australia research shows one in five bank fund members are considering switching.
While the bank-run retail super sector also markets MySuper products to its customers, the funds offer several
“choice” products, which are marked by a plethora of investment options that savers are able to tailor.
MySuper products, which many industry funds run as their flagship product, are run as “default” funds that are legally bound to provide simple investment options with low fees.
Rice Warner chief executive Michael Rice, who reviewed the new paper, said the research showed savers who invested their products in non-MySuper products were likely to have lower balances at retirement.
“There is a general view that members who choose to invest their super outside MySuper products should achieve a better outcome as they are tailoring their investment decisions to their personal circumstances and financial goals,” Mr Rice said.
“However, our research shows that well-managed MySuper products with low fees are likely to deliver better outcomes for members over the long run.”
Although the superannuation system was designed, in part, to take pressure off the Age Pension bill — the biggest category of welfare spending in the federal budget — the system has not resulted in a substantial increase in net national savings. Rather, generous tax breaks given to the superannuation sector have meant the revenue cost to the budget has exceeded any savings in pension outlays.
The report, commissioned by the not-for-profit sector Australian Institute of Superannuation Trustees, comes after Kenneth Hayne’s inquiry recommended that Commonwealth Bank’s superannuation business face findings it criminally breached the law more than 13,000 times, while counsel assisting Michael Hodge QC said National Australia Bank had a “disregard” for savers, regulators and the law. The bank is alleged to have broken criminal laws by charging tens of millions of dollars in fees but provided no service.
After a two-year review, the Productivity Commission found many savers had been shunted into underperforming funds, others were dudded by rampant fee gouging, there was a lack of competition among big default funds and too much money was being spent on bells and whistles, such as smartphone apps, in the high-fee retail fund sector.
The Productivity Commission chastised retail providers for running more than 39,000 “investment options” despite operating only hundreds of super funds. The commission said rather than offering true choice, this created confusion among investors. Industry funds operated 688 investment options.
“High fees and poor performing choice products are a drag on the efficiency of our super system, which ultimately is a cost to all Australians in the form of higher Age Pension costs,” AIST chief executive Eva Scheerlinck said.
Rice Warner’s modelling found that for singles and couples with different income levels and also for those who took a five-year career break, all individuals were worse off in the choice sector.
For workers on an income of $60,000, the difference in retirement balance of being in a MySuper product and a choice product was about $30,000. For those on $100,000 the difference was about $50,000.
By Michael Roddan (Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.)
17 September 2018