Bill Shorten has been urged not to hand the scandal-ridden funds management industry any more worker wages until it cleans up its act.
Along with scrapping the $450-a-month earnings threshold to qualify for mandatory super payments, Labor announced a plan to expand super to women on maternity leave under a $400 million plan that it argues would help close the retirement gender gap.
But superannuation experts shot down the plan as an ineffective way to reduce inequality and insisted the plan be contingent on a raft of proposed super reforms making its way into law before the $2.7 trillion sector is given any more responsibility to manage the savings of low-income workers.
“This is sound policy, but until the legislation, already before parliament, to cap fees and introduce a $6000 balance threshold for life insurance is introduced, lowering the $450 threshold won’t address the problem of low retirement balances for women,” said Xavier O’Halloran, head of advocacy at CHOICE’s Superannuation Consumers’ Centre.
Mr O’Halloran said the $450 threshold change would give people “at best” an extra $500 a year in super contributions, which would probably be whittled away by life insurance fees that already siphon an average $340 a year from account balances.
“There are some extremely damning findings likely to come from the final Productivity Commission report … and the royal commission. We need to act on those before committing more of our incomes to the superannuation sector,” he said.
The $450 threshold has not been increased since it was legislated almost three decades ago, meaning more than half a million extra employees are seeing 9.5 per cent of their wages locked away until retirement than would be if the threshold had been indexed to inflation, which would leave the threshold at more than $1000.
While the Productivity Commission found entrenched underperformance and overcharging in the for-profit fund sector, it also told a tale of underperforming trade union funds that refuse to merge and that low-balance savers and low-income workers were dudded.
The Financial Services Council, which represents the bank-run for-profit funds, said Labor’s plan could result in additional retirement savings of up to $110,000 after 40 years of work, assuming an annual investment return of 6.5 per cent.
Industry figures from Chant West show that over the past 10 years union and employer-backed industry funds had collectively managed a 6.9 per cent return compared to bank funds’ return of 6.3 per cent. These rates, however, fail to account for administration fees, which are often levied at a flat rate of about $10 a month and overwhelmingly punish savers with low balances.
The superannuation industry generates hundreds of millions in revenue each year through fees charged to small accounts. Based on a modest monthly member fee, the industry could be gaining an extra $50m in revenue each year thanks to the extra workers being captured by the super system.
Government budget proposals are seeking from July next year to limit fees charged on super accounts with balances under $6000 to a maximum of 3 per cent. A separate plan is also aiming to consolidate lost and forgotten accounts and reunite the savings with their owner.
Grattan Institute fellow Brendan Coates said there was “no good reason” low-income workers should be excluded from superannuation. But he added that superannuation was the wrong tool to help improve retirement for low-income earners, especially women.
“The reality is much of the value of the payment will be eaten up by superannuation fees, or clawed back due to the Age Pension assets test,” he said.
Industry Super Australia’s modelling on super for paid parental leave recipients showed it would increase the retirement savings of an average working woman by 1.7 per cent, and only boost retirement incomes by 0.4 per cent, he said.
The royal commission also revealed the major banks were often unwilling or unable to put the interests of super members first and retained profits at the expense of member savings.
By Michael Roddan (Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.)
20 September 2018