Edition: August/October 2018


Down Under isn’t tops

Oz relooks at itself, and SA should relook at Oz. Fault lines exposed in its equivalent of umbrella funds.

When retirement-fund reform was mooted in SA, studies and comparisons were made of the most successful schemes in jurisdictions abroad. Uppermost amongst them, for guidance on umbrella arrangements, was the superannuation system in Australia. To judge from the controversies now raging there, the SA industry and regulator had better take another look.

The draft report of an Australian governmentappointed commission into the compulsory superannuation system, which has been operating for almost 30 years and holds A$2,6 trillion in members’ savings, has identified key flaws:

  • The method of linking superannuation to the employer, not the member, has caused many members to hold multiple accounts. These members lose out by having to pay more than one set of administration fees and insurance premiums;
  • When members select the default option offered in their workplace, it’s a matter of luck that they land in a good fund;
  • Between 2005 and 2016, the returns shown by retail funds averaged a net 4,9% whereas not-forprofit funds returned a net 6,8%.

After the commission found that the super savings of millions of members are stuck in underperforming funds, reducing members’ balances by as much as 13 years’ pay, it proposed that an expert panel be set up to select the 10 best-performing no-frills superannuation funds to act as defaults.

“The super system has become an unlucky lottery for many workers and their families,” said commission deputy chair Karen Chester on release of the draft report. “The structure of the system is outdated.”

Because of defaults being tied to the employers, many members end up with another account when they change jobs. A third of accounts – about 10m – are unintended multiples. The excess fees and insurance premiums paid by members on these accounts amount to A$2,6bn every year.

Most members are in funds that deliver good investment returns. But more than one in four funds, with millions of members, are in funds that persistently underperform. Over the working life of an average member, being stuck in an underperforming fund can leave him or her with almost 40% less at retirement.

“Fixing these twin problems of multiple accounts and entrenched underperformance would lift retirement balances across the board,” said Chester. “Even for a 55-year old today, the difference could be up to A$60 000 by the time of retirement. And today’s new workforce entrant can be A$400 000 ahead by time of retirement in 2064.”

Of the proposed “modernisation” changes, foremost is that members be defaulted only once. This will be when they start working for the first time. They should then get to choose from a best-in-show list of high-performing funds that have been identified by an independent panel of experts. Existing members should be able readily to switch to these funds.

Chester . . . a lottery

“All members should be able to engage with their super without being bamboozled,” noted commissioner Angela MacRae. “Members today face a confusing proliferation of some 40 000 product options and information they don’t understand. It’s hardly surprising that many end up in a bad product. Super needs to be simpler and safer for all.”

Part of the problem is that products are most complex during the accumulation phase and most simple in retirement. For most members, MacRae added, the reverse is needed. She also reached the conclusion that impartial and affordable advice is hard to find.

Further, through their funds many members are getting life-assurance cover that was “manifestly unsuitable”. Some unknowingly had duplicate policies that worsened their retirement balances.

Finally, a comment from MacRae that might resonate in SA: “Governance needs to improve. Trustees of underperforming funds should be merging with betterperforming funds. And the best people with the right skills must sit on the boards of super funds.”

There, as here, it’s all in the implementation.