Flawed super system costs older workers $61K in retirement savings

Structural flaws in Australia’s $2 trillion superannuation system are robbing savers of tens and even hundreds of thousands of dollars in returns over the space of their working lives, a draft Productivity Commission report has said.

Treasurer Scott Morrison tasked the commission with assessing the efficiency and competitiveness of the super system. 

Morrison noted when he commissioned the investigation that research had already showed that more needed to be done to reduce fees and improve after-fee returns for fund members, particularly those that stuck with the default funds chosen for them by their employer. 

“Fees have not fallen by as much as would be expected given the substantial increase in the scale of the superannuation system, a major reason for this being the absence of consumer driven competition, particularly in the default fund market,” the treasurer said.

The commission’s draft report, released on Tuesday, indicated that Morrison’s concerns were well-founded. It said that structural flaws – mainly the facts that some workers had multiple super accounts and that poorly performing fund providers were “entrenched” in the system – were costing super savers a combined $3.9 billion a year. If that money was added workers’ super balances, a new starter would be $407,000 richer when they retired in 2064, while a 55-year-old today would have an extra $61,000 by the time they retired.

About 10 million ‘unintended’ accounts – extra ones set up and forgotten about by workers when they move jobs – are draining $2.6 billion from workers’ contributions every year through unnecessary fees and insurance, the Productivity Commission found, while most of the worst-performing funds were in the ‘retail’ super sector. The retail sector typical refers to the funds operated by banks, insurance companies and other financial services providers.

Meanwhile, the huge number of products in the super market – more than 40,000 at current count – makes it difficult for savers to properly compare funds and the way regulators allow workers to be ‘defaulted’ by employers into underperforming funds left some people exposed to a “costly risk”, the commission said.

The commission has suggested some fixes, including a once-only limit on how often workers can be steered into a default fund, a move to force funds to provide better-value insurance options for fund members, and a refocusing by regulators from being concerned about policing funds to being concerned about championing consumers. 

Making the super system more efficient was vital, the commission said, if Australians were going to adjust to not only the changing workforce, in which more people move jobs more often, but also the changes to retirement, which is being pushed back to a later age and often lasts longer than previous due to increasing longevity.

“Superannuation is a significant financial asset for many Australians,” the commission’s draft report said. “It sits alongside the Age Pension, the family home and other household savings as a pillar of the retirement income system.”

The Productivity Commission has invited responses to the draft report, which must be submitted by July 15. The release date of its final report has not yet been announced.

Do you think the Aussie super system needs an overhaul? What changes would’ve made a big difference to your retirement savings?