Bill Shorten has produced a major reform, and a major Labor reform, in yesterday’s Stronger Super announcement. Better yet, he’s actually got the fractious financial industry to back it. Even if key parts of the government’s separate Future of Financial Advice reforms hit the fence courtesy of gullible independents and the Coalition’s bloodymindedness, Stronger Super marks an important step forward on compulsory super.
Within a matter of years, no one will be paying commissions on their compulsory superannuation accounts unless they choose to, and no one will be left wondering why the super fund they ended up courtesy of their employer in is performing so poorly.
Since the start of compulsory super, many Australians have been paying commissions and management fees on their super funds, based on contributions they had no choice about paying. Many of those who ended up in retail funds had to watch their funds serially underperform those run by industry, companies or government. The beneficiaries were financial planners and the big banks and insurance companies who eventually came to dominate retail funds.
Stronger Super ends this by moving everyone who is in a default fund into a MySuper product with a single investment strategy and a standard set of fees, from 2013. The fees will be limited to an administration fee, a tightly-targeted investment fee, and cost recovery fees.
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For anyone who wants to choose their own super fund or wealth management strategy, the status quo continues. But for the rest of us, who pay minimal attention to our super since we’re forced to pay it automatically, we’ll be progressively transferred to MySuper products in a couple of years, through to 2017. It will build in a basic premise that compulsory super shouldn’t attract the sorts of commissions and high fees that choice-based wealth management services carry.
In terms of account returns, the difference in your eventual retirement income may well be significant. According to figures obtained by Crikey from the August SuperRatings survey, the best performing top 50 super fund of the past seven years — that is, since 2004, so a considerable period of time encompassing boom and GFC years — was the Commonwealth Bank’s OSF Super, which is the bank’s in-house fund for its employees and their families. It achieved a rate of return of over 7%, well ahead of its competitors, over the past seven years. Well done, Commonwealth.
But how did the Commonwealth’s wealth management arm, Colonial First State, perform for its external customers? The return from CFS FC Emp — FirstChoice Moderate was about half the OSF, at 3.56% over seven years, barely outperforming inflation.
In fact the worst performers in the top 50 funds are dominated by retail funds controlled by the big banks and insurers. Westpac’s BT Bus Super fund, which underperformed inflation — i.e. you’d have been better off putting your contributions under your bed; AXA’s SD Bus and Westpac’s Asgard super funds performed even worse.
As the Commonwealth example shows, the big banks do know how to generate decent super returns for their members when it’s in their interests to do so. But that skill curiously goes missing through their retail offerings.
Shifting default super accounts into MySuper is likely to reduce the impact of this bizarre vanishing act, with the removal of commissions and single investment strategies. It will mean higher returns for members (something the Australian Chamber of Commerce and Industry used to argue there would be less need to lift the CSG to 12%) and less transfer payment pressure on budgets in the 2020s and 2030s.
The reforms have been portrayed as a win for the retail super industry because they’ll be able to tailor MySuper products for large companies, providing some of the flexibility the absence of which they have been decrying about MySuper since the Cooper Review came out. Retail funds argue they’ll be able to generate economies of scale for large employers and offer lower fees. It’s an interesting claim to make given that the Superstream process, to standardise industry administrative process and generate back-office savings, will separately continue anyway across the whole industry. And it’s one they’ll have to justify to APRA. They won’t be able to offer lower MySuper fees to large employers funded by subsidies from other funds.
And the interesting feature of the reforms — and possibly where Shorten has been very smart — is that any inactive super accounts you have will also be shifted to your MySuper product unless you agree not to do so. Anyone who has switched jobs a couple of times is likely to have at least one inactive account lying around somewhere. At the moment the threshold is $1000, but that may be lifted in the future. It will start a process of “auto-consolidation” into MySuper that will accelerate the end of commissions on compulsory super.
From the government’s point of view, the best part is that the whole industry appears happy, or at least relaxed, about the reforms. That may be testament to the consultation process undertaken by Paul Costello’s Stronger Super Peak Consultative Group. But Shorten will eventually get the credit for what will be a major improvement to the compulsory super system.