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Fixing the worst problems in the superannuation system could leave Australians billions of dollars better off, according to the Productivity Commission's assessment of the sector.
Solving just two of the biggest issues — unintended multiple accounts and underperforming MySuper funds — would collectively save members $3.8 billion a year.
The Productivity Commission's report recommends a slew of changes to the super system — here's how they could affect you if they are implemented:
If you're starting out in the workforce
Young people have a lot to gain if the major problems plaguing super are sorted — the Productivity Commission found a new entrant to the jobs market today would have $533,000 more when they retire in 2064.
Multiple super accounts are a major source of duplicate fees, eroding retirement savings over the long-term.
For people working causally or moving between jobs, new accounts can be opened each time they change employer unless they nominate an existing account for their payments to go into.
The Productivity Commission says a third of all accounts — or 10 million — are unintended multiples, leading to $2.6 billion in unnecessary fees and insurance each year.
The report recommends accounts with balances under $6,000, that have been inactive for 13 months or more, be rolled into a single account.
It says the Federal Government should increase the $6,000 threshold for automatic consolidation over time.
Insurance is also in the report's sights, recommending insurance become opt-in for members under 25 years old and require funds to cease all insurance cover on accounts that have been inactive for the past 13 months.
For someone starting out in the workforce or working multiple jobs, this would mean a reduced risk of having multiple super accounts and insurance policies, and being charged extra fees.
Measures to consolidate duplicate, low balance accounts and make insurance opt-in for young people are already contained in the Federal Government's super reform bill, which is currently before the Senate.
If you're not paying attention to super
If you have little interest or time to dedicate to choosing a super fund, a range of 'no-frills' products known as MySuper are supposed to make it easier.
Employers must select a fund that offers a simple, low-cost MySuper product as the default option for workers who do not select their own fund.
However, the Productivity Commission found at least 1.6 million default accounts, holding $57 billion, have ended up in underperforming products, "eroding nearly half their balance by retirement".
The report recommends developing a 'best in show' list of no more than 10 MySuper products for workers to choose from, selected by an independent expert panel.
Only one default account would be able to be created for each person.
If you're paying high fees
There's a slew of different fees that can eat into the balance of superannuation accounts, from admin fees, to insurance premiums, to charges for financial advice.
Fees have a significant impact — the Productivity Commission says a 0.5 per cent increase in fees could cost a typical full-time worker $100,000 by the time they retire.
While the commission found fees are trending downwards across the sector, it says "a tail of high-fee products remains entrenched, mostly in retail funds."
The report recommends the Federal Government require all fees charged by super funds to be on a 'cost-recovery basis' — essentially, members should not be charged more than it costs the fund to deliver its services.
It also wants trailing commissions paid to financial advisers banned as soon as possible and to amend the legal definition of 'advice' to ensure it only covers personalised advice taking a member's circumstances into account.
Lower fees would mean more money in members' accounts when they reach retirement.
If you're in your mid-50s
A lot of the recommendations will have the biggest impact on those with decades of super contributions ahead of them but the impact on those closer to retirement is not insignificant.
The Productivity Commission found fixing the problems of unwanted multiple accounts and underperforming funds could mean an extra $79,000 by retirement for someone who is currently 55 years old.
The report recommends the Federal Government send a prompt to superannuation members when they turn 55, encouraging them to visit government websites for more information about preparing for retirement.
If you have a self-managed super fund
The number of self-managed superannuation funds (SMSFs) is on the rise, increasing from around 309,000 in 2006 to almost 600,000 in 2018.
While the Productivity Commission found people's engagement with their superannuation is low on average, it is (predictably) higher among people with an SMSF.
However, the commission says financial literacy among SMSF members is mixed, and they do not, on average, show financial skills that are significantly different to non-SMSF members.
The report recommends people providing advice on how to set up an SMSF should be required to have specialist training.
It wants proposed product design and distribution obligations for financial products to be extended to SMSF establishment.
What if you're a woman?
The report notes the increasing importance of superannuation to women, as the rate of workforce participation for females aged 25 to 34 years old approaches that of males.
However, there are no recommendations for how to specifically boost the super balances of women who take time out of the workforce to perform caring roles.
Labor has proposed changes to ensure super is paid to mothers and fathers who take government parental leave.
Topics: superannuation, business-economics-and-finance, banking, australia
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