Too many members of Australia’s A$2.6 trillion ($1.97 trillion) superannuation system are getting “subpar returns, at a substantial cost to their income and wellbeing in retirement,” according to an assessment of the fund released this week that found several shortcomings and structural flaws within the “outdated” system.

 “The system is working well for many members, but not for all,” Karen Chester, deputy chair of the Australian government’s Productivity Commission, said in a release. The “super system has become an unlucky lottery for many Australian workers and their families.”

The Productivity Commission is an independent research and advisory body that counsels the Australian government on a range of economic, social, and environmental issues. The commission was asked to assess the performance of the superannuation system to determine if it is meeting the needs of members and retirees, and providing the best possible investment returns.

The 571-page assessment found that while most members of Australia’s retirement savings system are in funds that deliver good investment returns, one in four funds, affecting millions of other members, persistently underperform. It said that being in a poor-performing default fund can leave workers with almost 40% less savings in retirement.

“We have had compulsory super for nearly 30 years, but its architecture is outdated,” Chester said, adding that the system suffers from two structural flaws: unintended multiple accounts and entrenched underperformance.

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

In its assessment, the commission proposed changes to help modernize the system and deliver higher returns. The proposed changes include:

• Stronger governance rules. The report recommends a set of amendments to governance rules to lift the performance of boards, and to make trustees more accountable to members.
• Funds need to provide valuable insurance. “The industry’s code of practice is a small first step,” said the report. But the code is unenforceable and “falls well short of what is needed, and of best practice for an industry code of conduct.” It said its effectiveness will depend on the extent of voluntary take-up, and the strength of its provisions.
• Regulators need to be member champions. Regulators need to confidently and effectively police trustee conduct, said the report, and collect and use more comprehensive and member-relevant data. “The role of regulators is ultimately to protect member interests, although the absence of member voices in major industry debates means the interests of funds can sometimes dominate.”

Chester also said that with default funds being tied to employers rather than employees, many members end up with a new account every time they change jobs. This has led to approximately 10 million unintended multiple accounts. She said the excess fees and insurance premiums paid by members on those accounts amount to A$2.6 billion every year.

“These problems are highly regressive in their impact,” she said, “and they harm young and lower income Australians the most.”

Tags: Australia, Australiansuper, Karen Chester, Pension