The Productivity Commission recently issued its Draft Report in response to Stage 3 of the Superannuation inquiry – Assessing Efficiency and Competitiveness. In this article we share key insights and findings from the report.
According to the report, the current superannuation system has two significant structural flaws:
1. Unintended multiple accounts
Seen as a significant problem, unintended multiple accounts represent around one in three member accounts and annually cost members around $1.9 billion in excess insurance premiums and $690 million in excess administration fees, resulting in unnecessary balance erosion.
2. Entrenched underperformance
Some funds have been underperforming over the long term, which can have a significant effect on retirement savings. While most underperforming products could be found in the retail segment, industry and corporate funds were also mentioned.
Other key findings include fees being a drain on net return, too many products to choose from, and insurance not delivering value for all members – such as complex and difficult to compare policies; member difficulties interacting with funds; poor application of risk premiums; and inadequate tailoring of policies for different cohorts.
To improve and modernise the superannuation system and to benefit members, the Commission has proposed a range of recommendations that include:
1. A new mechanism for allocating defaults – A shortlist of expertly chosen ‘best in show’ products enabling all members to choose their own product when entering the workforce. Members who do not choose a fund within 60 days would be sequentially allocated to a product from the shortlist.
2. Insurance that works for members – Members under 25 years of age should only get insurance on an opt-in basis, and insurance should cease if an account has been inactive for 13 months. This recommendation has already been adopted by the Federal Government and announced in the recent Federal Budget.
3. Products and information that meet members’ needs – Simple, clear and accessible dashboards are needed to enable members to make informed decisions. Data and technology should be harnessed to better design superannuation and insurance products for members.
4. Regulators should become member champions – Greater clarity is required about the respective roles of APRA and ASIC. Regulators also need to collect more relevant data for assessment of member outcomes.
Download the full Productivity Commission Report – MetLife Client Update here.
View and respond to the Productivity Commission’s Draft Report on Stage 3 here.