Super plan is experimental and high-risk

How did a report that finds people are better off in a default super fund end up making a recommendation that teenagers should make decisions about their super that could stick with them for their entire lives?

When you cut through all the noise, it is extremely clear from the recent Productivity Commission report that industry super funds form a safety net for workers who do not choose their own super fund. And the majority of super fund members - 8 million Australians - do not actively choose their own fund. That's why we need the best system for allocating people into a super fund where they don't choose. Small differences in fees and returns, and the way super is governed, have a big impact. A wide-ranging review of the super system to ensure the safety nets are working is important.

But while the Productivity Commission's report provides a 500-page detailed analysis of the system, this analysis bears little or no relationship to the key recommendations around default funds. There is a very significant disconnect between the evidence and the recommendations.

The commission report finds that not-for-profit funds outperform retail funds. Its report finds that default funds outperform chosen products' net returns. The commission report finds that over time, people in high-fee funds do worse on a net returns basis. In other words, it finds that the not-for-profit funds sector - which includes industry super funds - has the lowest fees and performs better than the bank-owned retail funds.

On the basis of this evidence you would expect the commission to focus recommendations on the structure of retail funds and the choice sector, and fine tune what is already working in the default fund sector. Rather, the commission proposes that a new merit-based selection process determine default super arrangements for workers that do not choose their own super fund. It recommends younger workers in their first job be required to choose a super fund for life, from a list of 10 pre-selected funds. This is experimental, and it is high-risk.

Industry Super Australia research shows that two thirds of Millennials find it hard to choose their own fund. There is no cohort likely to be less engaged and less informed about saving for retirement than younger members, and particularly teenagers starting their working lives. The commission has argued this is necessary to fix the issue of multiple accounts. We don't need to dismantle a safety net system that is proven to work, in order to remove multiple accounts out of the system. ISA has proposed that when people change jobs, their old super fund account - which will become inactive at some point - should be automatically consolidated into their new, active account. Due to technology change this system is now possible.

And as for the merit-based system for selecting default funds, it should be conducted by an expert panel at the Fair Work Commission, a process that worked well in selecting default funds until it was recently frozen.

  • David Whiteley is the chief executive of Industry Super Australia.