Labor has rejected a recommendation to freeze the compulsory superannuation rate at 9.5% until flaws in the super system have been fixed, saying the rate could still be increased to 12% while the system is being reformed.
It has also pushed back against a proposal to create an official list of the top 10 performing superannuation funds to help workers better navigate the super system, saying the idea could have unintended consequences.
The Productivity Commission released its final report on Australia’s super system on Thursday, proposing major changes that could see workers retire with an extra $500,000 in their super accounts.
It has recommended weeding out poorly performing funds by revoking the licences of super funds that persistently underperform.
It says Australians should be given an official shortlist of the 10 best super funds to help them choose a good fund when they first enter the workforce.
It estimates if new entrants to the workforce are placed in a highly performing fund from the beginning of their working life, their super will be $165,000 higher on average by retirement age.
It says a top 10 shortlist would have a dual benefit – it would help workers know which funds are the best and it would force funds to compete to get onto the list. It says an independent panel of experts should decide the shortlist every four years.
“The competitive dynamics generated by wanting to get onto, or remain on, the shortlist will drive funds to deliver strong investment performance for their members, pass through the benefits of greater scale, and innovate to better meet their needs,” the Productivity Commission report says.
“The shortlisted funds will effectively serve as ‘role models’ for other funds that miss out, who will have a clear incentive to beat their competitors the next time around.”
The advice was included in the commission’s interim report in May, and it remains a central recommendation from the final report.
The Productivity Commission also recommends abolishing a quirk of the enterprise and workplace agreement system that prohibits workers from choosing whatever fund they want to be in.
It has also maintained advice from its earlier report to grapple with the high number of unintended multiple accounts that workers hold.
It says about a third of superannuation accounts, or 10 million, are accidental multiples.
It believes reducing multiple super accounts, cutting the impact of insurance fees, increasing competition and getting people into better performing funds would deliver an estimated $3.8bn a year overall.
For a person starting their first job now and retiring in 2064, the commission believes the changes could give them up to $533,000 more. For a 55-year-old, the changes could boost their retirement savings by $79,000.
“Australia’s super system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees,” the report says.
“Structural flaws – unintended multiple accounts and entrenched underperformers – are harming millions of members, and regressively so.”
The PC also calls on the government not to raise the compulsory superannuation rate above 9.5% until the entire super system is reviewed, reasoning if more wages are forced into an already flawed system more retirement savings will be lost.
“We have not looked at the broader role of super in funding retirement incomes or the impact of super on national savings, public finances or intergenerational equity – broader questions that should be answered by an independent inquiry ahead of any increase in the Superannuation Guaranteerate,” the report says.
Labor welcomed the report, agreeing there are flaws in the system that have to be fixed. But the shadow treasurer, Chris Bowen, says there is no reason why the compulsory super rate could not be lifted to 12% while the system is being reviewed, and he’s concerned about unintended consequences from adopting a top 10 list of super funds.
“My concern is that a fund that might be well-performing at one particular time might not be well-performing in the future years, and that all these things need to be considered, including the competition impacts,” he said.
“There’s not much which unites the entire superannuation sector, but both industry funds and retail funds … have pointed out there are perhaps unintended consequences from the best-in-show model, which are, in some respects, similar to the concerns I’ve expressed.”
The treasurer, Josh Frydenberg, said the report showed the superannuation system was serving the nation reasonably well but there were “significant issues to address”.
“The default system, the Productivity Commission finds, is outdated, resulting in millions of unintended multiple accounts,” he said.
“There is also the persistent underperformance of a number of superannuation funds, which is a result of a lack of effective competition, member disengagement and regulators that the Productivity Commission find need to be more focused on members’ needs.
“This flaw creates an ‘unlucky lottery’ for millions of superannuation members … for someone entering the workforce today, it could be costing them more than $500,000 at retirement, or about half of what their retirement balance should otherwise be.”
He said the Morrison government would consider the recommendations but await the final report from the banking royal commission before finalising its response.
The Greens senator Peter Whish-Wilson said the report has revealed that the super system is rigged in the interests of wealthy trustees and fund managers and needs a major overhaul.
“The super system has been operating for years in the best interests of the wealthy trustees and fund managers overseeing it and not in the interests of everyday Australians. Banks simply are not fit to be super trustees,” Whish-Wilson said.
“This report clearly shows that the best thing you can say about the regulators who are supposed to be working in our interests, Asic and Apra, is that they have been asleep at the wheel. We need a regulator who isn’t in bed with the people it’s supposed to be regulating. It’s time for a significant restructuring of financial services regulation and for the ACCC to step in to protect consumer interests.”