Submission to Super System Review
Download: CPSA's submission to the Super System Review [Adobe Acrobat PDF - 98.89 KB]
CPSA represents pensioners, superannuants and low-income retirees. CPSA has 148 Branches and Affiliated Organisations, with a combined membership of 33,000 people. CPSA welcomes the opportunity to make comment on Phase Two of the Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System, addressing operation and efficiency.
The Superannuation Guarantee (SG) has improved retirement incomes of workers in Australia, and will undoubtedly continue to do so. However, it is CPSA’s view that the superannuation system could be improved to increase workers’ superannuation through smarter management of members’ investments, better administration of lost funds and introduction of fee regulation.
The vast majority of workers earning the average wage or below will have at best modest superannuation savings when they reach retirement. It is highly likely that this group will outlive their superannuation savings and therefore spend a greater period of time in receipt of a full-rate Age Pension. In any case, many will receive the full-rate Age Pension because their superannuation savings are modest, and most will be eligible for a part-rate Age Pension.
CPSA believes that efforts to improve the retirement incomes of low and middle income earners by increasing the SG (for example) will not be efficient until wastage in the current system is addressed. Billions of dollars are lost annually through lost and/or inactive accounts, poor investment choice, high fees, and payment of multiple insurance premiums. These losses are compounded during periods of poor investment performance.
Many of these problems could be overcome if every fund member took an active interest in their superannuation throughout their working lives. The reality is that most do not. Of those who do, many do not make appropriate decisions about their super. Superannuation is complex, time-consuming, and generally not at the forefront of workers’ minds until they approach retirement, by which time it is too late to improve their superannuation.
Workers are forced to save 9% of their employment income and then left to manage it. It is expected that all are savvy investors, aware of the fees and charges applied to their account, regularly read their super statements, and when they switch jobs ensure their super is consolidated.
The reality is that most workers are not concerned about their superannuation. The superannuation industry has capitalised on this national inertia, with many funds charging high fees. Lack of consumer interest has provided little incentive to reduce high fees.
Treasury estimates that half of the workers in Australia earn less than three-quarters of the average wage.  This population is expected to obtain the bulk of their retirement income from the Age Pension, with most receiving a full-rate Age Pension.
It has been widely acknowledged that high-income earners are the major beneficiaries in the superannuation system because of the substantial tax concessions. While the Australian Government has attempted to better assist low-income earners through the superannuation system (for instance, the Super-Co contribution), this direct assistance amounted to 1.6% of the $25 billion (2008/09) government expenditure on superannuation.
Making Australia’s superannuation funds not only more efficient but better focused on delivering improved retirement incomes for their members is of great importance to all workers, but especially those earning less than the average wage. This group is by and large unable to save more than the mandatory 9% SG because of a lack of disposable income. There are generally other, more pressing areas of expenditure to take priority over investing extra money into super. They are more likely to enter retirement with a mortgage or private rental commitments, adding additional strain to retirement incomes.
Alongside a non-existent capacity to put more away into super, research shows that low-income earners under the age of 30 tend not to be interested in saving for their retirement.  While a more efficient system will be of benefit to all fund members, the benefits to people on low incomes are perhaps the most important and likely to reduce future government expenditure on retirement income support payments.
CPSA supports suggestions for a universal default fund, run by the Australian Government, such as that proposed by the Australia Institute.  A low-fee fund that delivers reasonable returns and works to clean up lost and inactive super accounts is very much in the interests of workers as well as that of the Australian Government.
Superannuation savings have reached $1.1 trillion and savings are forecast to double by 2025. However, many superannuation accounts are not working to improve the retirement incomes of those who hold them.
In 2008, there were 32 million superannuation member accounts in Australia.  Of these, about nine million were inactive, and 6.4 million were lost accounts.  Australia has about ten million employees, suggesting that a sizable portion of the working population hold multiple accounts, and therefore pay multiple sets of fees and premiums, which inevitably reduces their retirement savings.
A low-cost, low-fuss universal default fund available to all employees would help alleviate problems arising because of member disengagement from superannuation. All employers would offer the default fund to employees. Employees not wanting to use the default fund could elect to have super contributions made to a fund of their choice. For everyone else, super would be directed to the universal default fund.
Inactive accounts that would otherwise be automatically rolled over to an ERF would go to the universal default fund instead. ERFs are perhaps the biggest causes of superannuation inefficiency. The rapid growth in ERFs illustrates what may be the largest problems in the superannuation system: the inertia of fund members and the inability of the superannuation system to locate lost fund members to consolidate their super.
ERFs typically have higher fees than other funds, and poorer performances. Yet the number of ERF accounts continues to grow, from just over 3,000 in 2002 to almost 6,000 in 2008, illustrating the low number of account holders consolidating their super. 
The average size of the lost accounts is just under $1,000. Fees may still be charged on these accounts, even though contributions cannot be made. The only protection for ERF members is that the fees must not exceed the “investment return allocated to the account, unless the investment return is negative.” Therefore, it would be very difficult for savings to accumulate in ERFs because of the fees charged, especially when investment returns are negative. To curb this massive waste, ERFs should be replaced by a universal default fund, and amounts below $1,000 should be better protected from being eroded by fees.
As proposed by the Australia Institute, a universal default fund should have its fees capped. If fees in current funds were capped at even 1%, considerable savings would be achieved compared with average fees of 1.25 to 1.37%.  CPSA does not suggest that 1% fees are appropriate or that this rate does not overcharge fund members, especially when average superannuation balances grow and fees remain set at a percentage rather than a flat rate. Indeed, Mr Jeremy Cooper has been widely reported stating that a universal default fund would be able to reduce fees by half, yet operate successfully. In any case, fees should be capped as low as possible, with a ‘fee-freeze’ for accounts with $1,000 or less that do not have regular contributions being made.
A universal default fund should manage funds in the best interests of its members. CPSA supports a lifecycle approach to investment, where funds are invested in accordance with the member’s age and retirement intentions. Generally, people nearing retirement are not able to make up losses in superannuation savings by remaining in the workforce. For many, it can be difficult to secure adequate employment once over the age of 60, and the incidence of disability is high among people aged over 50. Furthermore, someone who loses their job over the age of 45 has at greater risk of remaining unemployed for 12 months or more compared with their younger counterparts.  The rate of long-term unemployed people over the age of 45 will no doubt increase once the Age Pension age is lifted to 67 by 2023. Therefore, fund members approaching retirement who have sustained considerable losses in their savings because of a protracted downturn in the market generally have little opportunity to regain those losses.
On the other hand, younger workers investing in low risk, low return options needlessly hinder the accumulation of their super. It is well documented that superannuation delivers good returns over a 10 to 15 year period, and as such, younger workers are better equipped to take more risky investments that will deliver good returns in the long run because they have time on their side. This is also beneficial for younger workers who typically make smaller SG contributions because of lower income levels.
A lifecycle investment approach would better protect fund members close to retirement from losing a large portion of their savings because of a sharp market downturn. It would also ensure that younger workers were maximising their savings for the long-term, from the beginning of their working lives. This model would put the member at the centre of the superannuation equation, and on the whole, improve retirement incomes.
A major issue for non-working parents, people with a period of illness, the retrenched and the long-term unemployed is extended periods of time spent not making contributions to their super. Fees and insurance premiums generally still apply, yet savings decline, often quite rapidly for smaller balances because regular contributions have ceased.
These groups may experience a double blow of not making SG contributions as well as voluntary contributions because of their reduced income. Similarly, if people spend time overseas and have not attended to their superannuation, they may return to find a reduced balance; the balance having been rolled over to an ERF (and subsequently subject to high fees and low returns); or totally lost because it had become consolidated revenue.
CPSA believes that all accounts left dormant for a year or more should be protected from being eroded by fees. As mentioned above, funds with $1,000 or less that have no contributions being made should be exempt from fees. Dormant accounts in non-government funds should be automatically rolled over to the universal default fund rather than an ERF.
CPSA recommends that the universal default fund be run by the Australian Government, without commissions or entry or exit fees. Given the substantial tax concessions that go toward superannuation, CPSA considers it prudent that a universal default fund be run to maximise members’ retirement savings, rather than eat away savings by way of fees and commissions.
Recommendation 1: The Australian Government set-up and operate a low-cost, low-fuss, universal default fund. The fund would have its fees capped and adopt a lifecycle approach to investment. This fund would be the default option for workers not choosing their superannuation fund, lost funds and inactive funds. This fund would provide protection for dormant accounts with $1,000 or less in savings.
Efficiency in superannuation must start with cleaning up multiple accounts. An automatic consolidation mechanism is required, operated by the Australian Government using workers’ Tax File Numbers (TFN). Workers’ superannuation would be automatically rolled over either into their primary fund or the universal default fund after leaving a job, to minimise prevalence of multiple accounts.
According to the ATO, “over half of all lost members also have an active superannuation account, with around 450,000 of these accounts being with the same superannuation provider.” If anything is to make the case for better identification of fund members, this statistic must suffice. If superannuation funds are not able to reduce multiple account holders in their own fund, what hope do they have of doing so when members have multiple accounts with other funds?
Multiple accounts mean paying multiple sets of fees and insurance premiums, eroding retirement incomes and undermining the SG. CPSA is not confident that the prevailing lack of interest in super will drastically change following public awareness campaigns.
CPSA appreciates that privacy concerns may arise by using TFNs as the tool to automatically consolidate super. CPSA believes that the ATO should be responsible for the consolidation process. Where super funds identify two identical TFNs within their fund, the ATO should be notified so that an automatic consolidation process can be undertaken. TFN verification should take place, for instance, confirmation of name, address, date of birth, etc., to minimise cases of mistaken identity.
Automatic consolidation of super would eliminate the need for ERFs, improve efficiency in the superannuation industry, reduce the need for lost super initiatives, reduce work undertaken to track down lost members, and better engage workers with their superannuation because they would see higher growth and better returns as a result.
Recommendation 2: Tax File Numbers be used by the Australian Government to automatically consolidate workers’ superannuation either into the universal default fund or the worker’s active chosen fund.
CPSA considers it counterproductive to have compulsory superannuation that forces workers to contribute 9% of their employment income to super funds, but not regulate fees charged by those funds. Average fees range from 1.26% to 1.35%.  An estimate of expenditure on fees annually is $14.3 billion, approximately half of annual expenditure on the Age Pension. If fees were capped at 1%, fund members would save $3.3 billion each year in fees alone. That may not sound like much compared with total superannuation savings, however, the Australia Institute estimate that such a cap would increase superannuation balances by $35,000 over a working life, approximately equivalent to two years’ worth of the single Age Pension. To put this in perspective, in 2006, super balances for women aged between 60 and 64 were $63,000 and $136,000 for men in the same age bracket.  An extra $35,000 would have boosted these averages (over a full working life) by 55 and 27 per cent for women and men respectively.
Better fee information and disclosure may assist, in part, to lower fees. However, because many fund members are not interested in their superannuation, it is unlikely that more information to encourage ‘consumer choice’ will lower fees. The Australian Government should regulate which fees can and cannot be charged.
CPSA recommends that exit fees be abolished. Often fund members will not consolidate their super because of exit fees. These fees can be as high as 5% of total savings in the fund, thus discourage rolling over superannuation. Equally, CPSA recommends that fees for contributing to a super fund should be abolished. As noted earlier, superannuation is mandatory for most workers and therefore, workers should not be penalised making a compulsory or voluntary contribution to their fund.
CPSA believes shelf-space fees should be banned because of the additional cost to members for the sole benefit of the fund.
CPSA recommends that switching fees not be charged unless a fund member exceeds a certain number of transitions between investment options on an annual basis. For example, one industry fund does not charge switching fees unless a member changes investment options more than 12 times per year.
Recommendation 3: Contributions fees, termination or exit fees and shelf-space fees be banned. Switching fees should be banned unless the fund member has switched a large number of times, for example, more than 12 times in the year.
CPSA opposes commissions, trailing commissions and asset-based fees. There is an inherent conflict of interest when commissions are allowed, and CPSA does not believe fiduciary duty can truly be achieved when commissions are accepted. More importantly, commissions undermine consumer confidence in financial services and inevitably undermine retirement incomes.
CPSA notes the recent Ripoll Review did not recommend banning commissions in the financial planning sector. It was reasoned that a ban on commissions would increase the cost of financial planning to the consumer, and therefore make financial advice unaffordable for many.
CPSA argues that financial planning is already unaffordable for many. With regard to superannuation, while CPSA acknowledges financial advisors may raise their fees because they are not able to accept commissions, industry funds that do not allow commissions consistently report lower fees and at least on-par or better returns than funds that do allow commissions.  This undermines the argument that banning commissions (at least within superannuation) will heighten the costs to the consumer.
Investors understand that financial advice, and management and investment of money comes at a cost. However, the wide range of fees charged by different institutions, the lack of transparency regarding fees and commissions and a general lack of financial literacy in the community, combine to make it difficult for consumers to shop around for, or negotiate, lower fees, especially within their superannuation fund.
Recommendation 4: Commissions, trailing commissions and asset-based fees be abolished to ensure that investors’ interests are not compromised and superannuation savings are not unnecessarily eroded.
Life and disability insurance offered by funds should be opt-in rather than opt-out. CPSA notes the incidence of often younger people contributing small amounts to a super fund for a short period of time, only to find that their superannuation has all but disappeared because of life and/or disability insurance premiums that they did not know they had. This is magnified where a worker has multiple funds and pays several insurance premiums. Premiums erode the little money that held in their fund.
Although premiums are generally discounted within superannuation funds compared with what their cost would be if purchased outside the fund, fund members may end up holding several premiums for the same thing when multiple accounts are held.
As many workers opt for the default option in their super fund and do not bother to ‘opt-out’ of insurance, CPSA argues that insurance should be opt-in to prevent investments being whittled away unnecessarily, especially for low-income casual workers and younger workers.
Recommendation 5: Life and/or disability insurance be opt-in rather than opt-out.
It is well documented that increased choice does not necessarily lead to better investment outcomes for consumers. There is evidence to suggest that increased investment choice within super funds has led to the opposite. 
CPSA does not consider it necessary for funds to have hundreds of investment options on offer, especially when the majority of members have difficulty comprehending their superannuation. The average retail fund has 137 investment options.  CPSA contends that if a high number of investment options increases the cost but not the benefit to members, then the fund is not operating in the most efficient way it can. CPSA supports restriction of investment options to prevent unnecessary costs to fund members.
Recommendation 6: Funds have the number of investment options restricted to reduce costs for members.
The financial crisis has shed light on many problems fund members face with regard to superannuation. When the share market crashed, many fund members switched to a less risky investment option, such as cash or fixed interest. However, some funds offered investment options such as cash ‘plus’, or cash ‘enhanced’, which invested in higher-risk options such as derivatives. Yet fund members believed that these options were low risk and therefore safe from negative returns.
A simple rating system explaining (in basic English) risks and returns associated with each investment option would better enable fund members to make appropriate choices about their investments. This system should be standardised so that all fund members have a clear idea of returns and risks associated with each investment option. This would also facilitate fund comparison.
Recommendation 7: Standard labelling of investments options be implemented, written in basic English, clearly stating the likely risk and return levels of each option.
CPSA does not support fees for paper-based correspondence from super funds. Such fees unfairly disadvantage fund members who do not have access to electronic means of communication, or require paper-based correspondence because of disability.
Recommendation 8: CPSA opposes fees for paper-based correspondence.
CPSA supports standardisation and simplification of superannuation forms to make members’ correspondence with super funds as simple as possible. CPSA believes that super fund enrolment and rollover forms should be standardised. These forms should be simple to understand and non-cumbersome (perhaps restricted to two-pages per form).
Recommendation 9: The Australian Government standardise and simplify superannuation enrolment and rollover forms.
A standard data set outlining fees, returns, investment options and insurance premiums is needed to allow consumers to meaningfully compare funds. Without standardisation, consumers will continue to struggle to make sense of the myriad fees, investment options and returns information when comparing funds. Often it is difficult to obtain clear information about fees that apply to an account, how much will be paid in fees over the course of the year or indeed the lifetime of the account, especially when commissions, trailing commissions, performance fees and asset-based fees apply. Importantly, fee information should not only be represented in percentage form, but their real impact on superannuation balances (for example a 1% annual fee on $10,000 is $100; on $50,000, $500).
CPSA acknowledges standard comparison tables will require standardisation of fees names and investment options across funds. Fee names should be relatively simple to regulate, but standardisation of investment options may prove more difficult. Options should be broken into broad categories (for example, growth, balanced, conservative) to allow comparison. The important thing is to ensure that consumers are better able to make choices about their super and that competition in the industry is improved.
It is essential that such a standard be simple and placed at the front of Product Disclosure Statements. A website that compares super funds would also be helpful, to allow consumers to easily compare funds.
Recommendation 10: Standardised tables for superannuation funds be implemented and maintained, documenting data on fees (including commissions), returns, investment options and insurance premiums. These tables should be available in both electronic and paper-based forms.
1. Treasury, (2009) ‘The Retirement Income System: Report on strategic issues’ Australia’s future tax system
8. Treasury, 2008 ‘Superannuation Clearing House and the Lost Members Framework’ Discussion Paper available at: http://www.treasury.gov.au/documents/1442/HTML/docshell.asp?URL=Superannuation_Clearing_House_and_Lost_Members_Framework_DP.htm
10. Australian Bureau of Statistics, ‘Long-term unemployment’ Labour Market Statistics, January 2006 available at: http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/A0DB00657A876C0ACA2570EE0018F3B9?OpenDocument
11. Treasury, 2009, ‘Superannuation Clearing House and Lost Members Framework’ Discussion paper available at: http://www.treasury.gov.au/documents/1442/HTML/docshell.asp?URL=Superannuation_Clearing_House_and_Lost_Members_Framework_DP.htm