Australia's A$2.8 Trillion Pension Industry Faces Overhaul

(Bloomberg) -- Australia’s A$2.8 trillion ($2 trillion) pension system faces a potential shake-up after a government review said under-performing funds should be closed and recommended that new employees be allowed to choose from a list of the 10 best-performing funds.

  • In its final report released Thursday, the Productivity Commission said default investment options that have lagged over eight years should be withdrawn unless they improve over 12 months.

Key Takeaways

  • While the government isn’t obliged to adopt the recommendations, an overhaul of the industry that has been under intense scrutiny in the past year seems inevitable.
  • Today’s report is likely to feed into the final recommendations of an inquiry into financial system misconduct that’s due for release by Feb. 2.
  • Treasurer Josh Frydenberg’s initial response indicates at least some of the recommendations will be adopted. He said the Productivity Commission had revealed significant issues such as “high fees, multiple accounts, chronic under-performance by some funds and a lack of competition in the default system” that need to be addressed.
  • If the recommendations are adopted, it could lead to consolidation of the industry, which has around 200 superannuation funds.
  • Flawed Australia Pension Industry Faces Overhaul: Key Numbers

Key Findings

  • Fixing the two main structural flaws in the system -- multiple accounts and entrenched under-performers -- could boost retirement savings by as much as A$3.8 billion a year.
  • Even a 55-year-old could gain an extra A$79,000 by retirement, while a new job entrant would have A$533, 000 more when they retire in 2064.
  • “Evidence abounds of excessive and unwarranted fees” and high-fee products are most apparent in for-profit retail funds.
  • Superannuation balances can be eroded by more than A$50,000 by unsuitable insurance policies. The government should commission a public inquiry into the issue.
  • “Inadequate competition, governance and regulation” are to blame; rivalry between default investment options is superficial; many funds lack sufficient scale and regulators don’t focus enough on the needs of members.
  • The list of the 10 best super funds should be selected by an independent panel appointed by heads of government agencies such as the Reserve Bank.
  • Superannuation accounts with balances under A$6,000 and inactive for 13 months or more should be automatically consolidated into an active account.
  • All fees should be levied on a “cost-recovery basis” and trailing financial adviser commissions banned.

Read More

  • Australia’s A$2.6 Trillion Pension System Is ‘Unlucky Lottery’ 
  • Australians Turn Away From Commercial Pension Funds
  • Banks Slammed for Greed in Industry’s ‘Day of Shame

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