Pooled superannuation trust A trust in which the assets of a number of superannuation funds, approved deposit funds or other pooled superannuation trusts are invested and managed by a professional manager. Preservation age The minimum age prescribed by law at which a member can withdraw their superannuation benefits from the superannuation system. Product dashboard Product and performance information (specified by APRA) regarding MySuper products that must be made available on superannuation fund websites. Registrable superannuation entity An APRAregulated superannuation fund, an approved deposit fund or a pooled superannuation trust. Retail fund A superannuation fund that offers superannuation products on a commercial ‘for profit’ basis. Retail level The level of the superannuation market that provides services directly to members. Self-managed superannuation fund A superannuation fund with fewer than five members, all of whom are trustees or are directors of a corporate trustee. Sequencing risk The risk of experiencing poor investment returns just prior to drawing on funds in retirement. Small APRA fund Any APRAregulated fund with fewer than five members. Small fund Any superannuation fund with fewer than five members. Superannuation Guarantee Compulsory superannuation contributions paid by employers on behalf of employees, and equal to a percentage (currently 9.5 per cent per year) of each employee’s ordinary time earnings. Superannuation system The collection of participants and activities involved in superannuation, including members, employers, funds, upstream suppliers, ancillary service providers (including insurers) and regulators. SuperStream An Australian Government package of measures designed to enhance administrative processes for superannuation, especially the way that Superannuation Guarantee payments are transferred from employers to funds.
conducting this inquiry in parallel with our inquiry into competition in the broader Australian financial system, which complements the analysis undertaken here. We have consulted widely in preparing this draft report (and the two preceding stages), and will continue to do so as we work on the final report. Public submissions are welcome (by 13 July 2018). We will also be holding public hearings. Box 3 What we’ve done that’s new and novel We have undertaken several novel analyses for this inquiry. We: constructed investment benchmark portfolios to compare performance across the system (by segments, funds and products) against the relevant benchmark portfolio, adjusted for investment strategy (asset allocation) developed a range of cameos to illustrate how retirement balances can be eroded by multiple accounts, unpaid super, insurance premiums, high fees and low net returns undertook econometric analysis of products to look at impacts of product proliferation on costs and fees, combined with stochastic analysis of how these fees affect members’ retirement balances simulated sequencing risks that members might face to evaluate how effective lifecycle products are at managing these risks. Two further pieces of analysis are well advanced, and will be uploaded on our website as technical supplements following release of this draft report. We are: undertaking econometric analysis of economies of scale to estimate cost savings that have resulted from scale improvements to date, what scale benefits remain to be realised, and the degree to which the benefits of scale have been passed through to members as lower fees modelling the fiscal effects of insurance in super, including the impact of insurance payouts on social security payments and the impact of retirement balance erosion caused by insurance premiums on Age Pension liabilities. What outcomes are members getting? The super system exists to support its members in retirement. As such, the outcomes delivered to members matter above all else. In the long term, members need strong investment performance and confidence that their balance is not eroded by unnecessarily high fees or insurance premiums. They also need access to products that meet their individual requirements — especially once they have retired — and the right information to make decisions. The system does well in some of these respects, but not all. There is much room for improvement.
competitive pressure being exerted by members opening SMSFs, which could have encouraged retail funds to reduce fees for choice products. Figure 5 Products by segment: retail and choice products have materially higher fees By contrast, fees for notforprofit funds have been largely flat over time, but on average remain well below the fees charged by retail funds. And fees charged by retail funds remain relatively high, at least for choice products. Roughly 14 per cent of member accounts appear to be paying annual fees in excess of 1.5 per cent of their balances. Fees can explain a significant amount of the variation in net returns across super funds. Funds that charge higher fees tend to deliver lower returns, once both investment and administration fees have been netted off (figure 6). And highfee funds — which hold about 10 per cent of the system’s assets — tend to have persistently high fees over time. This suggests there is significant potential to lift retirement balances overall by members moving, or being allocated, to a lowerfee and betterperforming fund. Moreover, at least 2 per cent of accounts are still subject to trailing adviser commissions — despite such commissions being banned for new accounts by the Future of Financial Advice laws. Though largely a legacy problem, these commissions can materially erode member balances. In addition, high exit fees in some choice products can create a barrier to member switching, across both the accumulation and retirement phases. Analysing fees is bedevilled by significant gaps and inconsistencies in how funds report data on fees and costs, despite regulator endeavour to fix this. This lack of fee transparency harms