By Paul Rickard 

The Productivity Commission’s latest report on super might have attracted headlines, with the Australian Financial Review leading yesterday with ’Unions to lose default super grip’ and the Sydney Morning Herald with ‘Unions sidelined in radical overhaul of super’, but this report is not going anywhere quickly and it won’t impact your retirement nest egg.

That’s not to say that the super industry won’t get very passionate about it and spend money arguing respective self-interest. This is a 2.1 trillion dollar industry that has an annual fee pool of more than 10 billion dollars to share amongst the retail and industry funds. Spending a lousy few million on a TV campaign is nothing if it protects long-term access to this gravy train.

In case you missed the report titled ‘Superannuation: Alternative Default Models’, this is stage two of a three-stage superannuation review being conducted by the Productivity Commission recommended by the Financial System Inquiry in 2014 (yes, things move quickly). By the Commission’s own timetable, which involves a third stage (not yet started) and time for Government to respond, it could be at least 2020 before any of this comes into effect.

The report deals with default super arrangements, that is, when the employee does not choose the super fund where contributions are to be paid. As the employer is obliged to make contributions within a prescribed period, employers are allowed to nominate a default fund if no active choice is made. With the majority of employees not exercising their right to choose, and cozy deals between unions and employers, this had led to the dominance of industry super funds. In some cases, the industrial award specifies the default fund. For example, CBUS is the default fund for an employee in the construction industry.

With survey evidence showing that two thirds of super fund members stick to their default fund, getting access to default members is potentially very lucrative to super funds. Hence, the retail funds, which are owned by the major banks and insurers such as AMP, have been lobbying Government to open up these default arrangements to competition.

However, the Commission hasn’t yet formed a view about which is the best default arrangement. Rather, it has developed four alternative models to allocate default members to products. It has assessed these against five criteria, and compared the models to a baseline of unassisted employee choice. Following feedback and further review, the Commission may determine a preferred model.

The four models are described in the following diagram.

Importantly, employees who fail to exercise choice would only be allocated to a default product if they did not already have an existing superannuation account. Typically, these would be new entrants to the workforce (the first-timer pool), and they would retain that account (including through a change of employer) unless they actively switch.

The Commission favours the Government developing a centralised online information service, with universal participation by employers and employees, to facilitate this “once only” allocation to a default product. It describes the current arrangements that have led to the creation of multiple super accounts as an “egregious systemic failure”.  

This has major implications for the super funds, because the first timer pool of 400,000 members each year is materially less than the number of new default super accounts opened currently. Further, because they are new to the workforce (often part-time or casual), they only contribute $800m in contributions in the first year, virtually a rounding error in the super system. Expect the industry to fight this hard, and find all sorts of reasons (including cost and time) why a universal on-line system can’t be built.

How to find the best super fund

While the efforts of the Productivity Commission might lead to an improvement in super returns for the “new worker pool” as funds compete for the right to be allocated default accounts, particularly if fees become a key determinant in the model, it won’t do anything for existing super members, and in any case, is still years away. The question remains - how do I find the best super fund?

This question really should be divided into two. The first and most important question to ask is - do I have the right investment option? The second question is - do I have the right fund?

The data suggests that asset allocation, that is, the mix between growth assets such as Australian shares, international shares and property; and income assets such as cash and bonds; will have a bigger impact on the performance than the efforts of the fund manager in selecting individual investments. In a well-regulated superannuation environment, this means that the investment option is more important than the super fund.

Which option? This question can only be answered by reference to each person’s investment objectives, investment timeframe and attitude to risk. For most people, this is going to mean an investment option that is described as “balanced” or “growth” and comprises around 60% of the monies invested in growth-based assets. Millennials, Gen Y and others with a very long-term horizon and who can stand multiple market and economic cycles might even want to take a “high-growth” style option.

Choosing the right investment option applies also to retirees taking an account based pension. I am often surprised by people who retire and then suddenly go all conservative with their savings. With life expectancies growing, retirees in good health need to plan for their savings lasting 25 to 30 years, more than enough time for a couple of market cycles. Some growth assets are required!

Once we have the right investment option, let’s now turn to the attributes of the manager. Here are five factors to consider.

Firstly, investment performance, or perhaps more importantly, the consistency of performance - how has it gone relative to its peers over one year, three years, five years and even 10 years? While every adviser and product issuer is required by ASIC to warn that “past performance is not a reliable indicator of future performance”, many of us believe that it is worth considering. 

Next, the management fee. While performance figures are usually quoted net of fees, the data also shows fairly conclusively that super funds with lower fees perform better than funds with higher fees. Not always, and by no means in every case, but on average. So, if choosing between two funds which have similar investment performance, go for the fund with a lower fee.

The third factor is service, usually pretty hard to assess. Next, if insurance is relevant, then the availability, cost, and features/policy benefits of any insurance. Life insurance, TPD (total and permanent disability) and income protection cover can usually be arranged through super. The main advantages of accessing this way is that it is often cheaper (due to the fund’s buying power), premiums can come out of contributions rather than cash flow and sometimes approval is automatic (no medicals). The main disadvantage is that it can be pretty basic, and for some occupations, you cannot get the cover you need. One important point about insurance - don’t pay for it for you don’t need it.

Finally, flexibility. Some funds offer investment options where you can select the actual investments, while others make it easy to start a transition to retirement pension at no additional cost.

There are two really good comparison websites. Super Ratings rates more than 500 super and pension fund investment options and issues platinum, gold, silver or other ratings. Chant West uses a star system to rate 150 super funds and 90 pension funds.