Workers in underperforming superannuation funds could lose hundreds of thousands by retirement

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It’s hard to feel sorry for underperforming superannuation funds.

On Tuesday, 13 big-name funds holding tens of billions of dollars of money invested by 1.1 million Australians failed the financial watchdog’s performance test.

This test is designed to weed out underperformers from Australia’s $3 trillion super system and help lower the high cost of fees.

It looks at MySuper funds, which hold the bulk of savings of hard-working Australians, and funds will be tested annually.

This was the first time the test has been undertaken as part of the federal government’s Your Future, Your Super reforms.

The more than 1 million Australians who are members of underperforming superannuation funds will soon receive letters urging them to switch funds.

If super funds get two consecutive failures, they will be banned from taking any new members until they lift their game.

“They’re not welcome in the industry unless they can improve their performance dramatically and begin to deliver for the members what they’ve promised,” Superannuation Minister Jane Hume says.

It’s a fair point. And an important one in an environment where younger Australians are disengaged about their super.

Many have no idea how much they have in retirement savings, let alone how much they pay in fees.

And many are defaulted into their super fund when they start a new job.

By the time they realise their fund is being eaten away by high fees and poor returns (if they realise it at all), they’ve lost thousands of dollars.

This rises to hundreds of thousands of lost savings if they do nothing by the time they retire.

Are super funds doing a good job of managing your money? Some aren’t

The performance test was recommended by the Productivity Commission and has been used by financial watchdog, the Australian Prudential Regulation Authority (APRA).

The list of the nation’s best- and worst-performing super funds is now public, as an online comparison tool on the ATO’s website designed to help those disengaged Australians.

The fees charged by super funds are coming down, but they are nevertheless staggering.

Australians pay $30 billion a year in fees, according to the Productivity Commission, and that’s excluding insurance premiums.

Superannuation funds often forget that this is not their money. It’s workers’ savings for retirement, which they are supposed to properly manage and grow.

When companies refuse to pass on legislated super increases, that money is coming out of the pockets of workers. They are effectively making workers pay for their own superannuation rises.

So are the funds doing a good job of managing your money?

If you look at the list rating 76 MySuper products, most are. But some aren’t.

The difference between the top performers and the low performers can amount to hundreds of thousands of dollars over a worker’s lifetime.

The Productivity Commission’s 2019 review found that just a 0.5 percentage point difference in fees can cost a typical full-time worker about 12 per cent of their balance – or $100,000 – by the time they retire.

And that the gains from switching from one of the worst-performing funds to the best-performing funds could boost the average worker’s retirement balance by $660,000.

The difference in returns between the top and low performers on the list is massive.

If you are a 30-year-old with a $50,000 balance, the list shows that you would be best to have your money with Local Government Super (now re-branded and known as Active Super), with a return of 9.46 per cent.

The others in the top four also give returns above 9 per cent: AustralianSuper (9.44 per cent return), HOSTPLUS Superannuation Fund (9.33 per cent return), AON Master Trust (9.14 per cent return).

Compare this to some of the underperformers, which are offering returns of just above 3.5 per cent (depending on which product the member has with that super fund).

The “name and shame” file has both retail names such as Colonial First State FirstChoice Super Fund and with industry funds like the Maritime Super (MySuper Investment Option).

You should do your research before switching funds

So should Australians be switching to higher-performing funds? The short answer is yes, but it comes with some disclaimers.

Superannuation industry lobby group the Association of Superannuation Funds of Australia (ASFA) argues the data is historical and doesn’t take into account the fact that many funds have been working hard to boost returns and lower fees.

There are more mergers occurring, which will give super funds greater scale to be able to offer more competitive products.

As chief executive of ASFA Martin Fahy notes, do some research before making the call to switch your fund.

He says the big issue with the data is that it doesn’t account for the types of investments funds make.

Some funds will invest in current top-performing assets, while others look for more ethical investments, that in comparison may offer lower returns but in the long run may be more beneficial.

“ESG — environmental social governance considerations — are increasingly an important part of how people want their superannuation invested,” Dr Fahy argues.

“There are funds in this test who underperformed that engage in what’s called impact investing — that is, investing for social outcomes, as well as financial outcomes.”

“There are funds out there who, for instance, don’t invest in Amazon as a stock because of labour practices and labour hire considerations.”

He also points out that if a fund chose not to invest in a certain stock such as Amazon because of its labour hire practices, “you will have a significantly lower return than the benchmark”.

Christian Super, which describes itself as an ethical fund, was on the list of 13 underperformers.

But chief executive Ross Piper says the test’s “blunt design means all products under a certain benchmark are being tarred with the same brush”.

He says this is being done “without consideration for how those returns have been generated and whether the fund is, in fact, delivering far more than just strong long-term financial returns”.

Mr Piper says the fund has doubled its members’ money over the past 10 years and has reduced fees three times in the past two years (its current fees are $610 annually for a member with $50,000 balance.).

He adds that Australians are increasingly thinking about their personal footprint and how their superannuation contributes to it.

“This desire to invest in line with their values is missed by blunt tools like the performance test,” he says.

“There can be a ‘price of virtue’ when investing for the good of society rather than profit alone.”

That is also a fair point.

However, as Superannuation Minister Jane Hume notes, the performance test measures funds that Australians are defaulted into.

“They’re the ones that people tend to be in by accident — and because they’ve been defaulted into them, trustees are held to an even higher standard,” she says.

“If people choose to be in a fund that invests in a particular way, that’s terrific.”

Stopping the build-up of multiple accounts is a good move

The other big problem with superannuation has been multiple accounts, which the government’s reforms also intend to fix.

Australians have been so disengaged from their superannuation that the Productivity Commission found over one-third of all super accounts are “unintended multiples”.

That is, they are created when a person changes jobs or industries, and the member does not close their old account or roll over their existing balance.

The Productivity Commission report, which called for major reforms, said these unintended multiples collectively cost the members who hold them $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees.

Over time, the foregone returns compound to erode their retirement balances, and can leave a typical full-time worker 6 per cent (or $51,000) worse off at retirement, it said.

And it found younger and lower-income members were worst affected.

Under the Your Future, Your Super reforms, Australians will be stapled to their existing fund so they don’t lose out every time they start a new job.

While Industry Super Australia is worried some people could be stapled to dud funds, consumer groups say not having multiple accounts with multiple fees is a good thing.

For too long, superannuation funds have been able to benefit from a system that lacks transparency and relies on a disengaged customer who pays little attention to their money being eaten away by fees and poor returns.

The government’s changes are designed to push superannuation funds to compete and make Australians more aware.

Let’s hope the underperformers lift their game.

By business reporter Nassim Khadem (Original ABC Article)