Earlier this year, the super regulator APRA released its hit list of poorly performing super funds.
This underlines the longstanding truth that super doesn’t work. It doesn’t get enough people off the pension and it costs the budget more than it saves. The system is not focused on outcomes. It is focused on itself.
The ongoing insider trading scandal where 67 super employees are suspected of trading on secret information for personal gain underlines this point. The $3 trillion superannuation sector is Australia’s most privileged industry. It charges $30bn a year in fees – or around a third of the $100bn in annual contributions.
The 2021 Intergenerational Report forecasts that the sector will balloon to $34 trillion by 2061, dwarfing everything.
Super is too big to fail. It is our biggest gamble. We have to make sure we have the right formula for workers. At the moment, we don’t.
Australians stand to be the biggest losers from the super system. In exchange for the vague promise that it will benefit them in retirement, Australians see nearly 10 per cent of their pay flow into superannuation funds. Sluggish returns aren’t good enough.
To fix this, I’ve put forward a discussion paper with a bold but simple idea: a single default fund for superannuation, managed by the Future Fund – called Super Guarantee Australia (SGA).
Why do we need this important change?
The need for action is clear. The Intergenerational Report forecasts a lacklustre decline in dependence on public pensions – from 70 per cent of the eligible population to 60 per cent by 2061.
Moreover, the fiscal cost of the sector is expected to increase on the back of tax concessions – already the single largest tax concession.
Who can think of another mandatory savings system which costs more than it saves? To put it plainly, the costs outweigh the benefits. That’s a bad outcome.
Adding to this is the costs imposed on workers as consumers. The Productivity Commission (PC), in its most recent comprehensive evaluation of the superannuation system, stated: “The costs incurred by the Australian superannuation funds are some of the highest in the OECD.”
As Brendan Coates of the Grattan Institute says: “People have got to choose what product that they are in (and) making those choices has historically been really hard.”
Superannuation is an asymmetric market. On one end, you have a $3 trillion industry with unrivalled political, economic and commercial clout. On the other, you have the Australian worker. It is time to tip the scales back in the right direction.
That asymmetry suits big finance and big unions who pillage the accounts with high fees. Dracula would be proud.
Why the Future Fund?
As an established independent fund, SGA would likely provide better performance, lower fees, and have fewer conflicts than the retail or industry sectors.
SGA could be the default for all Australian workers. Not compulsory, but a starting point.
The Future Fund has been a world-class public asset manager.
It has outperformed the median superannuation fund. The average annual return of the Future Fund over the past decade has been 9.1 per cent per annum.
According to Chant West, the median growth fund has returned 8.1 per cent per annum since the introduction of compulsory super. Meanwhile, many super funds have delivered just 5 or 6 per cent.
It should be noted that this is a challenging comparison because the Future Fund hasn’t received a contribution for 15 years, while super funds receive around $100bn in annual inflows.
For too long, the superannuation sector has operated as a closed cartel, like a closed shop. Large funds have benefited from hundreds of billions in legally mandated inflows.
In turn, tens of billions have been siphoned in fees for extraneous and wasteful purposes.
The workers have been shafted. The cosy relationship between unions, the ALP and the industry super sector has often meant that workers were “defaulted” into funds without any thought to their quality or appropriateness.
The money has driven the decisions as super funds are on track to give $30m to ALP-affiliated unions by 2030, based on electoral commission data.
So let’s end the rent-seeking. By forcing private funds to compete with SGA, a model investor, all funds will lift their game.
As a commonwealth government entity competing with semi-private corporations, Super Guarantee Australia would be required to adhere to the principles of competitive neutrality.
This idea has strong support: The Hancock Review of national superannuation proposed a public option for super in 1976.
Peter Costello, former treasurer and Future Fund chairman, expressed support for opening up the Future Fund to superannuation in 2018.
Paul Keating won’t like it. He handed the pot of gold to the unions and financiers 30 years ago and they have been more interested in running super for themselves rather than for workers.
Australian workers have paid the price – an eye-watering $30bn a year in fees and no public dividend. It is time to smash up the sclerotic super cartel.
Andrew Bragg is a Liberal Senator for NSW.