Retirees deserve a better deal from their super

In 2010, the typical super fund charged its members 1.25 per cent of their super balance in fees each year. By 2022, that figure had fallen to just 0.9 per cent. That’s a saving of nearly $7 billion for working-age members in 2023 alone.

Most Australians pay little attention to their super, and those who do often find it hard to scrutinise and compare super fund offerings.

That’s why the super funds’ default offerings for workers are subject to the government’s MySuper licensing scheme, and most products offered to working-age Australians are performance-tested, and rigorously and transparently assessed by the regulator.

These reforms have led to leaner, higher-performing super funds – and higher super balances for Australians workers.

Regulation too light in retirement

Our recent Grattan Institute report, Simpler super, showed that the regulation of retirement super is too light.

Australians are retiring with larger superannuation balances than ever. The average balance for people approaching retirement has doubled – in real terms – in less than two decades, to more than $200,000.

By the mid-2040s, retirement-phase assets will total $2.3 trillion (in today’s dollars), and about two-thirds of Australians will retire with at least $250,000 in their super.

More than four-in-five retirees in Australia invest their super in an account-based pension. They can expect to earn three quarters of their lifetime investment returns, and pay nearly three quarters of their lifetime fees, after the age of 60.

Yet, despite these higher stakes, the super funds’ offerings to retirees are more lightly regulated than the offerings to working-age Australians.

There are no ‘default’ super fund offerings in retirement, and retirement products are not subject to performance testing or public assessments by the regulator.

Account-based pension scrutiny

Performance testing of working-age super has been a success.

The test measures net investment returns against a matched portfolio of market index returns, and administration fees against the median of peer funds.

Funds must notify members if their product falls further than 0.5 percentage points under the combined benchmark over 10 years, and they cannot accept new members if they fail the test twice in a row.

It has led to fewer funds and cheaper products, saving members millions of dollars.

The performance test could easily be applied to account-based pensions: most retiree savings are in the multi-sector options the test was designed for; and the administration fee benchmark can be updated to account for the higher cost of servicing retirees.

Some argue the test is hampering investments in specific environmental, social, and governance (ESG) investments of ‘national significance’, such as renewable energy projects. But any leniency or accommodation made for specific investments should be informed by compelling evidence, which so far has not been forthcoming.

And the government should ask the regulator to include account-based pensions in the Comprehensive Product Performance Package (formerly known as ‘Heatmaps’).

Best super funds list

Performance testing and assessments of account-based pensions would weed out the poorest products. But more is needed to ensure funds deliver for retirees.

The government should also establish a list of the top 10 super funds. This would implement a 2018 Productivity Commission recommendation to create a ‘best in show’ shortlist of up to 10 super funds, selected by an independent expert panel.

‘Best in show’ could easily be extended to cover super funds’ offerings to retirees.

Implementing ‘best in show’ and extending it to the retirement phase would generate effective competition between funds where it wouldn’t otherwise exist, including on retirement services, advice, and guidance.

A top 10 list would encourage all super funds to lift their game, because funds would compete to make the top 10 and stay there.

Establishing a top 10 list would also fix the broken default system for allocating new workers to super funds in the first place.

The introduction in 2021 of ‘stapling’ – where workers’ first super fund follows them as they change jobs – means more and more workers will stay in the fund they are first defaulted into.

With stapling, the lucky few funds listed on awards for industries where people typically start their working lives will arbitrarily get much more business than the rest.

The government has an obligation to ensure that the super funds into which many Australians are now defaulted for life are among the best available.

Our recommendations would ensure retirees get a better deal from their super: we calculate these reforms could boost the incomes of future retirees who opt for an account-based pension by up to $70,000 over their retirement.