June 2, 2018
The word “inequality” hardly figures in the Productivity Commission’s draft report on superannuation, but that’s what it’s really about: some people get poor retirement outcomes as a result of decisions made for them by others.
It’s the fundamental problem with the system, apart from the government’s unremitting effort to politicise and muck it up, of course.
At least the commission has finally called out the Coalition on its nonsense this week.
The commission’s research has established conclusively that bank-owned retail funds charge twice the fees and produce 28 per cent lower returns than industry funds, leaving their unsuspecting members worse off when they retire. We already knew that, but the PC has proved it, so you might think it will put an end to the Coalition’s dishonest attacks on industry funds.
Alas, no. In every interview this week about the report, Financial Services Minister Kelly O’Dwyer first tried to blame Bill Shorten and then forgot to mention the huge difference in outcomes between retail funds and industry funds.
Let’s measure it: according to my savings calculator, the difference between saving 9.5 per cent of current average weekly earnings for 40 years at the retail funds’ average return of 4.9 per cent and the industry funds’ average return of 6.8 per cent is, as it happens, $666,000 ($996,000 versus $1,662,000).
The fact that the government has not denounced this and given the banks a deadline for fixing the problem can only be explained by the Coalition’s absurd bias against industry funds because union officials sit on their boards, as opposed to those pillars of rectitude and good governance — bank directors.
But while the Productivity Commission’s draft report is a fine, exhaustive piece of work, it has also fallen short, in my view.
Its recommendation that default super funds be chosen from the top 10 performing funds sounds good on the surface and is definitely better than the current mess and, as the saying goes, we shouldn’t let the perfect be the enemy of the good. But it’s definitely not perfect.
The commission says the median annual return of the top 10 funds in the decade prior to 2017 was 5.7 per cent, 1.1 per cent below the average return of the industry funds. That produces an average difference in retirement outcome for the worker on average weekly earnings saving for 40 years of $432,000 ($1.23m versus $1.62m).
Last year I wrote that a single national default fund should be established that would be run by the Future Fund and would ensure that everyone got the same good result — no choice or competition, but at least no inequality. The idea was later supported by the chairman of the Future Fund, Peter Costello (unsurprisingly), but was specifically rejected by the PC this week.
The Future Fund’s 10-year return to March 31, 2018, was 8.5 per cent. Putting that number into the savings calculator produces a retirement sum for the average weekly earnings saver after 40 years of $2.7m, $1.5m more than from the average of the top 10 super funds.
And apart from the averages, a choice from a menu of 10, even if they are the “top 10”, would inevitably produce inequalities, most of all between the best and the 10th best. And will they still be the best and 10th best in 20 years? Or will those positions reverse?
And how does a 25-year-old make the choice from that drop-down menu? The only thing that matters is the maximum compound interest over the long term, so why have numbers two to 10 at all?
Why would the Productivity Commission recommend a system that, based on past performance, is going to produce, on average, a $1.5m lower retirement sum than the Future Fund would, and continue to result in at least some inequality and unfairness?
Because while the Coalition is ideologically biased against industry funds, the PC is ideologically biased in favour of competition: it’s the answer to every question that is put to it.
And it is true that competition with informed choice is the answer to most, if not all, questions about the efficient functioning of markets, the problem with superannuation is that it’s not a normal market. The choice is about the future, and therefore can’t be “informed” because the future is unknowable.
Competition in banking, for example, works fine because you know the interest rates on offer. Same with most other products.
But with superannuation the product is money in 30-40 years’ time, and depends on future returns that can’t be known.
With super, you can only know past performance and current fees, and intangibles like governance. Fees are important but not decisive in retirement outcome — it’s all about performance, and past results are an imperfect guide to the future.
And governance? Well, give me a group of trustees who represent workers and employees over bank directors any day.
The PC rightly says that super is an unfair lottery with too many losers, especially those in retail funds, so consolidation through the removal of underperforming funds and accounts with small balances is long overdue.
Basing the fix on competition, just less of it, won’t work, but nobody in politics or the industry wants to create a new monopoly, especially after the NBN debacle — although it’s clearly the right thing to do — so it won’t happen.