Rice Warner has called for a shake up of default superannuation for people aged under 25 to help reduce erosion of their savings due to a lack of engagement.
Rice Warner says, in a submission to the Productivity Commission inquiry into alternative models for setting default super funds, that people aged under 25 shouldn’t go into ordinary default super funds. Instead, in the future, when people 24 and younger first start getting super it should be placed with the ATO for record keeping and then invested with the Future Fund, or appropriate alternatives.
“Young people are unengaged and many don’t get value from their superannuation,” says Rice Warner, in the submission.
“Their life insurance may also be of little value to many of them. Lack of engagement means younger members are especially likely to remain in the default investment and insurance options of their default fund, even if their specific needs would be better served by selecting different options.”
Under the plan there would be no insurance on these accounts and members could opt out at any time, rolling their contributions into another fund. At age 25 members would either choose a super fund or have their balance rolled into their employer’s default fund.
Rice Warner says that the superannuation of young people is often eroded by having multiple super accounts, high fees relative to their small balances and paying life insurance premiums “excessive relative to their needs at the time”.
“Young people are starting their careers so they don’t have a lot of superannuation. Consequently, the fees they pay are relatively large. This is exacerbated if they work part-time (and have lower levels of contribution), and have high levels of insurance cover and multiple accounts. Many will not have high balances by the time they are age 25.“
“The total administration fees paid by those under age 25 is more than $400 million a year and it is questionable whether, as a cohort, they achieve value for money.”
“Young people pay life insurance premiums of about $175 million a year. The majority of those who die under age 25 do so without dependants – anecdotally, the usual beneficiaries are the members’ mothers. When this happens, there is a tax of 15% on the benefit. The combination of the original tax on concessional contributions plus the tax on the benefit means the benefit is not efficient.”