Auto-rollover default super could boost savings by over $400 billion

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Automatically rolling super fund members into new default super funds when they switch employers could boost retirement savings by over $400 billion.

Recent inquiries have looked to change how default super funds are set to tackle the issues of underperformance by funds and reduce unwanted multiple accounts.

The Financial Services Royal Commission recommended that super fund members should be ‘stapled’ to a default fund, which is similar to the recommendation of the Productivity Commission. Industry Super Australia (ISA) has rejected stapling, instead arguing for an auto-rollover model.

  • Stapling: New entrants to the workforce would have a single default super fund which would carry across employers, unless the member chose to switch funds.
  • Auto-rollover: Member balances would automatically be rolled over to new default super fund when they changed employers, unless they choose a different fund.

ISA has now released analysis commissioned from KPMG finding that the auto-rollover model could boost retirement savings by $416.3 billion over 25 years (in real terms). These gains come from the assumption of a transition to higher performing super funds over time, leading to a 1% per year ‘performance dividend’.

The report also finds that savings from fees and insurance would be higher under the auto-rollover model – by $3.9 billion over 25 years compared to stapling – which would also produce savings, in addition to the savings from the recent Protecting Your Super changes.

“KPMG found that the industry super fund model of automatic rollover would not only eliminate multiple accounts, it would accelerate the weeding out of underperforming funds from the system sooner, delivering greater returns to workers,” said ISA.

“In contrast, under the fund for life model, workers could end up stuck in dud, underperforming funds for many years, and miss out on hundreds of thousands of dollars by the time they reach retirement.”

ISA also pointed to the Productivity Commission finding that a young person who is in an underperforming super fund now could have $533,000 less at retirement. Though ISA is opposed to some of the core recommendations from the Productivity Commission.

Industry Super Australia supports current default super framework

Industry Super Australia is opposed to the changes to the default super system recommended by the Financial Services Royal Commission and the Productivity Commission.

The Royal Commissioner Hayne recommended: “A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.”

This recommendation appears to be driven by a concern about the spending, or ‘treating’, including on sporting events or other entertainment, by some large super funds to be chosen as the default fund by employers.

“What I have called the ‘treating’ of employers should not be permitted. Permitting it means that decisions made by employers about default funds may be affected by considerations that should be irrelevant,” says Hayne, in the final report of the Royal Commission.

Seemingly the thinking is that if employers don’t have to choose default funds – because employees keep a single default fund – then super funds won’t need to spend money to be selected as default funds. He also recommended strengthening the SIS Act provision that bars the ‘treating’ of employers – section 68A.

Industry Super Australia told the Royal Commission that changes to s68A would “disproportionately disadvantage industry super funds”, as industry fund don’t have the established banking relationships of retail funds.

Though Hayne rejected this, saying: “Even if that were so, I do not accept that trustees should be permitted to attempt to influence employers’ decisions through irrelevant considerations.”

“Of course, if employers were not put in the position of determining an employee’s default fund, the necessity for section 68A would cease. If there are to be changes made to the arrangements for default accounts, that would call for a re-evaluation of section 68A. But such a change is beyond the scope of my inquiry. And in the absence of change, section 68A should be strengthened.”

The Productivity Commission recommended changes to the default super system – with new entrants to the workforce only defaulted into a fund once, with these employees to be shown a ‘best in show’ shortlist of up to 10 super funds selected by an independent expert panel.

Industry Super Australia is also opposed to the Productivity Commission recommendations on default super, saying it would abandon the “proven, low-cost industrial default system in favour of a choice-first architecture that has been ground zero for consumer harm”.

It is as yet unclear what changes to default super the Government may look to implement. The Government, in its response to the Royal Commission, said it “agrees that a person should have only one default account,” without setting out a model. The Productivity Commission says: “There has not been a government response to this inquiry yet.”

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