‘Smart defaults’ for super funds could boost annual super fund returns by 3.5%-4.5% per year, increasing balances at retirement by 35%.
The Financial Services Council (FSC) says that new technology allows for individually tailored superannuation products, but the default MySuper system is not taking advantage of these opportunities.
“Millions of Australians in MySuper are missing out on up to a third of their retirement balance because of the inertia created by a lack of genuine competitive forces targeting better retirement outcomes,” said the FSC.
The FSC and Tailored Superannuation Solutions (TSS) have released a report, Innovation in Superannuation: Smart MySuper Defaults, which finds that ‘smart defaults’ could add $5 billion to super balances a year across the 15 million MySuper accounts. These ‘smart defaults’ would take into account the individual circumstances of members, including time to retirement and projected retirement balance.
“In this digital age, it’s no longer appropriate for MySuper trustees to just dump two 40 year olds, one projected to retire on the Age Pension, the other with $1.6 million, in the same investment option for the next 25 years,” said TSS CEO Douglas Bucknell.
“Trustees tell their choice members to consider their investment horizon and projected retirement balance when selecting an investment option – but don’t follow their own advice when it comes to selecting an investment option on behalf of MySuper members,” he said.
The FSC says the lack of competition on default super providers, due to the industrial awards system, has allowed super funds trustees to avoid technological changes that could improve the retirement outcomes of members.
“New technology has made it possible to deliver superannuation products that are better tailored to members’ individual circumstances, but the current industrial default system means trustees have not had much incentive to innovate, until now,” said FSC CEO Sally Loane.
“The status quo is not providing solutions to the industry’s issues or contributing optimally to the retirement savings funding gap.”
The Productivity Commission will recommend new ways of selecting default super funds in 2018. The FSC has been campaigning for greater access for the super funds run by its members to the default super system.