PC Report into super recommends ditching retail funds

by Chris Becker

In news just in, the boffins at the Productivity Commission have worked out that putting your superannuation into “underperforming funds….that charge excessive fees” is harming Australians retirement savings. In other words, all the funds run by the banks.

In other news, water makes you wet.

The Federal Government commissioned – at some reluctance – the Productivity Commission to look into Australia’s failed superannuation system three years ago and has handed a report to Treasurer Extraordinaire Josh Frydenberg this morning. More from ABC with a few of the findings and proposals:

Australians could be more than $500,000 richer in retirement under the biggest-ever proposed shake-up of the superannuation system.

Super funds that underachieve over the long term would be booted from the industry under the Commonwealth agency’s proposal.

New workers would also be steered towards the industry’s top performers, with an independent panel creating a ‘best in show’ shortlist of 10 funds to choose from.

“I think there is merit to this idea that we can ensure that the better performing funds are taking up by more members,” Treasurer Josh Frydenberg said.

“Because what the report did find is that right now it is a lottery for members as to the quality of the funds.”

Even a worker aged 55 would be better off by nearly $80,000 if every recommendation was adopted.

“The Government will await the final report of the banking royal commission, which is examining the conduct of super funds and the regulators, before finalising its response to the Productivity Commission report into superannuation,” Mr Frydenberg said.

Reforming superannuation needs to start with breaking the strangle hold the banks have on retail super funds and cross selling, but moreover needs a systematic review into the actual functional purpose itself: savings. That means re-allocating away from secondary share markets and putting most super savings into a mature bond market for long term investment in infrastructure, energy, and research projects. Skewing away from short term share market volatility towards decade long stable investments. Maybe even diverting a portion or all into a sovereign wealth fund, with the Future Fund doing a superlative job without resorting to risky overallocation to equities.

Creating a “best in show” shortlist will not encourage such long term thinking as punters – literally – will try to bet on the best short term returns. The mind also boggles at the thought of such regulatory failures as Phil Lowe and Rod Sims choosing the products. Hopefully the panel will scrutinise year to year volatility as part of its construction of the shortlist, especially the downside, although that is unlikely given the lack of understanding in risk and return in the entire financial sector.

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