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Employers should not be allowed to pick worker’s default super funds, SCA says

Helena BurkeNCA NewsWire
Around 60 per cent of Australians use a default super fund, which is usually selected by their employer.
Camera IconAround 60 per cent of Australians use a default super fund, which is usually selected by their employer. Credit: istock

Australia's main advocacy group for superannuation users has called for a shake-up of the default super fund allocation system, urging for employers to be stripped of the responsibility to choose a default fund for workers.

Super Consumers Australia (SCA) said allowing employers to choose their workers’ funds had undermined market competition and cheated some Australians out of hundreds of thousands of dollars.

“Those not being defaulted into the best performing funds will have demonstrably less to spend in retirement. The Productivity Commission estimated people would be worse off to the tune of $502,000 compared to those who end up in the best funds,” an inquiry submission from the SCA reads.

Around 60 per cent of Australians use a default super fund, which is usually selected by their employer.

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While workers are free to pick a different super fund to their employer’s default option, many do not bother due to feeling disengaged and overwhelmed by the super system.

Four Australian hundred dollar notes hanging on washing line
Camera IconAustralians who are defaulted to worse performing super funds are retiring with $502,000 less than those who keep their money in the best performing funds. Credit: istock

Instead of allowing employers to select their workers‘ default fund, the SCA has suggested that placing the responsibility in the hands of the federal government could be a better system.

“Due to the compulsory nature of super, the government has a responsibility to ensure the default system is delivering good outcomes to all Australians,” the SCA said.

“A government default fund would have the potential to reach a scale that would dwarf participants in the current market. This would open the way for investment opportunities that would otherwise be out of reach of sub-scale funds.”

The SCA said 90 per cent of Australian super funds had been identified as “sub-scale” by the Australian Prudential Regulation Authority.

Earlier this year, 13 underperforming super funds were named and shamed after failing the APRA’s fees versus performance test.

Among those was Commonwealth Bank Group Super, the default super fund for all CBA employees.

But passing the responsibility of default fund allocation onto the government may not fix the problem.

Although the SCA said transitioning to a government-run default fund could help prevent Australians finding themselves in default funds that were underperforming, the consumer group noted that this approach could come with its own set of issues.

“If allocated all default contributions, a government monopoly fund would fail to harness the benefits of competition for better member outcomes (as identified by the Financial System Inquiry),” the Productivity Commission was quoted as saying in the SCA’s submission.

The SCA insisted “deep consideration” of the different options through an independent review would be needed to meaningfully improve retirement savings outcomes for Australians.

“Reform is unequivocally needed to drive this change by creating incentives that maximise long-term net returns and allocate people to quality products,” the SCA said.

“The default system should set a competitive standard for the rest of the industry. So that any fund looking to attract a default member should be able to demonstrate that it is offering something of value over and above the status quo.”

The SCA’s call for a revision of the super system was part of its submission to Liberal Senator Andrew Bragg’s inquiry into making a government-run super fund the default option for Australian workers.

Originally published as Employers should not be allowed to pick worker’s default super funds, SCA says

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