Two new reports released this month by Industry Super Network (ISN), Supernomics and Transformation of the Financial Advice Industry, demonstrate a chasm between the potential for a well functioning superannuation system in the best interests of members, and the reality of today’s market failure and a largely dysfunctional financial advice system.
However, both reports point to feasible structural reforms that will dramatically improve the efficiency of the Australian system to benefit members and national savings.
Superannuation Safety Net to address market failure
Supernomics, written by ISN Chief Economist, Dr Sacha Vidler, explores the three causes of market failure in Australia’s superannuation system and how to fix them.
The failures include:
- Member inertia and disengagement
- Product complexity and low levels of financial literacy
- The conflicts of interest created by commissions and incentives paid to financial planners
‘Supernomics explains the perverse economic conditions of Australia’s super system: the more you pay the less you get. The relationship between price and performance in the superannuation market is negative,’ said David Whiteley, ISN Chief Executive.
“On average, for each additional 1 per cent paid in fees, members of the largest public offer super funds lost almost 1.5 per cent in net returns,” he said. (Modelling done for the Report shows that only not for profit funds had above average returns and below average fees – see Figure 1, page 3.)
‘Retail funds, owned by banks and insurance companies, are profiting from member inertia and disengagement by siphoning commissions from member accounts. This is projected to cost Australia’s super savings pool $120 billion over the next 10 years.
In Supernomics ISN proposes a Super Safety Net to address the causes and effects of market failure in super including:
- Prohibiting commissions and requiring financial advisers to act in a client’s best interests
- A strong default system through modern awards with objective criteria, and
- Improved access to simple financial advice through super funds.
‘There is a moral obligation for the Government and industry to act – individuals’ retirement nest eggs and Australia’s pool of national savings are at stake,’ said Mr Whiteley.
On average, for each additional 1 per cent paid in fees, members of the largest public offer super funds lost almost 1.5 per cent in net returns.
Consider your own objectives, financial situation and needs before making a decision about superannuation because they are not taken into account in this information.