Top 10 super solution avoids hardest problem
In case you missed it (highly likely), the Australian Government Productivity Commission released its Superannuation Report last week — an inquiry tasked with looking into the “efficiency and competitiveness” of our superannuation system. Why should you care?
News coverage would have you believe it’s because you could be missing out on up to $500,000 extra in super. But while half a million makes a handy headline, it’s the report’s proposed solutions that I think shine more light on the real challenges of compulsory superannuation.
Notably, the recommendation that people should no longer be placed into a default super fund by their employer, but instead given a choice of funds from a “best in show” list compiled by an expert panel.
Sounds laudable in theory, but think about how much trouble you have deciding what to watch next on Netflix … are you confident you have the skills and knowledge to make the right choice to secure your entire financial future?
What is “best” anyway?
I’ll admit I haven’t had the stomach to delve into all 722 pages of the full super report. But, pages 31 to 36 of the overview include some good detail around the best in show proposal.
Here are a few of the main points:
- Employees (and not their employers) should choose the fund into which their compulsory super payments are made.
- To help them do this, a shortlist of “no more than 10” funds should be compiled by an independent expert panel.
- The shortlist should be revisited by experts every four years.
- Criteria for being included on the list would focus on the fund’s “likelihood of delivering strong long-term outcomes”. Investment strategy and performance would be highly weighted, but fees, governance and innovation would also be considered, the report says.
- The change would aim to “support simple choice … by making it easy to compare and select from a set of good products”.
So the proposed criteria suggests that investment performance wouldn’t be the only determining factor to be a “best” fund — otherwise, one could surely bypass the panel and consult a ratings website — but a range of more subjective factors too.
The report actually goes so far as to task the panel with identifying “likely future outperformers”. As experts, they could be expected to consider elements like global economics, whether a fund’s investment mix is suited to current conditions, risk-adjusted returns, fund manager track records, weightings of active to passive holdings, fees as a portion of returns and the list goes on.
But as non-experts on the receiving end of the list, how is the average person to then pick one fund from the ten? Without an understanding of all of these fairly complex variables, why would someone choose anything other than the fund with the highest returns? In which case, why even bother having the other nine?
(Turns out I’m not the only one wondering how this will work. Alan Kohler summed it up very well in The Australian today. Unfortunately a link’s no good ’cause of the paywall, but here’s a screenshot of some of his most pertinent comments.)
Education is most important
So, leaving aside the fact that the proposal to revisit the shortlist every four years suggests that the “best” funds in 2015 might no longer be the “best” funds in 2019 (a rather alarming thought for an investment that is designed to perform strongly over more than fifty years), it’s the last bullet in the section above that strikes me as particularly problematic.
In terms of defining how the proposed shortlist would make it easy for people to compare and select super products, the report overview offers no more guidance than that the shortlist be “accompanied by simple and comparable metrics on each product’s features in a way that captures members’ attention”.
Given that I’d be very surprised if the average Australian under the age of 40 even knows how much money is in their super account, I wonder what the Productivity Commission have in mind for “capturing [their] attention”?
As soon as one imagines putting together the communications material or designing a digital interface for this new government shortlist, the challenges present themselves. What are the fairest metrics to show? What are the relevant product features to highlight? Who determines “simple”? How much education is enough to enable decision-making but not too much to put people off?
The MySuper dashboards already had a stab at nutting some of this out. Has anyone surveyed on an increase (or not) in superannuation engagement since then? It might be a good place to start.
One thing you can do now
Reality is, though, all these big questions are issues for the government to worry about it. It’s their job to make the system fair.
It’s YOUR job to be informed.
I began this article by asking why you should care about the recent super report. And maybe you shouldn’t worry too much about most of it — there’s a lot hypotheticals, political context and debate around different types of funds that is quite far removed from your personal finances.
But you should care about your super, because it’s your money and one day you’ll be living off it. One easy way to engage is to check your superannuation balance. And then check it again in, say, six months’ time. And six months after that. And so on and so forth.
It’s quick to do and surprisingly effective (in my own personal and friends’ anecdotal experience!) in convincing you to start paying more attention!
All you need to do is log into your MyGov account, Australian Tax Office section. Here are the ATO instructions. Do it today!
