The case for a universal default superannuation fund

Since 2005, the great majority of Australian workers have been able to choose their own superannuation fund. While some people have taken advantage of greater choice in super, for many people choice is actually a burden. Widespread lack of engagement with superannuation means that competition in this sector is structured around intermediaries (like financial advisers) rather than consumers. As a result, fees on superannuation funds remain very high, at around 1.35 per cent of funds under management. Although 1.35 per cent does not sound substantial, it actually represents a transfer of $14.3 billion per annum from fund members to the financial services industry. This equates to half the $28 billion cost of providing the age pension””a payment that accrues to over two million retirees. Administrative costs of 1.35 per cent have been estimated to reduce final super fund balances by up to 27 per cent or over $130,000 for a worker on the average wage. For the majority of workers this is simply not value for money. In order to reduce the costs of superannuation for those workers who do not exercise their right to choose a fund, The Australia Institute proposes that the government set up a universal default superannuation fund (UDF). This would protect those workers who are currently paying high fees, including people who have multiple or inactive superannuation accounts. The UDF would apply to workers who do not have a default fund specified in an award or industrial agreement (between six and 16 per cent of the workforce). However, any worker would be able to opt into the UDF. Compared to a high-cost retail fund, a properly-designed UDF could add up to $100,000 to the superannuation of an average wage earner who utilises this option over the course of a lifetime. It would also help solve one of the most intractable problems in superannuation, the proliferation of multiple and 'lost' super accounts that erode the retirement savings of millions of Australians. In addition to establishing the UDF, we propose that fees for any super fund be capped at one per cent of funds under management. If funds wish to charge more than one per cent either in aggregate or for a particular plan or option, they would need to seek written approval from each member affected.