Product modernisation will strengthen retirement outcomes: FSC

New research commissioned by the Financial Services Council (FSC) highlights the case for a mechanism to support broader "modernisation" of superannuation and managed investment schemes.

The report suggests current legislative and tax settings are inconsistent in that they support the mergers of whole superannuation funds but not the modernisation of products and investment structures within a superannuation fund or managed investment schemes.

"Outside of a successor fund transfer (SFT), whereby a whole superannuation fund is transferred to another, and CGT relief applies for all members, there is no existing, viable mechanism that enables trustees of super funds and managed investment schemes to efficiently rationalise products and investment structures," it said.

"This creates an uneven playing field that only promotes efficiencies in a subset of scenarios. Consequently, the proliferation of products that could benefit from "modernisation" is creating system-wide inefficiencies, with our research indicating negative consequences for all stakeholders."

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Making way for efficient product modernisation would give access to equivalent products with higher net investment returns driven by both higher expected investment performance and lower fee structures, it states.

"There is $132 billion invested in superannuation and investment options that could benefit from modernisation, impacting over 1.8 million customer accounts," FSC chief executive Blake Briggs said.

"Allowing superannuation trustees and fund managers to move consumers to modern products would result in consumers having $16 billion more in their retirement by 2050, delivering $21 billion in additional retirement income for Australians."

According to the report, an individual aged 40 with a current balance of $80,000 could have an additional $198,676 - from $484,005 to $683,689 - by the time they retire in 2050 if trustees were permitted to move them to contemporary products without incurring tax penalties or regulatory barriers if they are currently invested in a legacy product.

"A product modernisation regime would support the government's fiscal position, by lowering government Age Pension outlays and raising new tax revenue, by almost $1 billion in the next decade, without having to raise new taxes on superannuation consumers," Briggs added.

The report said product modernisation is also the "natural extension" of the government's 'Your Future, Your Super' reforms, which has highlighted that consumers are often stranded in historical products but cannot be moved out of these products due to tax and regulatory barriers imposed by the government.

This means trustees may appropriately conclude that transferring a consumer (and triggering tax obligations) would not satisfy their best financial interest duties.

"The FSC supports performance testing of superannuation products, however flaws in the current design of the 'Your Future, Your Super' framework is having adverse consequences for consumers," Briggs added.

"The FSC encourages the government to act to protect consumers from being trapped in underperforming products that APRA has publicly identified, by implementing a product modernisation framework that allows superannuation trustees to transfer consumers to modern products.