The Productivity Commission reinforced several recommendations flagged in mid-2018 in a bid to modernise the $2.7 trillion industry, which included shaking up the default sector.
The Commission handed down 31 recommendations in its final report in assessing the efficiency and competitiveness of the superannuation system that didn't stray too far from the Draft Report released in May 2018.
Chief among the recommendations was pushing ahead with a best-in-show shortlist of MySuper products, despite feedback from the industry that feared it would "game" the process and harm competition.
Members should be able to choose their own super product from a best-in-show shortlist of "exemplary" default funds, the Productivity Commission argued.
In an effort to curb members defaulting into a new super fund every time they change jobs and incidentally "clean up" the multiple accounts issue, the Commission wants workers to be defaulted once, if they do not have an existing super account and fail to make a choice of their own, it said.
The shortlist would be compiled by an independent expert panel and assess the list every four years based on investment strategy and performance, fees, governance and innovation default insurance arrangements.
The ATO would implement the new default model by providing an online service for members to pick from the shortlist or nominate a new super fund, whether they are new to the workforce, changing jobs or wishing to engage with their super.
Lifting the governance game
The Commission recommended a number of governance rule changes that made it clear the right mix of knowledge, skills and experience, and managing conflicts of interest was more important than the number of independent directors.
Trustees should be required to have, use and disclose a process to assess their board's performance relative to its objectives and to assess the performance of individual directors annually, it said, and includes having a matrix that identifies the skills and experience of each director.
"At least every three years, an external third party should be engaged to evaluate the board's performance and capability against the skills matrix, with a copy to be provided to APRA."
Retail under pressure
Modelling undertaken by the Commission shows retail super funds were constant underperformers compared to not-for-profit funds, which delivered returns above benchmarks.
An analysis of 42 funds found 29 performed below their own benchmark portfolio.
"These 29 underperforming funds contain five million member accounts and about $270 billion in assets. About half are industry funds and almost a third are retail funds."
Notably, the retail funds were larger on average, collectively accounting for 77% of members in underperforming funds or about 3.8 million accounts.
Members save $3.8bn
The Commission said the twin issues of unintended multiple accounts and entrenched underperformers are harming millions of members.
A third of accounts (10 million) are unintended multiple accounts. These erode members' balances by $2.6 billion a year in unnecessary fees and insurance.
Eliminating these would benefit members $3.8 billion each year. On a per member basis, a 55 year old today could gain $79,000 by retirement, while a new job entrant would have $533,000 more when they retire in 2064.
A proposed solution is legislating the auto-consolidation of superannuation accounts with balances under $6000 and 13 months or more of inactivity. Trustees should transfer these accounts to the ATO to consolidate together with a member's matched active account.
The Commission recommended members under 25 years of age should be able to opt-in for insurance via superannuation and require trustees to cease all insurance cover on accounts where no contributions were made for 13 months.
APRA should step in "immediately" to require trustees to articulate and quantify the account balances are being eroded by premiums and make it available on their website annually.
Also on the insurance front, the Commission recommended the Federal Government to establish a joint regulator taskforce to advance the Insurance in Superannuation Voluntary Code of Practice. Its aim is to monitor and report on funds adopting and implementing the code.