Australia’s Failing Pension Funds Prepare to Be Publicly ShamedBy
New laws require poor performers to flag problems to customers
Exclusion of some funds from tougher rules draws criticism
For a fresh perspective on the stories that matter for Australian business and politics, sign up for our weekly newsletter.
Millions of Australians may soon get some very uncomfortable news about their nest eggs.
As part of a package of proposed reforms, the government wants to force pension funds that don’t meet key after-fee investment return milestones to write to their customers and set out their failure in plain language. Additionally, they would have to point savers to a government-curated list of firms that are doing a better job.
The new measures, which are being introduced to parliament this week, are part of a push to overhaul the world’s fourth-largest pension system and try and prevent disengaged consumers from getting stuck with sub-par operators.
Regulators will also get the power to close funds to new clients if the rolling eight-year targets are missed by more than 50 basis points for a second time. Ultimately, if things don’t improve, they can close funds entirely.
“It’ll weed out the worst of the worst in the industry,” Xavier O’Halloran, director of advocacy group Super Consumers Australia, said by phone. “And make it a little bit safer for consumers to pick the right fund for them.”
More than a quarter of default savings plans, which held over A$100 billion ($76.2 billion) in assets across 3 million accounts, underperformed these new benchmarks in the five years to 2019, according to a Treasury research paper.
Defined benefit pension schemes are rare in Australia, so the burden of ensuring a comfortable retirement lies with the individual. While compulsory employer pension contributions of 9.5% mean many Australians have savings pots that would be the envy of international counterparts, there is increasing concern that some of this money is being wasted.
A government inquiry two years ago found more than a quarter of funds were persistently under-performing and 10 million accounts -- one in three -- were unintended multiples that cost workers A$2.6 billion a year in unnecessary fees and insurance.
As well as consumer inertia -- one study found nearly one in five Australians had never even contacted their fund -- advocates worry that the 30% of Australians who struggle with financial literacy lack the understanding for informed engagement.
Stopping under-performing funds from signing-up new members is an important step toward protecting people who don’t engage from the worst outcomes, O’Halloran said.
The new laws are slated to come into effect in July, with the first letters sent out a few months later.
|Read more on the reforms to Australia’s pension industry:|
|Australia to Fix Flaws in World’s Fourth-Biggest Pension Pool|
|Australia Makes It Easier For Workers to Choose Pension Fund|
|Why Australia’s Pension System Isn’t ‘Super’ Enough: QuickTake|
The reforms aren’t without controversy though.
The draft laws have been criticized by Australia’s not-for-profit pension industry that claims many plans offered by bank-owned funds won’t be covered by the new rules.
The so-called retail funds hold about 20% of the market and a number faced sharp criticism during a separate recent inquiry into the financial system, not least for charging fees for services they didn’t provide.
Critics also say the performance targets don’t tell the full story as they ignore administration fees and other charges, which at times are larger than investment fees.
“It’s about net returns, the bottom line that lands in a member’s account,” Leeanne Turner, chief executive officer of not-for-profit fund MTAA Super. “That’s what important.”