Australians in retail superannuation funds would have to work an extra eight years to achieve the same retirement income as a worker who had made the same contributions to a not-for-profit fund for the past 25 years, new research has found.



The adequacy of super savings is under intense scrutiny as the government proposes to raise the age at which the age pension can be claimed to 70, for those born after 1965, and to defer the planned increase in compulsory superannuation contributions from 9% to 12%.

Industry superannuation funds have seized on the research, by the centre left thinktank the McKell Institute, to argue that the government should allow only “best performing” super funds to be the default funds for the many workers who do not nominate a preference for the super fund that receives compulsory contributions from their employer.

Industry Super Australia’s chief executive, David Whiteley, said it also provided more evidence as to why a bank-run super fund should not become the “default” super fund for employees just because it was also the business bank for their employer.

“With eight in 10 Australians not choosing their own super fund, there needs to be a default super safety net that ensures only the very best performing funds over the long term can be default funds,” Whiteley said.

“Bank-owned super funds are seeking to abolish the safety net and intend to cross-sell their super funds by leveraging existing business banking relationships.”

The McKell Institute did the research to test whether not-for-profit funds had been disadvantaged by being run by trustees from employer groups and unions, in response to a government discussion paper considering whether industry funds should be forced to include “independent” directors on their boards.

It found that the not-for-profit funds had done much better over time, and that based on actual returns over the past 25 years, workers in for-profit funds would have to work much longer for the same retirement income.

The study looked at workers making identical contributions to not-for-profit and retail funds in the 25 years from 1987 and the average actual returns of the different types of funds over that period. One scenario showed it took six years longer for the worker to achieve the same retirement income, and the other that it took eight years longer.

Hypothecated over a 50-year working life (actual returns data is not available for that long), it found that a worker in the retail fund would have to stay on the job between 8 and 11 years longer to achieve the same retirement income.

“Proponents of the federal government’s discussion paper have argued that the involvement of employer groups and trade unions in the governance of these funds were born at a time of high levels of regulation and industry centralisation. They argue that as the structure of the economy has changed so too should the administration models of the superannuation sector.

“However, as this report shows, all the available evidence shows a strong relationship between not-for-profit representative governance and higher levels of return for members,” the McKell Institute says in its paper The success of representative governance on superannuation boards.

The government has backed the argument of the Finance Services Council, which represents for-profit funds, that super funds should have a majority of independent directors like any other company.

Former assistant treasurer Arthur Sinodinos issued the discussion paper last year asking for submissions about “how best to ensure an appropriate provision for independent directors on superannuation trustee boards”.

In June the government succeeded in passing controversial changes to financial advice laws, with the support of the Palmer United party, which Whiteley said allowed banks and retail funds to pay sales incentives to to staff selling super products and to allow commissions paid on super products to automatically continue when a member was transferred into a pension product with the same provider.