Financial Services Council says $94 billion sitting in underperforming default super funds

Retirement savings of 1.4 million Australians are languishing in "sub-scale" default superannuation funds, according to Financial Services Council.

Some members could be facing a $170,000 shortfall at retirement due to their inclusion in these underperforming funds, the council said.

About $94 billion is sitting in 33 default super funds that manage less than $10 billion, according to the latest research released by the council.

The council said the average return of the 33 funds over 10 years was 4.5 per cent per annum, or 1.4 per cent lower than the performance of the best performing Mysuper products.

The council said this performance gap meant a consumer could be more than $170,000 worse off by retirement if they remained in an underperforming default fund.

"If this many Australian workers were enabled by law to languish in poorly paying jobs with working conditions way below their peers, for as long as 40 years, there would be outrage across the entire community," FSC chief executive Sally Loane was cited as saying by The Australian Financial Review.

Default super funds are so called because workers who do not select a fund are put into a default fund named in their award – are not-for-profit industry funds owned by Australia's biggest unions.

Research by Chant West has said that the not-for-profit funds with less than $10 billion in funds under management have, on average, higher fees and lower returns than funds with more than $10 billion.

"Its [FSC's] analysis of scale focuses on not-for-profit funds, as the level of assets in a particular fund is a reasonable measure of scale," Chant West head of research, Ian Fryer, said.

"On the other hand, major retail providers issue many different products, and even though the assets of some products may be relatively low, those products still benefit from the scale of the organisation to some extent."

However, by Industry Super Australia's analysis of Australian Prudential Regulation Authority data for the 12 months to June 2016, default industry funds with less than $10 billion in FUM outperformed retail funds with FUM greater than $10 billion not listed in awards by 1.28 per cent over 10 years, and by 1.16 per cent over five years.

The FSC refused to name the 33 sub-scale funds identified in the research but analysis from Rainmaker based on APRA figures reveals only 27 funds in the country that have more than $10 billion in FUM.

"Some of Australia's best funds like Care Super and BT Super For Life would only just make it. But even more amazingly, top funds like Equip Super, Vision Super, Energy Super, Statewide, AustSafe, BUSSQ, ANZ SmartChoice and HUB24 wouldn't," said Alex Dunnin, Rainmaker executive director, research and compliance.

"Large funds of course have major advantages, but well managed boutique funds have repeatedly shown themselves to be amazingly competitive. Indeed a good question to ask is whether all large funds are exploiting their advantages," he said.

Other funds under the $10 billion mark include the Australia Post Superannuation Scheme with FUM of $7.4 billion, AMP Flexible Super Retirement Account with just over $9 billion and NGS Super with $7.8 billion. 

The Productivity Commission inquiry into default superannuation is looking at ways to carve up billions of dollars of super contributions under the default scheme.

Industry funds sector wants a system where the Fair Work Commission is responsible for selecting which funds are placed in the awards, while the retail sector has argued that the market should be opened up to wholesale, or near wholesale, competition.

Loane said the current Fair Work Commission default arrangement should not be tolerated.

"Many can't change funds because of the current industrial awards governing default super, and many are chronically disengaged or disinterested. Either way the system needs to change if the policy is going to work for all Australians," she said.

In its submission to the Productivity Commission's inquiry into the competitiveness and efficiency of the superannuation system, the FSC said the commission should recommend a model that allows consumers to exit underperforming funds and switch to a fund, whether it is a retail or an industry fund, that will deliver stronger returns and a more comfortable retirement.