Forty billion dollars gone; four million Australians out of pocket; fees charged for services that are never delivered. It’s the biggest scam you’ve never heard of, and there’s a very real chance you’re a victim.
Indeed, according to the results of a groundbreaking research project last month, a series of questionable practices in Australia’s superannuation industry are gouging close to $80,000 from the retirement savings of many average income earners.
Most worryingly, the same report warned that without immediate, decisive action to fix these serious problems $120 billion more could be siphoned off in the next decade alone.
The Supernomics report, commissioned by the Industry Super Network, has found that more than four million workers who are members of retail super funds are paying hundreds of dollars a year for financial advice that they have not received.
Even more alarmingly, it found that typically the more you pay in fees and commissions, the less you will probably get, with the average results showing that for every percent extra paid, customers lost almost 1.5 percent in net returns.
Since 1996, more than $40 billion has been silently milked from the nation’s retirement savings, while the poor performance of these funds has cost customers a further $50 billion.
The retail super funds, owned by the big banks and insurance companies, have successfully exploited that fact that most people find the system too hard to understand, so neither realise they are being ripped off, nor make the move to a better performing product.
Supernomics has also revealed that many workers experience ‘choice overload’, where they are unable to make decisions because of the complexity of products and pricing.
It is imperative that government act immediately to introduce laws to require financial planners to act in their clients’ best interests. The announcement on Monday that a “best interest” test would be legislated for in mid 2012 means several more billion dollars will be lost before this problem is finally fixed. Currently, there is nothing illegal about a financial planner knowingly recommending a high fee, poor performing super fund that pays them ongoing commissions, when there are many super funds on offer with lower fees and sustained better performance results.
These incentive payments have a large and negative impact on retirement savings, with a typical trailing commission of just half a percent reducing super accumulations by around 10 percent over a 40 year working life.
The research also reveals that this is a choice most financial planners make. Despite non-profit industry super funds outperforming for-profit retail funds in nine out of the last ten years, financial planning dealerships rarely allow their planners to recommend industry super funds because they don’t pay commissions.
Many retail super funds also engage in ‘flipping’, where workers are moved from relatively cost effective corporate master trusts into high cost personal super products when an employee changes jobs.
The tangible impact of this extreme corporate greed is not only the fact that individuals are robbed of their hard earned money, saved for retirement, but that taxpayers will need to fill the breach and provide greater support to our aging population.
Industry super funds believe there is a simple solution that will deal with both the causes and effects of this market failure. Creating a “super safety net” that prohibits commissions, requires financial advisers to act in their client’s best interests, improved access to simple, easy to understand financial advice and a strong default system with objective criteria implemented through modern awards.
With a major review into the superannuation industry on foot headed by Jeremy Cooper, the Government still has another opportunity to immediately fix the chronic market failures in the superannuation sector, and the problem of disengaged workers who find the system too complicated, to make sure we can protect the nation’s retirement pool.
The Australian Government has a moral obligation to act, and act decisively, because failure to do so will continue to put the retirement nest eggs of working Australians and our pool of national savings at stake.
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