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One of the problems that arises from Royal Commissions and Enquiries is the over-reaction factor by government and regulators. Whilst many good reforms have emerged post the Hayne RC, the Treasurer’s subsequent enquiry into the reform of the retirement savings system has produced some ill-informed and dangerous suggestions.
Recently, the Productivity Commission released its report into the overhaul of the retirement income system. In the report the commission, who were briefed by Treasurer Frydenberg, recommended the creation of a list of the best performing funds that consumers could use to choose as their default fund.
This, in my opinion, is a completely naïve, ill-informed and inappropriate recommendation in so many ways I find it absolutely staggering.
In the first instance, the “best performing” superannuation funds will have huge variations in their investment strategy, risk and outcomes. It is not comparing like with like, nor does it take account a superannuant’s age and stage of their working life. Some funds are growth oriented and some are income oriented. Someone approaching retirement and needing to shift their benefits to a pension fund would not want to be investing in a growth fund that is likely to be volatile.
It has also been suggested that superannuants only get to choose a default fund just once and then take it with them from job to job and avoid the creation of multiple accounts. You wouldn’t want to choose a dud, would you?
Furthermore, history has repeatedly shown that this year’s winners are likely to be next year’s losers depending on many factors like market movements, investment management decisions and timing.
There is also the issue of union-controlled industry funds, some of which are pseudo compulsory. Take for example the building industry’s union fund Cbus. Whilst strictly speaking membership may not be compulsory, my understanding is that building industry workers are not permitted to work on a union controlled work-site without a Cbus membership card.
Superannuation is vitally important to all Australian employees. It represents 9.5% (growing to 12%) of their wages accumulating compounding earnings over their entire working life-time. It is most likely the second largest asset after the family home for most and essential to fund an ever-increasing retirement phase of life. Choosing a default fund from “this year’s hit list” is simply inadequate.
Another issue is that of definitions of fund types. For example, a “Balanced Fund” can have massive variations in asset allocations and in risk exposure depending on the manager’s definition of “Balanced”. This just adds more complexity for the consumers to try and understand.
Perhaps a solution is for APRA / ASIC to provide specific approval for endorsed “Default Funds” according to a set of generic criteria to achieve some sense of normalisation?
Consumers need to be provided with a reliable and unbiased avenue to access information and provide guidance in determining a default superannuation fund that is suitable to them and then the ability to review annual performance with an opportunity to switch if necessary.
Seeking advice from a suitably qualified and unbiased financial planner is a preferred option for this most important decision making. But perhaps there also needs to be some government driven guidance available on-line to outline the factors and the issues to be considered before selecting a default fund.
This whole issue requires a lot more consideration and consumer guidance. But producing an annual “Top of the Pops List” is not the answer.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email email@example.com or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.