The annual performance test at the center of the Australian government's Your Future, Your Super reforms is part of a broader push to help disengaged workers help themselves when it comes to managing their retirement savings — a quest critics warn could backfire.
Previous rounds of reform — like the one which ushered in low-cost, balanced MySuper default options eight years ago for workers who fail to select a retirement fund on their own — were designed to ensure that even the most disengaged participants could count on securing a reasonable retirement outcome.
By contrast, for the latest reform package the government is emphasizing the importance of getting those laggards to come off the sidelines.
"Greater member engagement is critical to the success of the superannuation system," driving competition, lowering fees and producing better results for participants, Treasurer Josh Frydenberg wrote in the government's introduction of the reform package.
Australia's Productivity Commission found that two-thirds of superannuation system participants don't actively select a superannuation product when starting a new job.
The latest reforms are designed to give that army of disengaged workers the information and tools they need to avoid getting stuck in persistently underperforming MySuper funds that, if unaddressed, would find them retiring with inadequate nest eggs. MySuper funds that fail to achieve the test's minimum target return will be required to inform members of that fact by letter and refer them to a new "comparison tool" to help them easily identify a better-performing fund.
But the system will require members in those underperforming funds to take the initiative in switching funds.
It's "a huge leap," said Simon Russell, director of Melbourne-based consulting firm Behavioural Finance Australia, pointing to the fact that only 2% or so of super fund participants moved into cash during the 40% COVID-19 sell down in the first quarter of 2020 as a good indication of the system's underlying inertia.
Even after a royal commission splashed news about underperforming funds on front pages across Australia, there are "still hundreds of thousands of members sitting in poor-performing funds … because for whatever reason … they don't have the time, energy or confidence to do something," noted Melissa Birks, general manager, advocacy with the Australian Institute of Superannuation Trustees.
The new reforms, meanwhile, could leave those disengaged participants worse off rather than better off, observers say.
If all participants of funds that fail the performance test get the letter informing them of that fact, those who are relatively engaged will open it and possibly move to a better-performing fund, leaving those who don't open it or do so and take no action in a shrinking fund, probably facing higher fees, said David Carruthers, a senior consultant with Frontier Advisors LLC and head of the Melbourne-based firm's members solutions group.
AIST is one of many organizations calling on the government to take a more active role in closing perennially weak funds and ensuring their participants are transferred to stronger funds.
"It's a compulsory system so you should be able to do nothing and be OK," Ms. Birk said. If, instead, this goes ahead as planned, "you're going to have more people potentially stuck because they haven't read the letter or taken action," she said.
Meanwhile, the ranks of Australian employees stuck in underperforming funds remain small.
The Productivity Commission reported 21 out of 77 MySuper funds falling short on a similar performance test — perhaps 20% of the system's 15 million accounts but only A$100 billion ($77.1 billion) in retirement assets, or less than 5% of the industry total, noted David Knox, Melbourne-based senior partner at Mercer Australia and lead author of the annual Mercer CFA Institute Global Pension Index.
Against that backdrop, the measures being proposed are "very strong" — effectively "using a hammer to crack a nut," Mr. Knox said.
Super fund executives say they're ready to roll with whatever punches come their way.
"In the end, there's little that we can do as a fund to influence the regulatory environment," noted Troy Rieck, chief investment officer of A$13 billion, Brisbane-based LGIAsuper. "Instead we will adapt to it, looking to meet our obligations to members and beat those regulatory hurdles as well," he said.