May 29, 2018 / 4:54 AM / 3 months ago

Poor performers on notice as Australia's $1.96 trln pension system faces overhaul

* Australia has world’s third-largest pool of pension assets

* Govt adviser recommends pension system overhaul

By Jonathan Barrett

SYDNEY, May 29 (Reuters) - Fund managers who perform poorly should be locked out of Australia’s A$2.6 trillion ($1.96 trillion) pension industry, the government’s peak economic advisory body has recommended.

The Productivity Commission said in a report on Tuesday that a shortlist of up to 10 strong-performing pension products, chosen by an independent panel, should be presented to workers from which to choose when they enter the workforce.

If adopted, the Commission’s model would replace a system whereby the employer chooses a fund for any worker who does not nominate a preference, regardless of the product’s performance, fee structure or insurance arrangements.

“Most (fund) members are in funds that deliver good investment returns, but millions of members are in funds that persistently underperform — over one in four funds,” said Karen Chester, the Commission’s deputy chair.

“Over an average member’s working life, being stuck in a poor performing default fund can leave them with almost 40 per cent less to spend in retirement.”

Becoming an employer’s nominated fund, known as a default fund, is big business. Australia boasts the third-largest pool of retirement savings in the world, according to OECD data.,

The industry enjoys billions of dollars of guaranteed inflows a year, underpinned by a mandatory system where almost one-tenth of a worker’s wage is deposited into a pension fund, known locally as a superannuation or “super” fund to be accessed at retirement.

About 60 percent of those inflows go to default funds, according to Jeff Bresnahan, chairman at research house SuperRatings, because most workers don’t actively research and choose their own fund.

“There will be some funds that have underperformed for some time and are still getting strong flows,” Bresnahan said.

He noted, however, that the Commission’s proposal might not be workable, given it would be difficult to choose the “best 10” products when performance can be cyclical, and funds must also be measured on their fee structures and life insurance arrangements.

The Productivity Commission will hold public hearings next month before finalising the recommendations it sends to the government for possible implementation.

Pension assets totalled A$2.6 trillion at the end of the December 2017 quarter, according to the Association of Superannuation Funds of Australia.

Last year, the asset pool grew in size by 10.1 per cent, driven by investment returns and new contributions.

Any move to change the default fund system would likely ignite a new battle between commercial, or retail, funds and the country’s union-backed industry funds.

Industry funds have historically dominated the default market, locking in agreements with some of Australia’s biggest sectors, including manufacturing and education.

Commercial funds, run by the major banks and wealth managers, have lobbied the centre-right federal government for better access to employers to directly negotiate default arrangements.

$1 = 1.3286 Australian dollars Reporting by Jonathan Barrett in Sydney Editing by Eric Meijer

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