Karen ChesterDeputy Chair

SuperannuationPerforming for all members?

McKell Institute, 6 June 2018

2

What will we cover?

Our approach

About 30 minutes

Members’outcomes

Package ofimprovements

3

A three-stage investigation

2016 2017 2018 2019 2020

Criteria to assess efficiency and competitiveness of the

super system(final report November 2016)

Review efficiency and competitiveness of

the super system(including finalising stage 2)

Develop alternative models for allocating default fund

members to products(draft report March 2017)

Government to consider outcomes of review

INQUIRY31

2

STUDY

INQUIRY

Our approach

4

What’s new and novel

Investment benchmark portfolios (BP1 & BP2)

Cameo analysis

Econometric and stochastic analysis of products

Economies of scale analysis

Our approach

5

Data — central to the stage 3 assessment

Members choice survey Members survey

Funds survey Governance survey

208 RSEs invited to participate

114 responses representing about 90% of system covered

80 responses representing about95% of system covered

CEOs of 96 RSE licensees invited to participate

2348 respondents 2294 respondents

Our approach

Members’ outcomes

7

Two structural flaws

Members’ outcomes

Entrenched underperformance

Multiple accounts

8

There are too many unintended multiple accountsAccount proliferation starts early and persists, 2016

Members’ outcomes

Large uptick in members holding 2+

accounts

The peak starts to reverse

0

20

40

60

80

100

< 18 18-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65 > 66

Perc

ent o

f mem

bers

Age group

1 2 3 or more

1 in 3 accounts Unintended multiples

9

Multiple accounts reduce retirement balances

Members’ outcomes

Super problem: Multiple accounts = 1 years’ lost pay

$833,000

$782,000

Single super account

Multiple super accounts

Aged 21

$50,000full-timestarting salary

$51,000

or 6% less to spend in

retirement due to multiple accounts

$340avg. insurance premium

RetirementAged 67

10

Nearly 5 million accounts in underperforming funds Individual funds (with MySuper products), 2005–16

Members’ outcomes

Data source: APRA fund-level data and financial market index data (various providers)Benchmark: Fund-tailored BP2Coverage: All APRA-regulated funds with a MySuper product in the dataset over the full period (52% of assets and 61% of member accounts in all

APRA-regulated funds with a MySuper product in 2016). Over the entire super system, the figure represents 74 funds, 32% of assets and 50% of member accounts in 2016 (and is subject to survivor and selection bias).

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6An

nual

net

retu

rns

rela

tive

to B

P2ov

er 1

0 ye

ars

(%)

Retail Industry Corporate Public sector

BP2

BP2 – 0.25%

47funds above benchmark

9.8 million member accounts

$448 billion in assets

67%

68%

20funds

underperform

4.6 million member accounts

$197 billion in assets

31%

30%

11

Underperformance compounds to a substantially lower retirement balance

Members’ outcomes

$50,000full-timestarting salary

Super problem: Underperforming fund = 13 years’ lost pay

$1.2 million

$568,000

Top quartile fund returns

Bottom quartile fund returns

Aged 21

$635,000

or 53% less to spend in

retirement due lower returns

$340avg. insurance premium

RetirementAged 67

12

1.7 million accounts in underperforming default (2008–17)

Members’ outcomes

Data source: SuperRatings and APRA data and financial market index data (various providers)Benchmark: Segment tailored BP2Coverage: The figure represents 66 of 108 MySuper products covering 75% of member accounts and 73% of assets in all MySuper products as at December 2017

(and is subject to survivor and selection bias.)

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-2

-1

0

1

2

3

Annu

al n

et re

turn

s re

lativ

e to

BP2

over

10

year

s (%

)

Retail Industry Corporate Public Sector

BP2

BP2 - 0.25%

10best performingdefault products

6.1 million member accounts

$225 billion in assets

55%

48%

26underperformingdefault products

1.7 million member accounts

$62 billion in assets

15%

13%

13

MySuper can be a lottery for default members

Members’ outcomes

$50,000full-time starting salary

Super problem: Underperforming MySuper = 7.5 years’ lost pay

$1 million

$653,000

Top-10 MySuper return

Underperforming MySuper

Aged 21

$375,000

or 36% less to spend in

retirement due to lower returns

$340avg. insurancepremium

Retirementaged 67

-4

0

4

Perf

orm

ance

rela

tive

to

tailo

red

BP1

ove

r 12

year

s (%

)

Corporate Industry Public Sector Retail

14

Substantial tail of underperforming choice options, 2005–16Based on analysis of 362 accumulation options with an estimated $133 billion in assets

Members’ outcomes

Data source: SuperRatings data and financial market index data (various providers)Benchmark: Option tailored BP1Coverage: 362 accumulation options from APRA-regulated funds with an estimated $133 billion in assets (or 13 per

cent) in the choice segment. (Figure is subject to survivor and selection bias.)

4

0

-4

BP1 - 0.25%

BP1

172 options above

benchmark

$75.5 billion in assets 57%

172underperforming

options

$53.7 billion in assets 40%

Retail Industry Corporate Public sector

15

Other problems

Members’ outcomes

Fees erode balances Over 40,000 products to compare

Zombie insurance you can’t claim on

16

Today’s members — evolved needs

Participation rates by older people are rising steeply Marriage (and children) place less of a brake on participation

There has been an uptick in multiple job holders

Of those who change jobs, more are moving

between industries and occupations

Members’ outcomes

Participation rates by older people are rising steeply

Marriage (and children) place lessof a brake on participation

There has been an uptick in multiple job holders

Of those who change jobs, more are movingbetween industries and occupations

Not changed1990199419982002200620102013201734.85714285714284729.71014492753623434.06279733587060640.58733499139085443.69682236499392845.11941848390446843.14835787089468543.156530193367182Changed industry division1990199419982002200620102013201741.71428571428571535.50724637681159439.99654009168757151.98966902621005954.81854488626497456.86396677050883156.6440166100415454.747758453062545

Share of those who change jobs (%)

PR651979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620176.39030044791488286.35397421511973546.40028258923796585.81374900901474415.43455332313321645.17966440544391565.18672887862869565.07863520780619475.09032197476078535.0614698300521615.45215187729530025.2128425139989685.16632623231122335.4210177009601855.17466858531879395.00711792900709264.83748866820298145.30549935397247375.53381756170634015.57830607090248525.69534074313738976.09878295175727565.69247003237113085.98730431206879036.04598537141318286.30018217530380216.37297582073107366.2489485695762076.63977604134161497.45096300383079777.78337463058022658.72120357768377559.31023676943780399.852206692918812810.55372849978312510.98387258712614511.58808130690831612.01434075432411712.144723884153892

Share of 65+ year olds participating (%)

PRF2534UnMarr19791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016201771.87032706034021672.44163311346257273.06031045117808371.69857718290616371.72802487741708472.09985721693887274.3695681645186474.84759772880124775.13492639597785775.92337702107285275.80074125305910177.66898730844515377.31417742878379377.14182172796660175.74692247472945976.14842464014695676.15685700230602676.65614545542702375.82975964533915276.16710128752134876.76165267349408376.36217542971446977.19713385672666676.36528318260488475.45036040042970275.50868800400536476.65299436819071878.03009483005460877.96141872572128879.55937306208622378.03130987877339978.04604245678588477.90161159694808677.55813885620413878.65260386345835377.45529269735936978.10749699570827478.46548320524185376.748624713330145PRF2534Marr19791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016201746.26188141447874446.58466790905580347.39116445588013747.6147127457050248.74979963180183548.3291922642510750.29055490986456854.01962611579992356.46352682803350857.80399082349686858.8494306187773461.22709522283078361.27314929065230661.03684480985457160.97461100256833861.53762459373690863.31550876822811363.87024334242623563.74879888344872164.77087330179514963.91556942874876864.55819074279763566.56786754023804167.84952978014520468.45071187830582568.06295903811884869.04651480852169269.70023389184866969.53206371964768170.60578548590032771.98130599141715969.86691661006520370.85521923980549371.78561636466618371.76435363026841773.09826894334547473.75221737279902473.36972799190722674.561712319108693

Share of females participating (%)

Proportion of workers with more than one job (August of year)1987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520163.74.35.09999999999999965.2Proportion of workers with more than one job (April to May average in any given year)1987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520164.58273381294964024.50719424460431034.80935251798560964.80935251798560965.11151079136695.48920863309352045.38848920863309025.21223021582733015.18705035971222995.48920863309352045.31294964028777015.61510791366905965.66546762589928045.64028776978416965.81654676258991995.76618705035970975.46402877697841045.6151079136690596Proportion of workers with more than one job (2011 is for 2010-11 etc)1987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520165.99028319977616965.87149924069747535.87081755845157985.92223409006715776.05688485368420796.1229239024921833Proportion of workers with more than one job (May trend in given year)19871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015201666.20000000000000286.27777777777700416.23333333333299325.93333333333299616.0666666666659955.94444444444400235.94444444444400236.15555555555499725.81111111111100345.6777777777769955

Share of workforce

with multiple jobs (%)

17

HealthPackage of improvements

18

New default mechanism: employee choice

Improvements

Inspired by behavioural economics

Best in show shortlist

Elevated MySuper threshold

Members who default do so only once

19

Where will members go?

Improvements

New workforce entrants

474 000members each year

$1 billionin initial contributions

Job turnover and workforce re-entrants(already have a super account)

1.6 millionmembers each year

$16.5 billion in contributions

Voluntary switching

222 000members each year

$2.2 billionin contributions

If no choice, sequential allocation

from shortlist

If no choice, stay with existing fundCan choose any

product, including from shortlist

Centralised online service

List of all MySuper products Choice or SMSF‘Best in show’ shortlist

20

How will members benefit?

Most new entrants best performers

Benefits of competition unlocked

Few new defaults

Benefits spill over to other members

Improvements

21

The policy upside

Members’ outcomes

22

Other elements of the package

Products and information that meet members’ needs

Best practice fund governance

Insurance that works for members

Regulators that are member champions

Improvements

Next steps

Post-draft timeline

Final report

late 2018

Draft report release29 May

Public hearings

20–22 June

Subsdue

13 July

Fundssurvey II27 June

3 post-draftsupplementsmid August

Workshops

late August

Questions?

Attribution (Icons by the Noun project)Water drop by Nick Bluth

Superhero by Juan Pablo Bravo

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