More than 1 million Australians who are members of underperforming superannuation funds will soon receive letters urging them to switch where they invest their retirement savings.
A total of 76 MySuper investment options have been graded as either "pass" or "fail" — based on the Australian Prudential Regulation Authority's (APRA) test of comparison of fees versus performance over seven years.
The first annual performance test revealed that $56.2 billion is invested in underperforming products, with these products holding almost 1.1 million accounts.
On Tuesday, 13 big-name funds were shown to have failed the financial watchdog's performance test.
These include AMG MySuper, Commonwealth Bank Group Super, Energy Industries Superannuation Scheme-Pool, Colonial First State FirstChoice Superannuation Trust, Labour Union Co-Operative Retirement Fund, Maritime Super, BT Super's Retirement Wrap, ASGARD Independence Plan Division Two, Australian Catholic Superannuation and Retirement Fund, The Victorian Independent Schools Superannuation Fund, Boc Gases Superannuation Fund, AvSuper Fund and Christian Super.
The top 10 performers by net return (assuming it is a 30 year old with a $50,000 balance) were Local Government Super (now re-branded and known as Active Super, 9.46 per cent return), AustralianSuper (9.44 per cent return), HOSTPLUS Superannuation Fund (9.33 per cent return), AON Master Trust (9.14 per cent return), Goldman Sachs & JBWere Superannuation Fund (9.13 per cent return). Unisuper (9.01 per cent return) Construction and Building Unions Superannuation Fund (9 per cent return), Mine Superannuation Fund (8.86 per cent return), QSuper Lifetime (8.8 per cent return) and Retirement Wrap Westpac Group (8.75 per cent return).
The public naming and shaming of underperformers is part of the federal government's Your Future, Your Super reforms, which came into force on July 1.
The reforms are designed to weed out underperformers from Australia's $3 trillion super system and help lower the high cost of fees.
Australians get slugged $30 billion in fees annually
Excluding insurance premiums, Australians spend more than $30 billion in super fees every year, according to the 2019 Productivity Commission review into superannuation.
This is the first time that the list has been published but if super funds get two consecutive failures, under the federal government's reforms, that will result in a ban on that fund taking any new members until they lift their game.
Superannuation Minister Jane Hume said that eight products have exited the market since the performance test was announced. The regulator has now also written to superannuation funds whose products fail or marginally pass the performance test.
"The Your Future, Your Super reforms are estimated to save Australian workers $17.9 billion over 10 years," she said.
"Through these measures, the Morrison Government is ensuring the superannuation system works harder for all Australians by increasing transparency and accountability of returns generated for members."
APRA executive board member Margaret Cole said 84 per cent of products passed the performance test, "however APRA remains concerned about those members in products that failed".
"Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year's test or start planning to transfer their members to a fund that can deliver better outcomes for them," she said.
Australians could save hundreds of thousands of dollars by switching
Super Consumers Australia director Xavier O'Halloran says members of funds that have failed APRA's performance should check if there is a better fund for their retirement savings.
"Superannuation funds have a commitment to deliver the best financial outcomes for their members and that is what they should be pursuing," he said.
"They [super funds] have had plenty of time to fix this, they have been given plenty of leeway as well in the way the test works. If they've failed, then consumers really have to weigh out what this fund is offering."
Those funds that are deemed to be underperformers are required to send a letter to their members, with 28 days, informing them that the fund has failed APRA's annual test.
The letter will direct members to the online YourSuper comparison tool so that they can compare their fund's performance with others and decide whether to switch.
The letter will suggest that switching into a better-performing fund could potentially result in a fund member having thousands of dollars more in retirement.
It will state: "by earning 1per cent higher net return over a 30-year period, you could be 20 per cent better off at retirement."
According to the Productivity Commission, the gains from switching from one of the worst-performing funds to the best performing funds could boost the average worker's retirement balance by $660,000.
Its review in 2019 found that a 0.5 percentage point difference in fees can cost a typical full-time worker about 12 per cent of their balance – or $100,000 – by the time they retire.
Super funds hit back saying they aren't duds
The performance assessment will cover an eight-year time period that allows funds to target long-term returns and not blame "one bad year" for underperformance.
But super fund industry group the Association of Superannuation Funds of Australia (ASFA) says the regulator's performance tests are flawed because some of those called out were good products that had delivered excellent returns to their members over a long period of time.
ASFA chief executive Martin Fahy said the test was a retrospective assessment and the published test results don't tell members why, and by how much, their fund has failed the test.
That means that a product that falls half of one per cent (0.5 per cent) below the median is labelled as failing.
"The reality is even the funds in this test that are underperforming, are doubling the money of their members every 10 years — they're generating 7 to 7.5 per cent returns," Dr Fahy said.
"They're amazing returns in the current circumstances."
What about ethical investing?
He also criticised the tests for not taking account of funds that might be heavily weighted towards lower-performing stocks but invest in them for ethical reasons.
"ESG — environmental social governance considerations are increasingly an important part of how people want their superannuation invested," he said.
"There are funds out there that are providing sheltered accommodation, affordable housing.
"And that investment, which is a low risk, modest return has been benchmarked against high-street retail properties on Collins Street and Bourke Street, despite the enormous social benefits that we get from having these investments."
He said some funds also did not invest in high-performing stocks on ethical grounds.
"There are funds out there who, for instance, don't invest in Amazon as a stock because of labour practices and labour hire considerations.
"If you haven't held Amazon as a stock in your international equity portfolio, you will have a significantly lower return than the benchmark," he said.
Dr Fahy urged consumers to be cautious before switching funds.
"Please be careful, don't rush into this — take your time," he said.
"The test outright isn't going to tell us how much your fund has failed; the test is just going to be a pass or fail.
"Find out how your fund is performed. Look back at this historical performance. Take into account your insurance needs, ESG considerations and your life stage and the amount of risk you want to take."
Other super reforms aimed to help consumers
The government's super changes also prevent people from being pushed into a new fund every time they start a new job. From now on, they will be stapled to their existing fund.
While Industry Super Australia has warned that many people could be stapled to dud funds, Mr O'Halloran says "stapling is ultimately a good thing for consumers".
"It makes your superannuation much easier to manage," he said.
"There are about 10 million duplicate accounts in the system [which means] people will pay extra fees, extra insurance and ultimately it was eroding people's retirement balances."
He said over time he hoped to see Australians defaulted into better performing funds, but for now the federal government had stopped short of implementing that measure.
Superannuation funds are under increasing pressure to lower fees and boost performance, with industry experts predicting a wave of mergers will follow in the next few years.
"Funds are doing a huge amount to reduce fees — we're seeing greater consolidation in the industry trying to take a benefit the benefits of scale," Dr Fahy said.
APRA's annual test currently only covers MySuper investment options, where the majority of working Australians hold their superannuation.
But, from the middle of next year, the performance test will be expanded to include a wider range of investment options.[Top 10 performers by net returns][Underperformers listed alphabetically][Top 10 performers by net returns over 7 years]