Thirteen products failed the inaugural test last year, and five failed this year.
The think tank estimates the test has saved members of Australia’s worst superannuation funds at least $100 million in fees.
Australians spend about $30 billion a year on superannuation fees, which is more than they fork out on energy bills.
Adding to the test
The test was meant to extend this year to include “trustee-directed” products, which are multi-sector investment options that have been actively chosen by a fund member, but Labor deferred the move until 2023 to review whether this would have unintended consequences.
The Grattan Institute said the government should push ahead with plans to include trustee-directed products in the test, citing evidence from the Productivity Commission that 36 per cent of these options unperformed their benchmarks.
Recent analysis by APRA found more than 60 per cent of trustee-directed options had underperformed benchmarks. The products also charged higher fees without delivering better financial outcomes to members.
“Some argue that there is little justification for expanding the test to choice products given these members have engaged and made active decisions,” the Grattan Institute wrote.
“However, the outcomes outlined above indicate serious market failure because of the difficulties members have in assessing product quality.”
Grattan warned the government against creating carve-outs and allowing for greater discretion in how the test is applied.
“Funds can always find an excuse for their under-performance or high fees, and regulatory risk-aversion suggests this could lead to the policy being toothless,” Mr Coates and Mr Moloney wrote.
The think tank also suggested extending the test’s timeframe from eight years to 10 years.
Echoing a report released last week by Super Consumers Australia, Mr Coates and Mr Moloney found that members of some top-performing funds had actually increased their fees since the implementation of the test, while members in underperforming funds had enjoyed sharp fee reductions.
Both Grattan and Super Consumers found products that failed the performance test last year had lowered their fees by 20 per cent on average.
Products that came close to failing cut fees by 5.7 per cent, while funds that passed the test by a significant margin and have benefited from inflows of new members have raised fees by an average of 5.7 per cent, Super Consumers found.
The Productivity Commission estimated in 2019 that a 0.5 percentage point difference in fees could cost a typical full-time worker about 12 per cent of their balance – or $100,000 – by the time they reach retirement.
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