Retirees could be $200,000 worse off due to glaring issue with superannuation system, report finds

Australian retirees could be left more than $200,000 in the lurch because of their underperforming superannuation funds, a new report has found.

The analysis by Super Consumers Australia found retirees have access to far fewer protections in the superannuation system than their younger counterparts.

It also found that almost a third of retirement products (29 per cent) are significant underperformers, producing “much lower returns than their peers”.

Australian retirees could be up to $205,000 worse off if their superannuation fund consistently underperforms. (Max Mason-Hubers/SMH)

And that is hitting older Australians hard in their hip pocket.

“A retiree starting with $250,000 in super in the worst performing options could earn approximately $57,000 to $205,000 less in investment returns across a typical retirement,” the report states.

It added that most retirees who are invested in the underperforming funds have no idea that they’re missing out on potential earnings.

“The superannuation system is meant to provide Australians with a dignified retirement, not leave them in the dark about whether their money is working for them,” Super Consumers Australia deputy chief executive Dr Katrina Ellis said.

Since 2021, the Australian Prudential Regulation Authority (APRA) has evaluated super products, comparing them to industry benchmarks. 

Those that fail the performance test two years in a row are barred from taking on new beneficiaries.

However, the test doesn’t apply to products for retirees.

Super Consumers Australia said its findings showed the need for the government – which is currently reviewing the settings – to expand the performance test.

“It’s unreasonable that a 64-year-old is protected by a performance test, yet the moment they retire and move into an identical product, that safeguard disappears,” Ellis said.

“Retirees deserve the same protections as workers. Without them, people risk losing hundreds of thousands of dollars in retirement income and living standards will suffer…

“The federal government must extend the performance test and comparison tool to ensure retirees can avoid the duds and put their money in better-performing funds. 

“Anything less is leaving retirees exposed.”

The Financial Services Council (FSC), though, said it would not be appropriate for the same test to be applied to retirement products.

The report said most retirees who are invested in the underperforming funds have no idea that they’re missing out on potential earnings. (Louie Douvis/AFR)

”Retirement products combine investment design with other important features that support varied individual retirement needs such as providing flexible access to cash when they need it, providing a sustainable income stream, and managing longevity risk,” FSC chief executive Blake Briggs said.

“There is no one-size-fits-all approach when it comes to retirement.

“A performance test that focuses only on investment returns risks leading people out of products that may be appropriate for their circumstances… any expansion of this test to retirement products would be inappropriate.

“The industry strongly supports transparency for retirement products to assist those approaching retirement. However, Treasury’s work on a retirement product data framework is a more appropriate step towards this.”

In a hotly contested finding, the Super Consumers Australia report pointed the finger at four institutions.

It claimed that the “majority of retirement options with 10 years’ investment history at AMP, Russell Investments, Colonial First State and Rest underperformed compared to peers across all growth categories”.

“This suggests there may be broader problems with the investment approach at these funds, not simply poor investment choices in a single option,” it added.

However, those findings were strenuously denied by AMP, which described them as “narrow analysis”, “irresponsible claims”, and “misleading”.

“The report fails to recognise that AMP has delivered strong relative returns for our retirement members for the past three years, in addition to our super offers achieving returns in excess of 13 per cent for the past three years to September,” a spokesperson said.

“The report also fails to take into proper account the different objectives of retirement products, or consider contemporary lifetime income retirement solutions, which are delivering significantly better outcomes for retirees.”

Colonial First State also slammed the findings as “not accurate”.

“The report has selectively focused on 12 options out of the total CFS FirstChoice menu which has more than 200 investment options,” a spokesperson said.

“In regard to options in the report, APRA assessed the accumulation equivalent of these same retirement investment options and they passed the annual superannuation performance test,” they added.

Rest also rejected any suggestion its options were underperforming.

“Our Rest pension product is recognised for its value and quality by independent ratings agencies using established methodologies,” a spokesperson said.

A spokesperson for Russell Investments, meanwhile, said the figures cisted for the company’s options “are not accurate”.