Gruen says the central questions are the management cost of superannuation to superannuants and members of funds and the problem of longevity risk — people running out of retirement savings before they die:
“It will be increasingly important for the private sector to help manage longevity risk through income stream products such as insurance or pooled products. Most life insurance products do not address longevity risk and the individual immediate annuity market in Australia is small. At issue is the availability of a range of products that balance risk transfer and affordability and the identification of any industry, taxation or regulatory impediments to developing cost effective products that enable individuals to manage longevity risk.”
Gruen also points out the central risk in self-managed super funds (without mentioning them) — their tendency to concentrate on wealth accumulation rather than retirement income, which requires a completely different class of assets, such as bonds, cash or annuities, for example. Very few products or managers offer longevity risk management products to the exclusion of wealth accumulation products — in fact, many investment funds for people in retirement mirror the funds used to manage super while people are at work, and many retirees structure their self-managed funds similarly to those funds they used while working. A sharemarket crunch or a recession in the economy could seriously damage those funds, leaving their holders exposed to longevity risk. As the Reserve Bank has noted, self managed super funds are also increasingly exposed to property and the banks, which is slowly concentrating the riskiness of these funds.
One of the key aspects of the government’s repeal of FOFA is how it will perpetuate the existing incentives for financial planners to exploit their clients’ disengagement by continuing to charge them for advice they don’t ask for and don’t want, by removing the requirement for clients to opt in to those fees. But Gruen flags that the high cost of superannuation fees is a major concern:
“In 2013, Australian superannuation fees ranged from approximately 0.7 per cent to 2.4 per cent of mean fund size, with fees averaging around $726 per year for a member with a balance of $50,000. Although international comparisons are difficult, in 2011, Australia’s average superannuation fees were around three times those in the UK. In aggregate, Australians spend around $20 billion annually, or over 1 per cent of GDP, on superannuation fees. A microeconomic reform that permanently reduced costs across the economy by a few tenths of 1 per cent of GDP would be considered a significant and worthwhile reform. Significant reductions in superannuation fees would have widespread benefits for society as a whole.”
Gruen rejects the idea that high fees are justified by performance:
“A large body of academic research challenges that argument. On average, high fees are simply a net drain to investors. While some investors might gain by selecting successful high-fee funds, the negative-sum nature of the process implies that other investors must lose even more.”
Gruen’s view is backed up by the latest data on fund performance from SuperRatings, which enables a comparison of the performance of different industry, retail, corporate and government funds over the short, medium and long term. Looking purely at “balanced” funds across different sectors, rather than comparing conservative to higher-risk funds, they show high-fee retail, or master trust, funds underperforming compared to industry super funds, and by levels that mean clients will retire with significantly lower funds than if they’d been in an industry fund.
“The impact on fees of recent initiatives is unclear at this stage,” Gruen said. “In particular, the introduction of MySuper and Superstream should make the sector more efficient and push down costs — and there is some evidence that this is occurring. Nevertheless, there needs to be policy consideration of further options to increase competition and drive down costs. Given the stakes, this is an important area for the Financial System Inquiry to examine.”
Whether David Murray — a man with close links to the big banks and a key figure in the Commonwealth Bank’s move into the lucrative wealth management sector — regards it as similarly important will be revealed when we see his interim report in July.