While the discussion about superannuation in the wake of the Productivity Commission’s default super report has centred on underperformance, another key issues has been overlooked: fees.
Not the fees wrongly charged by retail funds, but the overall level of fees that flow to fund managers who manage our savings, and the administrative fees that get charged along the way.
Way back in the days of the Murray Inquiry, the Reserve Bank identified high fees as a major concern. Fees have been coming down — from around 1.3% of balances a decade ago to 1.1% in 2017 — but the PC reckons we still pay around $30 billion a year in fees. That sum, already larger than the combined profits of the big banks, is growing.
And while underperformance can inflict serious damage on the amount a fund member will be able to retire on, high fees also take a huge chunk. According to the PC, “for example, an increase in fees of just 0.5 percentage points can cost a typical full-time worker about 12% of their balance (or $100,000) by the time they reach retirement.”
It says that “evidence abounds of excessive and unwarranted fees in the super system. Reported fees have trended down but a tail of high fee products remains entrenched, mostly in retail funds.” Moreover
reported fees in Australia are higher than in many other OECD countries. While some of the difference may reflect regulatory or other factors beyond funds’ control, we obtained data on investment costs by asset class, which are much more comparable across countries. The data reveal that Australian super funds pay higher costs for the biggest asset classes (equities and fixed income) compared with their peers in other developed countries.
And despite the decline over the last decade, “annual fees exceed 1.5% of balances for an estimated 4 million member accounts (holding about $275 billion). Almost all of these accounts are in choice products offered by retail funds. While some may be receiving exceptional investment returns or member services, the evidence indicates that funds that charge higher fees tend to deliver lower returns …”
Then there are more iniquitous fees like high exit fees, which undermine competition and choice. And “at least 2% of member accounts are still subject to trailing adviser commissions — despite such commissions being banned since 2013 for new accounts by the Future of Financial Advice laws”.
This $30 billion-plus pot of money will continue to attract fund managers trying to collect as much as they can from the great money whirlwind that is the super industry. And such people are lionised in the financial media. The Financial Review has a “Monday Fundie” column profiling these ticket clippers — though there’s been no “Friday Flops” in the wake of the disaster that 2018 turned out to be for nearly every fund manager.
Indeed, the Fin itself admitted last year was a “year of shame for fund managers” — especially active managers, who claimed to be able to outwit falling markets by picking star performers. But super account holders have unwittingly poured tens of billions into the homes, children, international travel, substance abuse habits and divorce settlements of these rock star fundies. Any super reforms that focus only on underperformance will miss one of the biggest scams in the economy.