Australian super system one of the costliest in OECD

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Australia’s superannuation system has some of the highest operating costs in the OECD and must improve its efficiency.

This is according to the Treasury’s submission to the Financial System Inquiry headed by former Commonwealth Bank CEO David Murray.

The submission uses statistics from the OECD pension markets in focus 2013 research report, which revealed that Australia’s pension funds have comparatively high operating expenses.

Of the 15 OECD countries of which the submission has selected to display statistics, only the Czech Republic, Mexico, Hungary, and Spain out-do Australia in terms of superannuation operating costs.

“The relatively high cost of Australia’s superannuation sector suggests there is scope for the sector to continue to improve its technical efficiency – reducing the use of resources internal to the sector – to place downward pressure on fees,” the submission said.

And despite fees drifting down slightly as a share of mean fund size since 2002, industry, public sector and corporate superannuation funds still have fees between 0.8% to 1.1% of mean fund size.

This means that on a $50,000 balance, the average superannuation fund charged $726 in fees in 2013.

Principal-agent theory could account for the high operating cost of Australia’s superannuation funds, said the submission.

“[This] suggests that the separation of the ownership of funds from those who manage the funds opens up the risk that managers rationally maximise their own interests at the expense,” it said. “These risks rise when there is a potentially complex decision to be made, with possible asymmetric information and disengaged members.”

The Treasury also stated that Australia’s superannuation sector continues to rely on costly manual and paper-based office systems, and the maintenance of legacy systems.

Recent policy reforms - when fully implemented should drive improved efficiency - however it said there is still too heavy a focus on the accumulation phase of the superannuation sector.

“It would be timely for the Financial System Inquiry to review the availability and adequacy of default options for the retirement phase.”

The submission asserted that to improve dynamic efficiency, the superannuation sector also needs to improve its ability to innovate and provide products and services that are valued by consumers.

“The dominant retirement income product offered through Australia’s superannuation sector is currently an account-based pension – essentially a managed investment with a minimum annual drawdown required by regulation,” it said. “In 2013 annuities captured only $2.2 billion of the $70 billion in funds accessible to Australians retiring.

The Treasury was supportive of the SMSF sector, which has been one of the largest growth areas since the 1997 Wallis Inquiry.

“Self-Managed Super Funds support consumer choice and should not be prudentially regulated,” it stated.

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  • Good advice on 8/04/2014 1:39:10 PM

    So industry funds normal fees are about 1% and a member fees of $52 pa {dislcosed} and the fund managers wholesale MER {non-disclosed} and $220 per hour for biased advice... sounds about the same cost if not more expensive for high fund balances to a Wrap account or an SMA?
    But thats right, ISF's dont put any value on advice unless its to stay in the Industry fund and have your money in the default fund.
    Seems expensive to me.

  • Innocent Observer on 8/04/2014 2:44:56 PM

    For god's sake….

    Even the bureaucracy running and monitoring the review don't understand the system, they're editorialising the issue on one hand (re: comments about annuities and SMSFs), then contradicting themselves on the other (i.e, talking down ABPs as "essentially a managed fund").

    If this is the standard of public enquiry, we're officially all screwed….

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