$10 billion proposal end to industry/retail divide?

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Industry Super Australia (ISA) is continuing its campaign against bank-owned super funds, with its latest ammunition being a major report that slams the Australian superannuation system for stinging users to the tune of $10 billion too much.

The super fund is just one of a variety of parties with vested interests who have something to say about the in-depth report, which reveals problems within Australia’s super system and puts forward a unique solution.

Super sting: how to stop Australian’s paying too much for superannuation has just been released by the Grattan Institute and reveals that excessively high fees are seriously damaging individual retirement balances and hurting taxpayers.

Reducing fees by at least half will save account holders $10 billion a year, it said.

Its author, productivity growth program director Jim Minifie, told Wealth Professional the report comes in neutral in respect to the industry and retail fund battle, and the real purpose is to raise awareness about Australia’s high superannuation fee costs and spur change.

In fact, its proposed solutions would not favour either party in particular and would instead shift the basis of competition to be much more heavily focused on fees.

“It’s the largest single opportunity for micro-economic reform in the Australian economy and it is long overdue,” Minifie said.

On conservative assumptions a 50-year old Australian today will have their super balance reduced by almost $80,000 in fees at retirement, the report revealed. A 30-year old is set to lose more than $250,000 or about a quarter of the overall balance.

The 57-page report also analyses the superannuation system in other countries and how they affect the fee structure.

It found that on average Australian’s pay fees of 1.2% on their account balances – more than three times the median OECD rate.

“Every system has a history and ours has a particular one,” Minifie said. “The short answer is that we obligate people to save using a product that they don’t understand, and as a result there’s very little active price pressure from the customer, and the funds have responded by setting the fees high.”

If you look around the world, systems that have low fees are much more centralised, have less choice, or run on a non-profit basis, he said.

In particular, the report highlights the high functionality and lower cost of Chile’s pensions system, whereby government tenders for the right to manage the default accounts of their individuals as well as their money.

Chile’s default fund is awarded in a biennial tender to the firm that offers to manage funds for the lowest fees, the report said, and tenderers must offer five defined asset allocation options, each with the same fee.

The account fee for the default fund is about 0.2% a year – less than a quarter of the Australian average default fee.

Minifie said the Australian system wrongly assumes that choice in the market will drive enough account holders to choose low-price funds, forcing others to lower their fees.

“But this approach has not worked in Australia or anywhere in the world,” he said. “Superannuation is inherently opaque and most people do not make an informed choice, instead paying into a default fund chosen by their employer.”

The Grattan Institute propose two reforms that they say will save Australian superannuation $10 billion a year in excessive fees.

The first is to create a new low-price default fund for fresh job starters. This will cut fees for account holders who are disengaged, and propel the government to introduce wholesale price pressure on superannuation products.

The government should hold a fee-based tender to select one or more non-government funds to be the default fund, the report said.

Secondly, the tax return process should allow taxpayer to match their fund against the performance of the new fund, and switch on the spot if they desire. This will make it easier for Australians to select a better superannuation product, according to the report.
Among others, the ISA has been quick to point to evidence within the report that indicates retail funds have significantly higher fees than other funds.
It published a press release stating that the Grattan Institute report is proof that there are huge risks in abandoning the current selection process of default funds; which has been criticised by many financial planning organisations for being too costly, anticompetitive, and favouring industry funds.
“The report shines a light on how excessive costs among bank owned super funds drags the system down,” said the ISA. “The blame for excessive costs in Australia’s superannuation system can be laid squarely at the feet of bank owned retail superannuation products.”
But Minifie said his assessment is that the Fair Work Commission process won’t really make any difference to fees, and won’t affect enterprise bargaining processes.
He said that while it’s true that industry funds on average have lower fees, the industry/retail battle is not the focus or point of the report.

“Our proposal comes in as neutral in respect to that battle. It’s not clear who would be advantaged [under a tender system]. It would be big efficient front ends and big efficient investment sides – probably both could pull that together,” he said. “We felt well, this [battle] has been going on forever and it will keep going on forever, but the art of good policy is to find single changes that are practical and make a big difference.”


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  • Innocent Observer on 1/05/2014 11:02:15 AM

    Ok, I've just read the report and there are a few observations worth making.

    Firstly, some of the principles (and empirical evidence quoted) is spot on.

    However there are also several practical considerations that are completely skipped over -- and not overly complex stuff; things that would take perhaps a paragraph or two to explain (you know, the kind of stuff that if we didn't explain would see us as poster boys-and-girls for the ISA's next "dodgy scumbag adviser" campaign, and would see an early morning raid by the ASIC lynch-mob).

    Instead, by over-simplifying or avoiding the real issues, the credibility of this report is significantly watered down. And then there's stuff that if feels that the author doesn't really understand, and certainly doesn't fully acknowledge such as the relative complexity of our superannuation and tax system. Oh, and forgetting that if a country's government pays some or all of a fee, that money's got to come from somewhere….

    Most importantly, though, the report suffers a severe case of hindsight bias and short termism. Looking at the period covered, the quantitative inputs are close to meaningless. As a result asset characteristics are under or over emphasised, and (as is often the case) volatility and risk are confused as being the same thing.

    I'm not saying that the whole report should be bashed, but the author didn't help his own credibility (though probably helped publicity) by reporting on the matter as he did.

    But then again, these reports are designed to entrench opinion: those who already believe this clap-trap will strengthen their convictions (without actually reading the report, mind you). To them I wish the best of luck, and hope that they won't be too much of a burden on me when my taxes are paying their pension because they were too afraid to get advice.

  • James Smith on 1/05/2014 8:08:35 AM

    Oscar Wylde defined a cynic as someone who sees the price of everything and the value in nothing. Sadly the cynics are dominating the debate which not only limits the outcomes for the community but also limits opportunities for job creation and economic growth to support our aging population and the less advantaged. Short sited and misinformed.

  • Mossman on 30/04/2014 4:07:58 PM

    Alleycat, I suspect your client would have been happier making NO income, in order to not have to pay tax. :/

    My uncle was obsessed with fees. He would quite happily sacrifice $5,000 in additional earnings from a better performing fund, if that fund charged an extra $100 in fees compared to a cheaper, worse performing fund. He was far too concerned with 'being ripped off' that performance was irrelevant to him.

    So he never sought financial advice, and has sat in a cheap industry fund all his working life, and has paid bucket loads more tax due to never undertaking TTR strategies, never moving additional capital into his super or pension for the friendly tax environment, gets less Centrelink Age Pension etc... but at least he saved a few thousand dollars on fees and didn't get ripped off! (as he likes to boast) :S

  • alleycat on 30/04/2014 10:05:11 AM

    @James Smith
    It doesn't matter even when think you're serving the clients interests and you do your best for them
    In 1994 I put $24,000 as part of a client's portfolio into a well known equity fund.
    Up until 2000, that fund averaged 12.0% p.a. with distributions being paid out on a 6 monthly basis to her cash account to spend.
    In 2001 I decided to track her distributions to 2009. In that period she received $28,000 in distributions which she spent. Her fund value at that point was just over $26,000. Now if some would care to take into account the events that effective share markets between 2001- 2009, they weren't exactly all "blue sky". I calculated that her year on year return exceeded 10.0% p.a.(not taking into account imputation credits) The average cash rate was just over 5.5% before tax and inflation.
    In 2007 she received over $50,000 on her portfolio to spend (not all in equities by a long stretch), averaged 15.7% on the portfolio and had to pay 10.0% tax on the $50,000 and she was unhappy that she had to pay any tax.
    Needless to say " I said good bye"... find another financial planner

  • Let's Get Real on 30/04/2014 12:10:44 AM

    Did the Grattan Institute assess the cost impacts on final retirement balances which would include the CGT impact of constantly switching super funds to "save on fees"? It seems to only ever be half the stories with some of these crowds.....if that

  • James Smith on 29/04/2014 11:01:59 AM

    Agreed Alleycat. The fee budgets of many super funds would have missed these opportunities. Also to reap the rewards of these funds investors would need to have persevered during severe market cycles. Behavioural Finance studies into past investor behaviour show that individuals are there own worst enemies in dealing with market volatility. The value of advice - keeping clients on track with their strategies. Perhaps the Grattan Institute could review the wealth destruction of individual behaviour in their next study. And how about indexed funds be used as a benchmark to compare the fees of the default funds against. If cost is the only issue, indexed funds will win hands down. What then is the relevance of the industry funds and my super accounts ?

  • alleycat on 29/04/2014 10:32:30 AM

    The over-simplification of this report does not take into account the "value of advice" or the fact that not all superannuation funds are the same.
    It's like comparing apples with oranges.
    For instance, the default fund for one ISA is "Core" which is set up for a "Balanced" investor. What happens if the person who was disengaged in choosing this fund in the first place is actually a "Conservative" investor ?
    The fees may be less in the Industry Fund than say a Wholesale Fund but the issue here is not necessarily about the fees but more about how the client receives reasonable outcomes for their retirement.
    Can you imagine ISA putting any of their clients into say a Magellan Global, Perpetual Industrial Share Fund, Bennelong EX 20 Aust Shares or a Platinum International/ Asia Fund.

    I would suggest not likely but each of these funds by way of example have medium to long term performance that would eat alive any industry fund including the most aggressive of their portfolios

  • James Smith on 29/04/2014 10:22:36 AM

    Did the Grattan Institute analyse how superannuation fees are calculated ? We have a floored system where many industry funds are non unitised with fees deducted for admin etc separately. The challenge with models that compare fees is the assumptions made which are often flawed. Disclosure of super fees should be uniform (eg unitised pricing ) and regulated to prevent vested interests distorting the numbers and/or using flawed comparisons to push their product.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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