$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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