The real story on super competitiveness and fees

28 Jan 2021

By Ian Fryer, General Manager, Chant West

In the recent Federal Budget Your Super, Your Future proposals, Treasury seems to have accepted some of the spurious claims of the anti-superannuation lobby who, with a myopic focus on fees, continue to portray our system as expensive at best and at worst, a fee gouging rip-off.

Treasury points to the extent by which fees have risen since the introduction of MySuper in 2014. They claim that MySuper fees on a $50,000 account balance have increased by 13.6% since June 2014. This claim is a bit disingenuous, because it ignores the industry’s increased costs associated with more regulation and policy change in recent years, as well as the introduction of a new fee disclosure regime, Regulatory Guide 97 (RG 97), in 2017.

Chant West is uniquely qualified to comment on super fund fees because we’ve been researching them since the late 1990s. The table below shows the progression of fees from June 2014 to June 2020, including the fees that applied immediately before and after the introduction of RG97.

It shows that administration fees have remained constant throughout, as a percentage of account balance, even though regulatory requirements have increased markedly over the period. In short, the significant increase in administration expenses due to regulatory change has been covered by the additional fees generated by increasing account balances, without a need to change the average fee structure.

Weighted average MySuper fees for $50k account balance - %

Date

Admin fees

Investment fees

Total fees

June 2014

0.36

0.59

0.95

June 2017

0.36

0.61

0.97

Sept 2017

0.36

0.80

1.16

June 2020

0.36

0.68

1.04

Source: Chant West

Investment fees are a different story. They remained fairly flat for the first three years from June 2014 to June 2017 and then jumped in September 2017 following the introduction of RG 97.

This was not because investment fees and costs had actually risen, but rather because more fees and costs were required to be disclosed in the new regime. Since that one-off increase due to RG97, investment fees (and total fees) have actually fallen by 12 basis points. So when we account for the change in disclosure requirements, investment fees have actually fallen by 12-15% since the introduction of MySuper – the exact opposite of the Treasury claim.

The Treasury paper contends that Australia’s superannuation costs are ‘some of the highest in the OECD’, but again this is not supported by the evidence. The latest OECD data, from 2018, shows Australia’s administration costs as 0.4% of assets which is on par with other leading retirement income systems such as Canada, Denmark and Finland. In any case, given the widely divergent disclosure regimes in different national systems, any comparison of fees across systems must be treated with great caution.

The Treasury paper also quotes the Grattan Institute’s 2014 paper that said Australians were paying three times more than they should be paying for super - a statement that was largely based on the fees charged in the Chilean pension system. In response to this paper, we published an article that showed the only reason Chile appeared lower cost than Australia was because Chilean pension funds only disclosed administration fees and costs, and these were being compared with the total fees and costs of Australian super funds. Indeed, we found that Australian funds charged similar administration fees to the low cost single Chilean default fund and that our non-profit funds charged lower administration fees than the Chilean default. The ‘problem’ identified with Australian super fund fees was ultimately that our funds disclose more of their fees and costs than in other systems, which is actually a good thing!

In terms of investment fees, Australian super funds do generally have higher investment fees and costs than pension funds in most other countries. This is confirmed by the OECD data. But there are three main reasons for our higher investment fees and costs. Namely, that we have higher allocations to growth assets, higher allocations to unlisted assets and greater use of active management. These investment decisions have been fully justified by the results. The long-term performance of our median growth fund has been very strong compared with typical return objectives – a real return of 5.6% per annum since the introduction of compulsory super in 1992 against the typical objective of 3.5% – and far stronger than if the alternative of a lower cost, more defensive, less-diversified, liquid and passive approach had been adopted.

The timetable for the proposed Your Super, Your Future changes is extremely tight, and we’ve no doubt the industry is eager to contribute to the discussion on these important initiatives to ensure the proposed changes achieve their objectives and improve member outcomes. The last thing we want is to exchange one set of problems for a different set of problems.

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