Published by The Australian, Monday 28 April
Australians are paying far too much for their superannuation. We pay about $20 billion in fees, including the expenses of self-managed funds. Customers of superannuation funds pay an average of $1300 per account- holder every year.
These payments to the superannuation industry can and should be reduced by at least half, potentially saving Australians at least $10 billion a year. Grattan Institute’s new report, Super Sting, shows superannuation fee reform is the largest single opportunity for microeconomic reform in the economy.
Australian funds charge their customers fees on average three times the median OECD rate. Many countries have superannuation pools smaller than Australia’s, yet their funds charge their customers much less. High fees hurt account-holders. Even the average Australian fee of 1.2 per cent reduces the amount of superannuation at retirement more than 15 per cent.
On conservative assumptions, a 50-year-old Australian will have his or her super balance reduced by almost $80,000 in fees at retirement. A 30-year old will lose more than $250,000 or about a quarter of his or her total balance. Under a fairer and more transparent fee structure, at least half that money could be saved.
High fees also hurt taxpayers, who pay more for pensions when superannuation runs short. High fees cannot even be justified by high returns: Australian funds that charge the highest fees consistently deliver lower returns than others once their fees are taken out. Since 2004, our most expensive super funds have delivered a negative return after fees and inflation.
Costs are too high in Australia because the system is poorly designed. It assumes account- holders will choose low-fee funds thereby forcing others to lower their fees. Yet this approach has not worked for decades. Nor has it worked overseas.
Superannuation is inherently opaque, and few people can make — or care to make — an informed choice. Instead, about 70 per cent of Australians pay automatically into default funds chosen by their employer or specified in an award.
The result is that funds do not compete primarily on fees. Instead, they are trapped in a costly game of competing on service levels, marketing and product features. All these push up fees and drive down net returns.
Some argue the complexity of Australia’s superannuation regulations increases the cost of the system. If this is true, it exposes an urgent need to reduce regulation. Yet it cannot be the whole story. The wide variation in the prices charged by funds suggests that often they are choosing to charge higher fees. The average Australian fund is six times bigger than it was in 2004, yet the savings that such growth should deliver have been almost wholly absorbed by rising costs.
Successive government reforms that have sought to expose funds to greater competition have also had little impact on fees. The latest round of reforms, Stronger Super, is still being phased in, but it will not cut fees much. Stronger Super includes MySuper, a more uniform set of products for people who do not actively choose their funds. It makes funds somewhat easier to compare, but does little to put downward pressure on fees.
The other main Stronger Super reform, SuperStream, will reduce some costs, but does nothing to address the costs of marketing, sales or excessive active asset management.
The government needs to absorb lessons from overseas. Most superannuation systems overseas that offer choice are cheaper because governments themselves run a default fund or because they force companies to tender for the right to run the best-priced default fund. Australia can learn from Chile, where default fees have dropped by two-thirds since the government tender started in 2010.
Grattan Institute’s report recommends two complementary reforms. First, government should select a small number of default funds every few years by running a tender based on fees. Unless they opt out, new job-starters would pay into these funds. Second, to push down fees for existing accounts, tax time at the end of June should also be superannuation choice time. A new step in the tax return process should enable taxpayers to compare their current fund with the low-cost winners of the default tender and to switch funds on the spot if they choose.
Compulsory superannuation was introduced in 1992 to ensure workers made adequate provision for their retirement, and to take the pressure off age-pension payments as the Australian population ages.
Excessive fees are eroding these policy goals. Effective reform is long overdue.