Superannuation tender process would help savers
by Jim Minifie
Published by Australian Financial Review, Sunday 19 April
Superannuation policy can be deeply political. It touches almost every worker and, by now, most retirees. The industry’s response to the financial system inquiry chaired by former banker David Murray is divided between industry funds and retail funds (mostly run by the big banks) in ways that partly align to party politics.
But one policy position unites the industry organisations. They all reject Murray’s view the industry is inefficient. And they reject Murray’s proposed solution. Murray advocates for the creation of a “competitive mechanism” – or tender – to allocate default accounts to funds that are most competitive on price. Before that happens, though, he proposes a review of the industry between 2017 and 2020 to assess whether it is still inefficient.
Perhaps the unity of opposites across the industry should cause Treasurer Joe Hockey and Assistant Treasurer Josh Frydenberg to reflect. They should be aware that whatever the industry’s public voices may say about fees, some larger and more efficient funds acknowledge there is a clear opportunity to cut costs.
To help government review its options, Grattan Institute’s new report, Super Savings, sets out the evidence on costs and fees in the industry and assesses the likely benefits of recent government initiatives.
Costs in the industry remain too high. In both the default and choice sectors, high administration fees are eroding returns. There is little evidence funds that charge higher fees provide better services.
With more than 30 million accounts for just 15 million account holders, too many accounts are superfluous. And too many funds: Australia has more than 150 in an industry where the benefits of scale are clear. As a result, we pay $4 billion a year more than what we would pay if all funds were run for the costs charged by lean funds.
Investment fees are also too high. Many funds simply do not perform well enough in the market to justify the extra fees they charge. Cutting fees to what high-performing funds charge could save more than $2 billion a year.
In the $465 billion default sector, serving just under 10 million people, excess administration and investment costs run to billions of dollars. They are even larger in the $900 billion choice sector.
The problem is competition still works poorly in this market. Industrial awards protect some inefficient industry funds. Some retail funds overprice their products and do not try hard enough to move clients to better offers. Many funds spend on services and product lines to build the scale they need to survive as independent entities.
Yet, efficient default super accounts should cost just 0.6 per cent, or even less, of the account holder’s balance per year. They could be run for little more than $100 a year, while investment fees should cost less than 0.5 per cent a year. A decisive shift towards scale and lean service delivery would add $40,000 to the average default account holder’s fund by retirement.
Major corporate funds already offer this cost base. The best public sector funds achieve fees at about the level a tender would produce. Over the long run, they have beaten industry average returns by about 1 per cent a year.
We should not wait for years to run an efficiency review, as Murray recommends. Current initiatives to reduce costs are not enough. The Stronger Super reforms to reduce administration costs and make default products transparent will cut total default fees by just more than $1 billion. The Future of Financial Advice reforms could yield benefits for choice account holders. But even if regulators work these policy levers with zeal, billions of potential savings will be left untouched.
Splitting defaults from awards is unlikely to help much, and could even push up default costs. It would put pressure on some inefficient funds. But funds would incur costs in retail competition, some employers would not be up to the task of selecting appropriate products, and the efficiencies of scale buying would be largely untapped.
Instead, if government did more to force inefficient funds to merge, and to stop the proliferation of accounts when people change jobs, it could save a further half a billion dollars a year.
Above all, government should accelerate the Murray recommendation, and design and run a competitive, price-based tender in default super immediately. Overseas experience shows a government tender can lower costs. It would save account holders a further $1 billion a year over time, and force other funds to lift their game.
Genuine superannuation reform will help to address a fundamental threat to the adequacy of retirement incomes and the long-term sustainability of the pension. Government should not wait. The time to create a fairer and more efficient super system is now