13 July 2018
Adam Creighton – Economics Editor
For two decades the superannuation industry has extracted more than $700 billion in fees above what typical super funds charge overseas, equivalent to almost 40 per cent of the nation’s annual GDP, according to new analysis.
Super funds charged fees more than four times higher than similar funds in Canada, Europe and the US, with workers thousands of dollars worse off each year, the study says.
“If members’ contributions between 1997 and 2016 had been invested in a passively managed fund with typical expenses and allocations, they would now be valued between $700bn and $800bn larger,” University of NSW economist Nicholas Morris said. The total pool of superannuation assets, $2.6 trillion in March, would now be more than $3.3 trillion.
Declaring superannuation a “policy failure”, Professor Morris, a joint founder of the highly regarded Institute of Fiscal Studies in London, said high fees meant the retirement system in Australia had delivered income replacement rates that were barely above 40 per cent, compared with an average of 63 per cent across OECD countries.
“Twenty-six years after compulsory superannuation began, you have a system that delivers an income replacement rate for retirees that is among the lowest in the OECD, forces fund members to bear risks they are ill-equipped to manage, and provides significantly poorer returns on investment than could reasonably have been expected,” Professor Morris told The Australian.
The Keating government made superannuation compulsory in 1992. The compulsory rate is scheduled to rise from 9.5 to 12 per cent by 2025.
Professor Morris’s analysis follows a recent Productivity Commission report that revealed system-wide annual fees had surpassed $30bn a year. The landmark report found one in three super accounts was unintentional, draining almost $3bn a year in fees, and millions of workers were set to retire with $600,000 less in savings because of chronic underperformance.
The study avoided international comparisons, but Professor Morris’s analysis of 256 large super funds around the world — comparing actual performance against benchmarks based on underlying investment allocations from 2004 to 2012 — showed Canadian and US funds, on average about 10 times as big as Australian funds, performed far better than local options.
Domestically, “retail” fund fees were twice as high as non-profit “industry” fund fees. The best performing funds were closed, in-house corporate and public-sector funds, managed for staff, including those for the Commonwealth and Reserve banks, Goldman Sachs and Telstra. The worst-performing fund was the Australian Christian Superannuation Fund.
“The greater the degree of separation between managers and beneficiaries, the worse the performance seems to be, partly because less attention is given to how the members fare, partly because there are more layers of cost,” Professor Morris said.
Funds open to the public exhibited costs three times those of closed funds.
“There are multiple regulators with insufficient responsibility for controlling overcharging and other rent-seeking behaviour, with no-one taking responsibility for the efficiency of the industry as a whole,” he added.
The Turnbull government in May announced it would cap management fees at 3 per cent of members’ balances, and make life-insurance policies “opt-in” only for members under 25.
The analysis also showed international funds that used low-cost, passive investment strategies beat the relevant benchmark by 0.28 per cent a year, while those that managed funds “actively” underperformed by 2.92 per cent.
Australian funds are beefing up their teams of active fund managers. Sun Super, which oversees $55bn, is reportedly set to lift the number of investment manager bankers from 29 to 50 by 2021.
After six years studying the super industry, Professor Morris launched a book in April warning other countries against adopting systems of compulsory saving — Management and Regulation of Pension Schemes: Australia — A Cautionary Tale.
He said the poor Australian performance also arose from poor choice of assets, driven by tax rules; unnecessary “churn” of assets, generating fees; and erosion of legal requirements for directors to act in members’ best interests.