- On May 4, 2017
Target of 1% is nearly in sight
Back in 2003, the then Labor spokesman on retirement savings, Nick Sherry, suggested that superannuation fees be capped at 1% of assets. He realised that a small reduction in fees could have a profound impact on retirement benefits.
This message has been formalised in all superannuation Product Disclosure Statements – ASIC requires funds to note that an additional fee of 1% of assets could reduce a member’s final benefit by up to 20% over 30 years. Mind, members don’t seem to get this message as the prominent warning doesn’t appear to stop people putting money into expensive funds like Spaceship Superannuation.
In 2014, Rice Warner projected that system fees would trend downwards to 1% by 2018 in a commissioned report to the Financial Systems Inquiry¹. The projection allowed for general growth in the system, the transition of Accrued Default Amounts (ADAs) and further consolidation of funds.
This year, we reported in our Superannuation Fees Analysis 2017 that total fees had fallen to 1.03%, which met our earlier expectation for 2016 set out to the FSI.
Table 1 sets out the progress in lowering fees across the industry since 2004.
Table 1. Fees vs Superannuation FUM 2004 – 2016
Table 1 shows that fees are falling steadily in percentage terms, but they are growing in dollars. The increase is a result of growth in member services such as intra-fund advice, life insurance and support for a growing number of retirees with higher service requirements.
We can expect the trend in fees to continue and to fall again this year as the final transfer of ADAs from legacy products will shift another $15 billion of assets from high-fees. Against this, we have the introduction of ASIC’s Regulatory Guide – RG97.
Impact of RG 97
A significant factor acting to dampen the rate of reduction in headline fees is the increasing transparency in disclosure of a wide range of investment-related fees.
Under the enhanced fee disclosure regulations and the shorter PDS regime, issuers of most superannuation products and managed investment products must meet certain requirements for disclosing fees and costs in Product Disclosure Statements (PDSs) and periodic statements.
Regulatory Guide 97 (Disclosing fees and costs in PDSs and periodic statements) addresses areas where previously the disclosure of certain costs was open to interpretation. The aim of RG97 is to ensure that any fees or costs that reduce the ultimate investment return of a member/investor are disclosed. This includes reporting on indirect costs separate to investment management.
This is likely to impose additional complexities for investment products with multiple underlying investment vehicles, which ASIC now terms interposed vehicles. All layers of fees related to the investment structure which reduce the overall investment return will need to be disclosed.
We expect that a result of this will be the increase in measurable fee levels across the industry. However, it is important to distinguish this type of fee increase – a technical increase – from an actual change in fee levels.
For example, the Productivity Commission in its inquiry will need to ensure that it does not interpret this as an actual increase in fee levels for the industry.
No respite in sight
Superannuation fees are fast converging on the headline target of 1% of FUM p.a. Will this be enough? Probably not given the UK has now capped fees on default products at 75 basis points (0.75%).
We consider there is more scope for funds to continue to provide better value for members. As fees approach the 2018 prediction of 1% of assets, we expect that there will be further reductions in fees as the industry continues to consolidate, as duplicate accounts are eliminated and technology and scale give funds the capacity to deliver services to members more efficiently. The sleeper is the growth of expensive Choice funds sold on emotion not value.