Fees versus Value
- On 16/08/2018
Superannuation fees have long been a contentious issue for our industry.
In 2003, the then Labor Shadow Minister for Retirement Incomes and Savings, the Honourable Nick Sherry, suggested that superannuation fees, then averaging 1.37% of assets, be capped at 1% of assets bringing the discussion to the forefront. At the time this seemed an ambitious target.
Fast forward fifteen years and the latest annual Rice Warner Superannuation Fees report¹ shows that average fees have finally dropped to 1% of assets or $22.4 billion for the year ended 30 June 2017 (Graph 1). This is a significant milestone and demonstrates that the superannuation system has become more efficient as it has matured.
There are still inefficiencies in unneeded multiple accounts, subscale funds that struggle to deliver value, and several underperforming products. However, overall, the industry is continuing to improve its offer squeezing in more member services and benefits while reducing its headline fee rates. An example of this is the recent announcement by Australia’s largest fund, AustralianSuper, that its MySuper investment fee reduced from 0.75% to 0.66% p.a.
Despite the progress, the industry is hampered by incorrect and misleading commentary on the level of fees for superannuation. Some recent examples include:
- The Productivity Commission’s has recently stated “Australians pay over $30 billion a year in fees (excluding insurance premiums).”² However, the real figure is $8 billion below this.
- Publisher Rainmaker has been quoted claiming fees of $30 billion as well (probably through including insurance premiums)³.
- The Grattan Institute has made public statements4 reaffirming the $30 billion myth and stating that the average Australian spends more on superannuation than electricity.
Hysterical headlines emphasising the total fees of ‘tens of billions of dollars’ are misleading as are comparisons to the electricity market. We need to change the focus to value not cost. Do people know that the Australian superannuation system has provided much higher real returns (5.1% above CPI after tax and fees) over the last 25 years than any other country? – and members get intra-fund advice, cheap life insurance and choice of investment strategies too.
The media headlines are sensationalistic but it is less exciting to report that there has been a 27% fee reduction over 15 years or that the whole industry is run at a cost less than the combined annual profits of the four big banks.
Graph 1. Superannuation fees5
An unhealthy focus on fees rather than value can lead to poorer outcomes for consumers. Take for example a recent start up in the choice superannuation market which advertised that its fees were below the industry average and which suggests members may be funding industry ‘fat cats’. Though its fees are at the industry average (which is better than most start-ups), the fund invests the money in low-cost index funds, an investment vehicle that an efficient superannuation fund such as Hostplus can provide for 0.06% p.a.
Many changes from this year’s Budget and the Productivity Commission’s likely recommendations will make the industry more efficient. This will happen as the under-performing and expensive funds are weeded out. We have yet to realise the benefits of scale and improvement in technology which will give even better value for money for members.
¹ Rice Warner, Superannuation Fees Analysis 2018. Available by subscription.
² Productivity Commission Superannuation: Assessing Efficiency and Competitiveness, 2018, Draft report pg. 131
³ Rainmaker Consulting, Superannuation Industry Revenue, May 2017
4 Daley, J. & Coates, B. “We need to switch off these superannuation rorts”, published in The Australian, 26 July 2018, https://www.theaustralian.com.au/opinion/we-need-to-switch-off-these-superannuation-rorts/news-story/66166e4f42ceff4d5810396b1324772e
5 Rice Warner, Superannuation Fees Analysis 2018. Available by subscription.