Start by consolidating: The PC says a third of accounts are unwanted multiples, eroding balances by $2.6 billion in unnecessary fees and insurance.
Australians pay $30 billion a year in super fees. As a rule of thumb, paying more than 1 per cent of your balance in fees is reason to take a closer look.
“Evidence abounds of excessive and unwanted fees in the super system,” says the PC in its report, Superannuation: Assessing Efficiency and Competitiveness. “Reported fees have trended down but a tail of high-fee products remains entrenched, mostly in retail funds.”
Ordered by the Coalition government, the report is the culmination of three years’ work led by economist Karen Chester, the PC’s deputy chairman. In December, Treasurer Josh Frydenberg announced Ms Chester’s appointment as deputy chairman of the Australian Securities and Investments Commission.
The PC was asked to closely examine the default super system, which is supposed to act as a safety net for workers who do not select a fund. The PC adopted a working theory that if you can lift the standards of the default system, the rest will follow.
As many as two-thirds of people “default” when they start a new job, which means they are tipped into whichever fund has been chosen by their employer.
About half of accounts are in default products, representing 24 per cent of total system assets or $595 billion.
Apathy and history
While there are more accounts in the default system – a reflection of consumer apathy, demographics and history – there is more money in the choice segment, which includes SMSFs.
Most default money is directed to industry funds, which are in fact the Johnny-come-latelies of the system.
Until the 1980s it was mainly government employees and white-collar professionals who accumulated retirement savings.
But the Australian Council of Trade Unions agitated for expansion of the entitlement to blue-collar workers and Labor introduced compulsory universal super in 1992.
The contributions of most workers were paid into funds aligned with their industry. The boards of these industry funds were – and still are – populated by an equal mix of union and employer representatives. It is this history that inextricably links unions, Labor and industry funds.
It is also helpful to note that only funds with MySuper authorisation from the Australian Prudential Regulation Authority can act as defaults.
MySuper products are meant to be low fee and simple.
When a worker fails to elect a fund, their employer will pay super into a default fund. In most cases the employer is required to choose from a list of eligible defaults written into an award or enterprise agreement, which are negotiated with unions.
The PC’s core recommendation is to dismantle the existing default system and replace it with an expert panel which would choose a “best in show” shortlist of funds.
The super industry hates the idea, insisting it’s anti-competitive and will lead to the emergence of 10 mega funds.
Industry super’s rails run
The lion’s share of default money presently goes to industry funds. This has given them a constant source of revenue from workers who typically leave their money in the same fund for a very long time. In concert with astute investment decision-making, industry funds have turned this advantage into an unassailable lead over all other types of funds. They want to hold on to that advantage as much as their opponents want to remove it.
“The prime motivation of the review of superannuation was to remove default from the award system and Fair Work, and to mortally wound industry funds,” observed one non-partisan super industry executive. “But it’s turned out to be a bit of an own goal like the royal commission.”
That is, the PC found industry funds to have performed better on average than retail funds, although there are duds in both spaces.
The Liberals have been forced to shed whatever allegiances and excuses they made for retail funds. How the Coalition will respond is less clear. Although Mr Frydenberg said “best in show” had merit, his party will be ideologically uncomfortable with picking winners.
Labor’s response to the PC report was swift and brutal: not a good idea, Chris Bowen said.
The PC says about four million accounts holding $275 billion have fees that exceed 1.5 per cent. Almost all of these are in choice products. Some high-cost choice funds could be doing really well, the PC concedes, but most are probably not.
Higher fees, lower returns
“While some may be receiving exceptional investment returns or member services, the evidence indicates that funds that charge higher fees tend to deliver lower returns, once both investment and administration fees have been netted off.”
There are safeguards against high fees being charged on MySuper products but there are no limits in the choice market, including SMSFs.
As the banking royal commission has shown, financial advice fees ought to be treated with caution.
“In 2017, 10 retail funds collected about $1.4 billion of advice fee revenue, charging their members about $341 per account in that year alone,” the PC says.
Maybe members of those funds received great advice. But they may also have been charged fees for advice that wasn’t delivered.
The major banks have, so far, committed to repaying more than $1 billion in response to the “fee for no service” calamity.
Moreover, at least 2 per cent of super accounts are still subject to pernicious trailing fees, the PC says.
“Eleven retail funds identified in data published by the royal commission are estimated to have collected in excess of $400 million in such trailing commissions in 2017 alone.”
Price dispersion is a feature of most markets. But PC reckons that in super the disparities are down to inefficiencies, including the absence of competition, member disengagement and higher fees in legacy products, such as trailing commissions.
The polls suggest Labor will win the next election, leading many to believe the PC’s work will mostly come to naught.
But even if its findings are not directly translated into new policy, they will have come as a wake-up call.
For those entering the workforce today, their period in retirement will be measured by decades not years. Every cent counts and whoever they entrust to look after their super – the biggest asset many will ever own outside a home – needs to be up for the task. If not, go elsewhere.