The latest report from the Grattan Institute – an independent think tank dedicated to developing high quality public policy for Australia’s future – is on superannuation. It reconfirms fees are too high, savers are getting lower returns than they should, and further reforms are needed urgently. We concur. You can read DFA analysis on super here. As the balances on super accounts grow ever bigger, the imperative for significant reform builds.
Grattan Institute’s 2014 report, Super Sting, found that Australians are paying far too much for superannuation. We pay about $21 billion a year in fees. That report proposed that government reduce fees by running a tender to select funds to operate the default accounts used by most working Australians.
The Murray Financial System Inquiry came to similar conclusions to those in Super Sting. Its 2014 report finds there is not strong competition based on fees in the superannuation sector. It recommends a “competitive mechanism”, or tender, to select default products, unless a review held by 2020 shows the sector has become much more efficient.
This report analyses superannuation fees and costs in depth. It shows that there are excess costs in both administration and investment management. It evaluates recent policy initiatives to lower fees and recommends further reforms. Our new analysis confirms the conclusions of our previous report. In both default and choice funds, administration fees are too high, and take a toll on net returns. There is little evidence that funds that charge higher fees provide better member services. There are too many accounts, too many funds, and too many of them incur high administrative costs. We pay $4 billion a year above what would be charged by lean funds. Investment fees are also too high. Many funds do not deliver returns that justify their fees. Cutting fees to what high-performing, lean funds charge could save more than $2 billion a year. In sum, superannuation could be run for much less than the $16 billion currently charged by large funds (self-managed super costs another $5 billion).
The superannuation industry argues that its $21 billion costs are not excessive, and will fall over time. It opposes a tender for default accounts based on fees, claiming that it would reduce investment quality and net returns. But 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 about $1 billion. The Future of Financial Advice reforms could yield benefits for choice account holders. But even if regulators pursue these initiatives with zeal, they will leave billions on the table. If remaining excess costs are not removed, they will drain well over 5 per cent – or $40,000 – out of the average default account holder’s fund by retirement. Excess costs in choice superannuation are even larger.
Government must act to close accounts, merge funds and run a tender to select default products. The tender would save account holders a further $1 billion a year, and create a benchmark to force other funds to lift their game. A high performing superannuation system will take the pressure off taxpayers and give Australians greater confidence in their retirement.
