The Australian superannuation industry sprang to its own defence yesterday in response to the Grattan Institute’s weekend attack on its excessive costs, entitled “The $10 billion Super Sting’’.
The institute said Australians were paying $20bn a year to manage their super, about twice what they should be, because of a number of issues including poor design.
It cited disengaged employers and employees, the complexity of the super system and a lack of price competition, saying that every time a new product or service was introduced, savings were almost entirely lost.
Pauline Vamos, CEO of the Association of Superannuation Funds of Australia, agreed that costs had been too high but said they were coming down, adding there were a number of systemic differences between Australian super and systems overseas, which the Grattan report said had lower costs.
The report said although the overall fees and expenses in APRA-regulated Australian super funds had dropped from 1.38 per cent in 2000 to 1.23 per cent now, “at that pace it will be 50 years before Australia attains even the median expenses achieved today by funded pension systems in OECD countries’’.
It said major government-managed funds in the US, Britain and Sweden had management fees of 0.04, 0.36 and 0.4 per cent, respectively.
A further suggestion in the report, which tallies with a proposal made in 2012 by the Productivity Commission, is to follow the Chilean model and compel managers to go in for a competitive tender process every two years to manage low fee default super funds.
Ms Vamos said it was difficult to compare Australia with other countries because of structural differences that made overseas systems cheaper.
“We’re competing against centralised superannuation schemes run by governments, for instance, and defined benefit schemes that have lower investment costs but which in many cases have proved extremely difficult to fund without government assistance.’’
The Financial Services Council, which represents the retail super industry that attracted most of the Grattan report’s criticism on costs, said there had been a measurable downward trend in fee costs since 2002.
A spokesman said fees had dropped from 1.37 per cent a year in 2002 to 1.12 per cent in 2013, a reduction of 18 per cent, over that period.
Meanwhile, the self-managed superannuation sector, which is our fastest-growing area and now represents about $500bn of the total $1.7 trillion now being managed on behalf of potential and actual retirees, noted that its costs were dropping faster than anyone else’s.
ATO figures say the SMSF sector grew by 37 per cent between 2008 and 2013, compared with industry funds growing by 27 per cent and retail funds growing by 17 per cent over the same period. Andrea Slattery, chief executive of the Self-Managed Superannuation Professionals Association of Australia, said the 1.23 per cent a year quoted by the Grattan Insitutute as being average current Australian super fees did not include the fees paid by SMSFs.
“SMSF fees are falling thanks to improvements in efficiency and lower technology costs,’’ she said, noting that the 1.23 per cent average annual number for management fees quoted by Grattan researcher Jim Minifie did not take SMSFs into consideration.
She said the ATO had calculated in 2012 that SMSF fees had dropped from about 2 per cent in 2002 to 0.56 per cent per fund in 2012.
“Those are fund fees, not member fees, and most funds have two members so in those cases, the fee per member is half the fund fee.
“The Grattan report acknowledged that SMSF fees were assumed to be between 0.85 and 1 per cent per fund per year,’’ she added, indicating the Grattan report’s numbers were significantly above the ATO’s numbers.
Duncan Fairweather, CEO of the SMSF Owners’ Association of Australia, said that the cost issue was one of several factors driving superannuation savers to set up their own fund.
“As management costs eat into investment returns and reduce retirement income, many people are looking to SMSFs as a cheaper alternative to the major funds.
He said research showed that 75 per cent of Australia’s half a million SMSFs are competitive with or cheaper to run than the big managed funds.
And he quoted ATO numbers from 2012, which said that while SMSF funds performance was in line with traditional APRA regulated funds in periods of good sharemarket performance, losses in the bad years were less significant than those suffered by the APRA funds. “In the negative 2008-09 financial year, for instance, SMSFs went backwards by approximately 6.6 per cent while APRA regulated funds averaged a drop of more than 11 per cent,’’ he said.
However, in 2010-11 they were almost lineball, then APRA funds just ahead, and in 2011-12 SMSFs were marginally ahead.