AUSTRALIA'S $80 billion Future Fund has spent almost $1 billion in fees in the past year, which is more than double what was previously disclosed.
A decision by the Future Fund to become more transparent with its reporting revealed more than $500 million of additional costs, and shone a spotlight on Australia's $1.4 trillion superannuation industry. It also raises questions about the true size of the fees the sector pays, amid calls for more transparency in relation to costs, remuneration, conflicts of interest and financial statements.
Future Fund managing director Mark Burgess, who took the top job last year, said the decision to report the additional costs was in line with its policy to be more open and transparent. "These other costs are more difficult to find and you have to make assumptions about performance fees, but we felt we should dig further to provide more depth," he said.
Mr Burgess said the relatively higher fees paid by the Future Fund was a reflection of the fund's diversification strategy. But he said keeping fees down was critical.
In Australia most super funds don't fully report their investment management costs on the basis that some fees paid to fund managers are indirect and, therefore, too difficult to extract. This means the indirect cost ratio can understate the true cost. (An indirect cost ratio is the industry standard to express investment management costs.)
Industry super fund Cbus has taken a leading role on transparency and in its latest annual report said: "Unlike many funds, Cbus incorporates all underlying trust and 'fund of fund' investment management fees into its total investment cost."
Cbus said it did this because it believed members should be informed of the total investment management cost of their superannuation.
The Future Fund is the latest fund to embrace transparency, reporting for the first time that its indirect cost ratio excludes investment costs in its "non-consolidated investment vehicles or where the fund is part of a co-mingled group of funds".
If says if these costs were included it would add another 68 basis points to its indirect cost ratio, almost doubling it to 1.11 per cent. This is equivalent to $524 million in additional fees.
This puts its total investment fees at close to $1 billion if transactional costs and management fees are included. Cbus' indirect cost ratio was 73 basis points in its high growth fund and 47 basis points in its conservative fund.
A spokesman for the Future Fund said the fund generated an annualised five-year return of 4.4 per cent per annum, compared with negative 0.2 per cent for the median balanced super fund.
In the 2011-12 financial year it generated a return of 2.1 per cent, which is below its long-term return target of at least consumer price index (CPI) plus 4.5 to 5.5 per cent per annum.
In the annual report it said cost control would be an ongoing focus and that the board had introduced "additional oversight processes" and would work closely with industry bodies to ensure the "investment management fee practices better reflect alignment between the investor and the investment manager".
The Future Fund was set up in 2006 by the former treasurer Peter Costello to create a vehicle for unfunded super liabilities in the Commonwealth public service.
Frequently Asked Questions about this Article…
What did the Future Fund reveal about its investment fees?
The Future Fund (an $80 billion sovereign wealth vehicle) disclosed it spent almost $1 billion in fees in the past year. After deciding to be more transparent, it revealed more than $500 million of additional costs that had not been previously disclosed — bringing total investment fees close to $1 billion when transactional costs and management fees are included.
Why did the Future Fund decide to report the extra costs now?
Future Fund managing director Mark Burgess said the fund chose to dig deeper and report additional costs to be more open and transparent. He noted some fees are harder to find and require assumptions (for example, about performance fees), but the fund wanted to provide more depth in its reporting.
What is an indirect cost ratio and how did the Future Fund’s reporting change affect it?
The indirect cost ratio is the industry standard measure used to express investment management costs. The Future Fund said it previously excluded costs in non‑consolidated investment vehicles or co‑mingled groups; if those costs were included they would add another 68 basis points to its indirect cost ratio — almost doubling it to about 1.11%.
How do the Future Fund’s fees compare with other funds like Cbus?
The article notes the Future Fund’s fees are relatively higher partly because of its diversification strategy. By contrast, industry super fund Cbus reports its indirect cost ratio at 73 basis points for its high growth option and 47 basis points for its conservative option, and Cbus explicitly incorporates all underlying trust and fund‑of‑fund fees into its total investment cost.
What does this disclosure mean for everyday superannuation investors?
The Future Fund’s disclosure highlights that many super funds don’t fully report indirect investment costs, so the indirect cost ratio can understate the true cost. For everyday investors it reinforces calls for more transparency around fees, remuneration, conflicts of interest and financial statements across Australia’s $1.4 trillion superannuation sector.
How has the Future Fund performed relative to typical super funds?
A Future Fund spokesman said the fund delivered an annualised five‑year return of 4.4% per annum, compared with a negative 0.2% per annum for the median balanced super fund. In the 2011–12 financial year the Future Fund returned 2.1%, which was below its long‑term target of CPI plus 4.5–5.5% per annum.
What steps is the Future Fund taking to control and oversee investment fees?
The Future Fund’s annual report says cost control will be an ongoing focus. The board has introduced additional oversight processes and will work with industry bodies to ensure investment management fee practices better reflect alignment between the investor and the investment manager.
What should I check when I compare super funds’ fee disclosures?
Look beyond headline fee figures and check whether a fund incorporates underlying trust and fund‑of‑fund fees into its total investment cost (as Cbus does). Be aware of whether indirect costs, transactional costs and performance fees are reported or excluded, because those omissions can understate the true cost of investing in a superannuation option.
Call 1300 880 160
Start a chat
Schedule a call
