Super Fees Too High – The Grattan Institute

When we discussed the superannuation sector recently, in our series, the Superannuation Story, we highlighted the impact of fees on performance. The Grattan Institute has just published their report “Super Sting – how to stop Australians paying too much for superannuation“.

“Australians pay far too much for superannuation. They pay about $20 billion in fees and expenses in total. Fund customers pay $1300 on average, every year. These payments to the superannuation industry can and should be reduced by at least half, saving Australians at least $10 billion a year. It is the largest single opportunity for micro-economic reform in the economy. High fees hurt account holders. They reduce the amount of superannuation at retirement by more than 20 per cent. High fees mean that on conservative assumptions a 50-year old Australian will have his or her super balance reduced by over $80,000 in fees (in today’s dollars) at retirement. A 30-year old will lose more than $250,000, or over a quarter of the total balance. Under a fairer fee structure, at least half that money could be saved.

High fees also hurt taxpayers, who pay more for pensions when superannuation runs short. High fees are not justified by high returns: Australian funds that charge the highest fees consistently deliver lower returns than others once their fees are taken out. Other countries show that superannuation can be managed at much lower cost. Australian funds charge fees that are three times the median OECD rate, on average. Many countries have superannuation pools much smaller than Australia’s, yet their funds charge customers much less. Costs are too high in Australia because the system assumes that account holders will make choices that will generate pressure for lower fees. Yet this approach has not worked for decades, nor has it worked overseas. Superannuation is inherently opaque, and few people can make or care to make an informed choice”

What is really interesting is that the $20 billion, and 1.2% average charge chimes with the earlier analysis from The Rainmaker Group. By way of comparison, the RBA reported that households in 2012 paid $4.1 billion in banking fees. Rainmaker also highlighted the fact that Retail Funds (these tend to be the worst performers) on average were charging around 2%, whereas Industry Funds (the better performer in our analysis) were charging around 1%. Remember 49% of members, and 44% of funds are in Retail funds!

We did some detailed modelling on the impact of fees on superannuation portfolios and you can read that research and modelling in The Superannuation Story Part 2. The reason for the changes in outcomes is explained by the compounding effect in the fund. Looking at a 2.25% scenario, in the first year, the fund takes 2.25% from the $1,000 contribution. In the second year, it takes another 2.25% from that initial contribution, plus from any additional ones made, and from growth in the fund. And this continues for the life of the investment.

The UK Pension Revolution

Changes announced this week during the budget speech will have  a major impact on the UK pension and annuity industry. In the past, people in the UK approaching retirement were forced to convert their hard-saved pension pots into an annuity, converting at a value which could be impacted by market conditions at the time, and the impact of various fees.

Effective April 2015, those over 55 will have much greater choice as to how they handle their pensions. They may take an annuity if they want, but they could also draw-down a cash amount, and up to 25% of the amount tax free. They can run their pension fund more like a bank account, and draw down what they want when.  Moreover, there will be free face to face advice for pensioners from pension providers to assist them in making the right pension decision. The age at which pensions can be drawn will be increased, but only slowly, moving to age 57 in 2028.

George Osborne, the Chancellor said:

“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any time they want. Let me be clear. No one will have to buy an annuity.”

As we reported, recent UK reports showed that annuities were both costly and inflexible, and that many investors were not aware of other choices.

These moves are likely to shake up the annuity market, potentially reducing demand, and creating more pressure for greater transparency on fees and returns. There have already been reports of people who were on the verge of taking annuities stopping the process and utilising their option to withdraw during their cooling off period,  and those holding annuities asking about changing them.

At the heart of the issue is a debate about whether people with pensions can be trusted not to splash the cash they have saved, and look to the government later for support, or whether individuals should have both choice and responsibility. Or, in other words, whose money is it? Given there were tax concessions on contributions, some still argue that the government should have some say on what happens to the money, but the Chancellor’s shock move should be welcomed as a victory for those who save for their old age.



In Europe, Move Towards Greater Investment Fee Disclosure Revealed

The latest EEC Directive “The Markets in Financial Instruments Directive II” (MiFID II) was passed into law recently and includes proposals for greater disclosure to investors in terms of the range of fees which are charged in the investment industry. It will give consumers a better feel for the true “all in” costs of investing. Today we look at these proposals briefly in the context of MiFID II.

By way of background, the original MiFID directive came into effect in November 2007 and harmonised regulation for investment services across the 31 member states of the European Economic Area (the 28 Member States of the European Union plus Iceland, Norway and Liechtenstein). The main objectives of the Directive are to increase competition and consumer protection in investment services.

The new directive, MiFID II introduces reforms impacting the trading of equities away from public stock markets, competition among derivatives markets and clearing houses, speculation in commodity and commodity derivatives markets, controls on electronic and high-frequency trading and the ability of firms in non-EU countries to offer financial services in the EU.

“MiFID II introduces a market structure framework which closes loopholes and ensures that trading, wherever appropriate, takes place on regulated platforms.

MIFID II increases equity market transparency and for the first time establishes a principle of transparency for non-equity instruments such as bonds and derivatives. Rules have also been established to enhance the effective consolidation and disclosure of trading data. To meet the G20 commitments, MiFID II provides for strengthened supervisory powers and a harmonised position-limits regime for commodity derivatives to improve transparency, support orderly pricing and prevent market abuse.

A new framework will improve conditions for competition in the trading and clearing of financial instruments.

MiFID II will introduce trading controls for algorithmic trading activities which have dramatically increased the speed of trading and can cause systemic risks.

Stronger investor protection is achieved by introducing better organisational requirements, such as client asset protection or product governance, which also strengthen the role of management bodies. The new regime also provides for strengthened conduct rules such as an extended scope for the appropriateness tests and reinforced information to clients. Independent advice is clearly distinguished from non-independent advice and limitations are imposed on the receipt of commissions (inducements).”

According to IFAOnline, “the passing of MiFID II into law has made it compulsory for UK investment firms to disclose the total cost of their investments to their clients. It will require the providers of investment products to present consumers with the total of the costs including adviser cost, product cost, third party cost, transaction cost and everything else that affects the amount returned to investors. The cost will need to be expressed as a single number as well as be disclosed in an ‘understandable format’. Investors will also be able to request an itemised breakdown of all the costs. The changes will need to be implemented by 2016.”

There has been debate between UK pressure groups like True and Fair Campaign and players like The  Investment Management Association (IMA) who represents the UK investment management industry which represents members who manage over £4.5 trillion of assets on behalf of UK and overseas clients. At the heart of the debate is how and what fees should be disclosed. As we highlighted recently the impact of fees on investment performance is crucial.

Total fee transparency is a good thing, even if there are issues about how to translate past data into information which may inform a potential investors decision. We welcome initiatives to help investors make better decisions and raise awareness of the true costs involved.

How transparent are the full range of investment fees in Australia?

Super Fund Balances Now At $1.8 trillion

APRA today released its quarterly superannuation statistics. They report that total estimated assets, which include the assets of self-managed superannuation funds and the balance of life office statutory funds, rose to $1.8 trillion at 31 December 2013.  Read about superannuation in our series of posts, The Superannuation Story.

DecSuper2Self managed superannuation rose by $11 bn, to $543.4, and represents 29% of funds, says APRA who is using data from the ATO.

DecSuper3The annual industry-wide rate of return (ROR) for entities with over $50 million in assets for the year ending 31 December 2013 was 15.1 per cent.

The industry-wide ROR for entities with over $50 million in assets for the December 2013 quarter was 3.7 per cent.

Contributions to funds with at least $50 million in assets over the December 2013 quarter were $22.7 billion. Total contributions for the year ending December 2013 were $91.5 billion, down 0.9 per cent from the previous year ($92.3 billion).

Outward rollovers exceeded inward rollovers by $50 million in the December quarter. There were $13.8 billion in total benefit payments in the December quarter. Total benefit payments for the year ending December 2013 were $53.3 billion, an increase of 7.7 per cent from the previous year ($49.4 billion).


Australian Annuities, The State of Play – Is There A Demand?

Today we start to look at annuities in Australia. This follows on from our look at the UK’s Annuity Mess recently. In Australia the annuity market appears undeveloped, but in the light of regulatory change, rising superannuation balances and self-managed superannuation, we review the likely prospects. Initially we will look at the demand side and outline the results from our recent household surveys, and later we will also look at the current market context and supply issues.

We started by looking at households retirement needs and plans.  Here are the results by age bands across Australia. We won’t cover the significant state differences here. We started by asking them how long they hoped and expected to be in retirement. Most were in the range 25-30 years.

OZAnnuitySur5We then asked how much monthly income, they thought they will need in retirement. (We did not test whether this was sufficient, taking into account rising costs of living and healthcare bills – that’s a story for another day)

OZAnnuitySur2We then asked them how much they thought they would need as a capital sum to invest to deliver the monthly return they wanted, assuming no other sources of income.

OZAnnuitySur4We built an annuity calculator, which enabled us to show households the consequences of their answers. For example, here is the plot of the result for those 60+. The blue area shows the savings balance (RHS), and the yellow line the monthly income (LHS).

OZAnnuity5We built assumptions into the modelling, that income should be inflated by 3% each year (keeping pace with inflation) and that net growth will be at 4%. In this scenario, the investment would only fund 15 years. If we re-run the scenario with 8% growth, the picture improves, to cover 21 years. Both shorter than the expected length of life.

OZAnnuity5aThe worst case answers came from those aged 20-30. Their investment pot would only last about seven years. Householders who participated in our surveys were astonished by how the mathematics worked, but were clearly unable to equate income and savings over time.

OZAnnuity1We conclude that many households have a poor grasp of the economics of retirement. They need to save more than they think they do. This is because current life expectations are extended, and the effects of inflation and returns compound. Education is required.

So would an annuity, which guarantees a payment flow over time be attractive to them?

We asked about their attitudes to annuities. Most said they did not understand them, thought they would get ripped off, and were a poor choice because they wanted to keep control. They also made the point that governments might change the rules on them, and in any case nearly 80% said they would rely on government pensions to see them through.

OZAnnuitySur3We also asked the more direct question, would households consider annuities (once we explained what they were!)

OZAnnuitySur1The bottom line is that not many households are interested at the moment. Younger households might be, but of course later in life. So the demand side of the equation suggests that annuities will not be the product of choice for many anytime soon.

The broader issue of a mismatch between savings and income expectations, and future life expectancy is a bigger and more serious issue, as the government will not be able to afford to extend support to the every growing ranks of baby boomers who have exhausted their superannuation savings. This looks like a significant issue which requires significant changes in education and perhaps policy.

Later we will look at the supply side issues relating to Australian annuities.


The Superannuation Story – Part 5 – Investment Platforms

In previous posts we looked at aspects of superannuation in Australia, from the perspective of investment fund performance, fees, consumer attitudes to super and self-managed super. Today we look at the role of investment platforms, an element in the superannuation value chain which is often overlooked by investors, but recommended by financial advisors as part of a wealth management strategy. An investment platform is an administrative system for investments, offering a range of services and consolidated reporting. It might be used by a financial planner on behalf of their client, or by the investor personally, or both.

In our household survey we asked about investment platforms. Most households thought they were not using a platform, or did not know:

Platform1Which was strange because when we asked about the nature of investments, and who they were investing through, it became clear that many were in fact investing via a platform recommended by their financial planner:

Platform2Actually, over 75% of the platforms are owned and managed by the big banks. Here is data from 2009. As more recent data is hard to track down from public sources, we tweaked the numbers to take account of AMP’s acquisition of AXA, and nab’s of Aviva. Perpetual outsourced to Macquarie, but we show this separately. Market shares have probably changed since then.

Platform4The MLC/nab platform would be used by financial advisors from for example, Apogee, Garvan, Godfrey Pembroke or nab Financial Planning.  Masterkey, Custom, Plum and Navigator are all under the MLC/nab umbrella. The relationship between the platform and advisor is not necessarily transparent.  The problem is that advisors may be influenced by the choice of investments on their platform, so the advice may be less independent than it appears.

Investment platforms might be a master trust, or a wrap.  There are some legal differences between the  structures, but from a consumer perspective, they function in similar ways. 2020DirectInvest compare and contrast wraps and master trusts:

“One of the main ways that a wrap platform will differ from a master trust relates to transferring assets held in the account. With master trusts, the underlying funds (investment options) are specific to that master trust, and if you owned units in a fund through master trust A, you would not be able to transfer these to master trust B. Instead you would have to sell the underlying investments in one product and repurchase them in the other product resulting in a capital gains event, as well as transaction costs.

Wrap accounts revolve around a central cash account, which pays interest and serves as a transitional account, funding buy transactions for shares and managed funds, and receiving the proceeds when shares and managed funds are sold. Depending on the wrap platform, cash accounts can be online bank accounts, cash management trusts or a full featured bank account with a cheque book facility. Investors are usually required to maintain a minimum cash account balance to pay their administration fees (typically $1,000-$5,000), and buy transactions can only be executed if the cash is available in the cash account.

Investors are able to invest in a broad range of managed investments and shares to diversify your investment portfolio. Once an investor has opened a wrap account, it is only necessary to meet the minimum per holding investment amount of the wrap platform – typically $1,000 – irrespective of the high minimum investment amount the investment fund requires from direct investors.”

Wraps may give access to wholesale investments normally not accessible to retail investors, and there are tax benefits relating to fees. However, master trusts or wrap accounts are often used by financial planners because they make it easier for the planner to plans, arrange and monitor their clients’ investments. In fact, sometimes it appears the convenience factor benefits the planner more than the client.

Fees are a potential problem. If an investor made a direct retail investment into a unit trust, they might pay commission in the order of 1.4%. Investing via a wrap at wholesale rates will be lower, say 0.9%. However, the investor now also needs to pay for the platform. These fees vary, somewhere between 0.3% and 1%. So its possible a wrapped investment will be higher. There is another issue also. Some platforms deduct advisor fees automatically, even if an advisor was not involved, so end users trading though their platform still may pay. These fees, which were once regarded as commissions, but now are “asset-based” fees may lift the total fee take by another 1%. In all, fees may dilute performance, as we illustrated in our previous piece.

The industry is also evolving fast. The first platform in Australia appeared in 1987, when the then Sealcorp launched its first master trust. Significant investments have been made since then. For example, the AXA platform was valued at around $60m when AMP acquired the business. At the time nab was blocked from acquiring by the ACCC because of industry concentration concerns. At least $100m was spend in 2013 on platform development and enhancement across the industry. The industry is seeking to build  greater flexibility into the platforms, offering choice of function (and fees) and also a transaction based pricing alternative.

Changes to the financial advice model (some being reworked by the new Abbott government), which includes a no cost/low cost default fund, documentation requirements and other changes are also in train.

The rise of online services, mobile devices and self-service is creating challenges for the traditional players. Some advisors are seeking alternative investment strategies, avoiding the higher cost wraps, by focusing on exchange traded funds, for example.  The arrival of a listed operating model for managed funds under the Australian Securities Exchange’s (ASX’s) Aqua II project may have an important impact on the market. This service will allow fund managers to put their products up and have them listed as ASX products.

The rise of self-managed super funds are creating an opportunity for some platforms to launch SMSF variants. AMP for example has developed a SMSF solution on its platform, with reduced function and lower fees to target this sector.

Industry experts believe the pressure on fees will continue to rise, so it will be interesting to see how they morph. What is clear however, is that investors and potential investors need to be know more about the role and function of the investment platforms. Today there are more than 50 “platfoms”, but actually powered by a small number of the large banks and other players. The industry is more concentrated than it may appear.



The Superannuation Story, part 4

Continuing our series on superannuation, today we look at Self Managed Super Funds (SMSFs). Growth in SMSFs is probably the most significant event in the superannuation industry, leading not unsurprisingly for calls for greater regulation or a clamp-down from many industry players. We will be referring to the recently published 2011-12 SMSF data from the ATO, together with our own survey analysis.

As we reported in our first post on super, the SMSF sector is growing strongly. 37% of asset growth went to SMSFs, well ahead of Industry or Retail funds.

SMSF01The number of funds, members and assets have all grown significantly:

SMSF02SMSFs have longevity, with 46% of funds more than 10 years old, and a median age of fund is 9 years, both according to the ATO report. 90% of funds set-up in the last 10 years still exist.

SMSF03SMSFs tend to be operated by individual trustees (90%), and are most funds have trustees who are older. The age of the average member is 56.5 years old.

SMSF07The average income for those with a SMSF is considerably higher than those who do not operate a SMSF.

SMSF05The average size of SMSFs varies, with the highest representation between $200k and $1m, but also there are a fair number above $2m.

SMSF06Looking at asset allocation, we find that cash and shares are leading classes, followed by non-residential real estate (possibly business premises), unlisted trusts, and residential real estate. I already discussed SMSFs investing in residential real estate here.


According to the ATO data, SMSFs have not performed that well. They calculate returns on assets by looking at net earnings in the year as a percentage of assets. This appears to be a function of investment returns, not fees, as the average audit fee was $566, and only 2% of funds paid more than $2,000. Note data is only available to 2012, as the 2013 returns are not in yet. Generally larger funds fared better than small ones.

SMSF09Turning to the DFA household survey, we asked why those with a SMSF had chosen to establish one. Multiple answers were allowed. The top answer was to gain more control (26%), then to reduce fees, improve returns and to provide greater flexibility.

SMSF10Finally, we also asked about levels of confidence in the investment decisions trustees made. Time required to manage the fund is a clear issue, 28% however are comfortable making their investment decisions, whilst 40% are concerned about whether they have the expertise required.


So putting all this together, it is clear the SMSFs are attracting new funds, especially from older more wealthy households. It is prompted by an expectation of greater control, and some hope of better performance, although the returns on assets are not that impressive as an average. That said, some do much better than others. For many though, the promise is not fulfilled. Whilst many trustees enjoy the investment challenge, others find the management of the fund difficult, and may turn to advisors for assistance. Some also funds have compliance issues, which is not surprising, given the quite complex supervisory framework which is in place.

Overall then, whilst a SMSF may perform well, and the fees may be lower, there is also a significant risk of poor performance. This leads me to the conclusion that if the superannuation industry were to really focus on being more open and transparent and focus on better engagement with the end investor, it is likely they would counter the flows to SMSFs as it is clear that the main reason for opening a SMSF is to gain greater control and transparency of superannuation assets.

The Superannuation Story, part 3

Continuing our series on Superannuation, after looking at performance and fees, today we look at consumer attitudes to Superannuation, based on the DFA household surveys. We collect data on an ongoing basis, and maintain a statistically robust sample. We include a number of specific questions to enable us to assess how connected households are with their super. We roll up the data into a series of scores, and produce an overall rating, currently standing at 25.3 out of a possible score of 100. We cover issues including awareness of the fund, performance of fund, fees, lost super, rollovers and other factors.

Engage6It is a relative score, which we are able to monitor over time, and by a set of consumer segments. These segments were developed using multi-factor analysis (as described here), to take account of elements like age, income, education, occupation, etc. Generally we find that people who are wealthier, older and better educated are more connected than younger people. Also, the score has not changed much over recent years.

We also collected data on the amount of super saved, and which type of fund people were invested in. We found that people in Industry funds tended to maintain smaller balances, whilst the balances in Retail Funds and SMSFs tended to be larger.


We also found that there were a number of common issues which stopped households from being more proactive about their super. These included the fact that rules keep changing, the value in super was small or people were too busy, although the factors relative importance varied by segment.

Engage8Engage7 We also found that people with larger amounts saved felt more in control of their super, compared with smaller savings. However, even those with large balances did not fell totally in control!


Finally, we also asked about their understanding of the various fees and charges which are incurred on the savings pools. We found a low level of understanding, even amongst those with larger balances. Generally the fees are not well understood. Many people felt powerless and they believed there were a number of undisclosed fees which impacts performance. Only a small number had considered switching funds because of the relative fees charged. Those with lower balances were less likely to switch. We found however that people were more likely to switch based on top-line fund performance, which may of course not translate into individual results, thanks to the impact of fees.

Engage5So, what can we conclude from this analysis? Households generally do not feel totally in control of their super. They find the arrangements are complex, the fees are difficult to understand, the rules change and pressure of time means often their investment is a matter of set and forget.

Yet whilst most people were not clear about the fees being charged by their fund, in contrast, we showed that fund performance varies significantly, and the level of fees has a profound impact on performance.

Next time we will be focusing on the rise of SMSFs.



The Superannuation Story, part 2

Yesterday we started our series on Superannuation, and showed that performance varied by type of fund, and across funds in an unpredictable way. Today we look at the industry from a consumer perspective. This is important because the overall returns as reported by APRA do not necessarily translate into the experience of individual superannuation accounts. This may be because of specific options selected in the enrollment process, but is most significantly impacted by the range of fees and charges taken from individual members each year.

The Rainmaker Group, a superannuation research body published data on superannuation fees recently.  To June 2013, the same period as the latest APRA data, they estimate fees were in the order of $18.6 billion, at an average of 1.23% of funds under management. By way of comparison, the RBA reported that households in 2012 paid $4.1 billion in banking fees. Rainmaker also highlighted the fact that Retail Funds (which as we showed yesterday tended to be the worst performers) on average were charging around 2%, whereas Industry Funds (the better performer in our analysis) were charging around 1%. Remember 49% of members, and 44% of funds are in Retail funds!

There are a long list of fees which may be taken from a members account through the life of the fund. ASIC, at its moneysmart site lists more than 10 fees which may be charged, either as a % of the fund, or a fixed amount.

Member fees – General administration fees to cover the cost of keeping your super account.
Management or investment management fees (also known as MER) – Fees for managing your investment which can vary for different investment options.
Contribution fees – Fees to cover the administration expense of receiving and investing your contributions.
Adviser service fees – Fees for personal advice provided about your super and other investments. Your adviser may also receive commissions for certain investments that they recommend to you.
Insurance premiums – The cost of insurance provided through your super fund. Many super funds have a set default insurance option. You can usually choose to lower or increase your level of cover based on your needs.
Establishment fees – an administration charge for setting up your account in the fund.
Withdrawal or termination fees – you may be charged fees when you take money out of your super account, for example when you retire or rollover to a different fund.
Investment switching fees – fees for changing investment options within your super account.
Contribution splitting fees – charged when you split off some of your contributions to your spouse’s super account.
Performance fees -additional fees that may be payable if your investments perform better than market benchmarks.
Issuer fees – fees charged by the investment issuer for overseeing the fund.
Expense recovery fees -out-of-pocket expenses your trustee is entitled to recover from your super account.
Family law split fee –  fees charged to split your super following a separation and family law court order.”

The application of fees has a profound impact on the overall returns from the fund to a member, especially any fees which are applied to the balance of the fund. To illustrate this, DFA has built a set of scenarios to examine the impact of fees.  We will make  a series of assumptions, to assist the analysis. Lets assume a new investor starts to make $1,000 in the first year, aged 25, and increases contributions by 2% in each subsequent year. Lets assume the fund grows at 8% each year and that fees are 1% each year on the balance of the fund. In this scenario, by aged 71, (47 years in the fund) the value would be $425,000. Note, I have ignored tax issues in this analysis, to simplify things. The red line shows the contributions, the yellow line the fees, and the blue bars the net fund value each year.

Super-2013-11Now, lets change the fees charged to 2.5%. In this scenario, the fund will be worth only $253,000, if other parameters stay the same. A massive drop in value.

Super-2013-10We can run a series of scenarios, to illustrate just how volatile the returns are as fees change. With no fees, the portfolio would be worth nearly $600,000. As fees rise, the value falls significantly.


The reason for the changes in outcomes is explained by the compounding effect in the fund. Looking at the 2.25% scenario, in the first year, the fund takes 2.25% from the $1,000 contribution. In the second year, it takes another 2.25% from that initial contribution, plus from any additional ones made, and from growth in the fund. And this continues for the life of the investment.

In fact, there will be a crossover point where any new contributions to the fund will be completely wiped out by fees. We modelled this, for our scenario. With fees at 1.5%, any contributions over 55 years old, will be eaten up in fees.


The larger the fund, the greater the fees. The higher the growth, the greater the fees. The higher the fees, the smaller the overall return. Its simple mathematics. In our next post on this subject, we will look at what the DFA household survey has to say about consumers awareness of their superannuation, and specifically about the fees paid.

But already, we begin to see why self managed superannuation is so attractive, as you can avoid most of the fees, and retain control of the investments, especially as balances grow.

It is not just in Australia that attention is being drawn to the fees on superannuation. In the UK in October 2013, the Government announced it would move towards legally capping fees at 0.75% or 1% and is in the midst of industry consultation as the the correct level, seeking to end what the Pension Minister called “excessive” fees. 


The Superannuation Story, part 1

In our first post for the new year, we begin a multi-part examination of superannuation, using the recently released data from APRA on industry and fund level performance to June 2013, together with DFA’s own research. Superannuation has become big business, with total assets now worth over $1.62 trillion (compare this with the $5 trillion in residential property in Australia). Last year it grew by 15,7%, or $219.8 billion. So it is important to understand the industry, how funds are performing, and to discover if there are important segmented differences. Note that this excludes the self-managed superannuation sector, which is controlled by the ATO, and runs on a different reporting cycle; and very small funds. These funds rose by 15.5% to be worth $506 billion, representing. SMSFs constitute 31% of the total. We will come back to these later, but today we look at the bigger funds.

To start the analysis, lets look at overall returns across the funds. The average performance to June 2013 was 13.7% in the last 12 months. This is the best result since the GFC in 2007, and ahead of the long term average of around 6%. But this average masks important differences, as shown on the chart below, which is a simple plot of returns ranked from lowest, to highest. This is data from nearly 300 funds, so not all the individual funds are labelled, it is the range of performance, from negative performance, through to over 20% which is interesting. It does make a difference as to which funds your money is in!

Super-2013-1We did more detailed analysis of the top 200 funds. Here we show the 1-year data, and the smoother 5-year data by fund, stack ranked from lowest to highest. Again, not all funds are labelled. We see some funds performing much better than others, and some loosing over the 5-year view.

Super-2013-2If we take the top 50 funds by size, and plot the performance, we see that size does not seem to matter when it comes to performance. We have included 10-year performance data, though there are some gaps as not all funds are that old. Performance is quite often not sustained across the three time horizons as some funds appear to find it hard to maintain enduring good performance.


Funds are categorised by APRA into Industry Funds, Retail Funds, Public Sector Funds and Corporate Funds. The largest by value are Retail Funds (44%), then Industry Funds (34%).

Super-2013-4Membership is also spread across the fund types, with 49% in Retail Funds, and 41% in Industry funds.

Super-2013-5The average member balance varies by fund type. The average member in an Industry fund has the lowest balance ($27,173) compared with Retail ($30,161), Corporate ($120,273) and the Public Sector ($63,889).

Super-2013-6The final picture today, is the relative performance by fund type. Retail funds, whether you look at 1 year, 5 years or 10 years, are under performing. Reasons will include the need for the entity to make returns to shareholders, commissions paid to advisors, different fee structures, and innate process inefficiency.

Super-2013-3One last piece of data, there are over 28 million fund members, which means that many people will hold more than one superannuation account. We will come back to the significance of this later.

So, to conclude, we see that Industry funds perform better, that the size of the fund is not correlated to performance in the short or long term, and that there are wider variations in performance across funds, and funds types. All this leads to considerable complexity when individuals are thinking about their superannuation, and later we will use data from our surveys to compare and contrast. But its clear that not all Superannuation Funds are the same, caveat emptor (let the Buyer beware)!