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.