Australians are paying an extraordinary $20 billion per year in superannuation fees the Commonwealth Treasury says, around three times as much as they need to.
Addressing the Committee for the Economic Development of Australia on Monday the treasury director David Gruen said super fees averaged $726 per year for members with a fund balances of $50,000.
There was little evidence to suggest the fees were value for money. On average high fees were “simply a net drain to investors”.
Australia’s fees are around three times those in the UK, accounting for 1 per cent of gross domestic product.
“A microeconomic reform that permanently reduced costs across the economy by a few tenths of 1 per cent of GDP would be considered a significant and worthwhile reform,” Dr Gruen said.
Significant reductions in fees would have “widespread benefits for society as a whole”.
Although government innovations such as MySuper and Superstream should help drive down costs, more were needed.
Dr Gruen drew attention to a Grattan Institute study that found if fees were merely halved lump sums would eventually be 15 per cent bigger and retirement incomes 20 per cent bigger...
The Grattan Institute recommended removing from employers the power to select default funds and giving it instead to a government-appointed body that would conduct a tender for the right to manage all new default accounts each two years. After ascertaining that the tenderers were appropriately qualified the government would award the tender on the basis of price.
Super products were also deficient in that most didn’t cover longevity risk, Dr Gruen said.
Longevity risk is the risk that a superannuant will outlive their lump sum and be forced on to the pension.
The Australian Research Council Centre of Excellence in Population Ageing Research has pressed the financial system inquiry to consider making lifetime annuities compulsory past the age of 85. On retirement each Australian would have to take out a policy that would pay out for the rest of their lives beyond the age of 85. The policies would be cheap, the Centre says, because of the “mortality bonus”. Many of those taking out the insurance would not live until 85 and many of those who did would not live too many years beyond that.
The Centre recommends allowing earlier access to the lifetime annuities if “serious cognitive decline” sets in earlier.
The financial system inquiry reports in November.
In The Age and Sydney Morning Herald
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