Thursday, April 24, 2014

The Grattan fix. How to stop fees eating up our super

Invisible fees are forcing Australians to pay twice as much as they should to their superannuation fund managers, cutting retirement incomes by 20 per cent according to a new study that recommends the government take control of default super funds and award contracts by tender.

Entitled The $10 billion super sting the Grattan Institute study says Australians pay $20 billion in superannuation fees, or $1100 per account per year - roughly twice as much as is charged in similar OECD countries.

The extra fees cuts retirement lump sums by more than 15 per cent and retirement incomes by more than 20 per cent.

Analysis of Australian Prudential Regulation Authority data shows the funds with the highest fees typically produce the lowest returns, even before the fees are taken out.

But because the fees are are automatically removed from compulsorily accumulated savings and not invoiced they are largely invisible, allowing funds compete on the basis of marketing rather than price.

Most Australians remain in the default fund assigned to them by their employers, allowing fund managers to promote themselves to employers and financial advisors rather than members in the knowledge they won’t face the fees.

Fewer than ­­2 per cent of Australians ‘shop around’ by switching funds for any reason other than changing jobs or being moved into a new fund by their employer.

“Most Australians are very trusting,” said the Institute's productivity growth program director Jim Minifie...

“They are never presented with a bill for what’s taken out of their accounts. They figure that if the government set up the system it must have put in place the checks and balances.”

The Institute’s assessment is backed up by the Treasury which this month described Australia’s super system as one of the world’s least efficient and most expensive. Of the fifteen OECD nations whose pension operating expenses it graphed in a submission to the financial system inquiry, Australia’s were exceeded only by those of Spain, Hungary, Mexico and the Czech Republic.

Dr Minifie said the new SuperStream rules for default funds will do little to change things.

“They prohibits commissions and cut back on administrative costs, but they does nothing to restrain fees,” he said. “The most expensive SuperStream product we found has an annual fee of 2.5 per cent.”

The Institute proposes removing from employers the power to select default funds and giving it instead to a government-appointed body which would conduct a tender for the right to manage all new default accounts for a period of two years. After ascertaining that the tenderers were appropriately qualified the Australian Office of Financial Management would award the tender on the basis of price.

“When Chile did this it got the fee for new accounts down to 0.4 per cent. We could get it lower given the size of our market,” said Dr Minifie.

To spread the benefits the Grattan Institute also suggests an initiative for the customers of other managers called “Make tax time super choice time”.

When completing online returns these taxpayers would be shown the fees charged by their fund also shown those charged by the default fund. They would be invited to switch at the press of a button.

“It’s similar to the Motor Voter in the US where Americans are prompted to sign up to vote when they renew their registration. The idea is to make it as frictionless as possible,” said Dr Minifie.

In The Age and Sydney Morning Herald

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