The Grattan Institute has recently
been released a report alleging that Australians pay $10bill too much fees
collectively per annum. The net effect this has to the average Australian is a
cut in retirement income of up to 20 percent.
Overpaying for the seemingly simple function of holding and
investing assets is not news to most of us with a superannuation or pension
fund in Australia. However, the fact that Grattan has come out with a specific
figure of $10bill per annum, I would suggest is quite a revelation as to the
extent of inflated margins being facilitated by the institutions that are
entrusted with our retirement savings.
If anyone has doubts to the basis of these figures, perhaps
you would rather listen the Treasury, who earlier this month described Australia's
superannuation system is one of the world's least efficient and most expensive
(http://www.smh.com.au/business/super-system-expensive-and-inefficient-says-treasury-20140406-366re.html#ixzz30FXZtVGP).
Of the 15 OECD nations whose pension operating expenses it graphs, Australia's
are exceeded only by those of Spain, Hungary, Mexico and the Czech Republic.
It is not the entire Super system that is seemingly
overcharging, as is highlighted in one of the charts extracted from the report which shows that public sector and corporate funds are a paying fees of a third to half what industry and retail funds pay.
It is clearly the Retail sector of
funds that pass to their members the additional costs of sales and distribution
needed to market their products to advisers and consumers. FOFA reforms should
be a catalyst for fees to come down as costs of commissions payed to advisers
is no longer allowed. This of course, does not reflect reality as fund managers
attempt to recover costs in a more competitive market. Treasury also suggests
that the separation of the ownership of funds from those who manage them
''opens up the risk that managers rationally maximise their own interests at
the expense of fund members''.
Unfortunately, the truth is that without an overriding
consumer disruption, retail funds and fund managers have had no incentive to
lower fees. As such, the Grattan report declares “Fees in Australia are high
for one main reason. The system relies on account-holders and employers to put
pressure on fees, but many do not.”
They are referring to the extent of member disengagement
which is another feature of our superannuation system. The vast majority of
retail fund members are still in a retail fund because they have been put in
there by an employer, are disengaged and uninterested in switching funds or
even investment options.
For those who have read my previous papers, you will know
that I have been arguing for years that the industry has too many fee and admin
layers in delivering the basic function of holding and investing assets. In
addition, super fund back office processes are still highly manual, leading to
costs incurred in the deployment of expensive human resources, and the clean up
of errors that human involvement leads to.
Excluded from these charts are
SMSFs, who according to the report, average fees in the range of 0.85-1%. The
fact that this has been the fastest growing segment of the super fund market
for some time we believe reflects the fact that a large proportion of members
with larger balances are attracted to the ability to have increased transparency,
engagement, and lower fees than retail fund options.
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