Superannuation fees in Australia are scrambling retirement nest eggs, according to University of NSW economist Nicholas Morris.
Declaring superannuation a ‘policy failure’, Professor Morris said super fees in Australia were more than four times higher than similar funds in Canada, Europe and the US. Over two decades, the industry had gouged an extra $700 billion in fees compared with charges at typical super funds overseas, he said.
However, the Association of Superannuation Funds of Australia (ASFA) says such statements are misleading and potentially damaging.
Professor Morris, a joint founder of the Institute of Fiscal Studies in London, analysed 256 super funds around the world and reviewed the Federal Government’s Productivity Commission draft report into the superannuation industry that revealed annual fees had passed $30 billion a year.
“If members’ contributions between 1997 and 2016 had been invested in a passively managed fund with typical expenses and allocations, they would now be valued between $700 billion and $800 billion larger,” Professor Morris told The Australian. “The total pool of superannuation assets, $2.6 trillion in March, would now be more than $3.3 trillion.
“Twenty-six years after compulsory superannuation began, you have a system that delivers an income replacement rate for retirees that is among the lowest in the OECD, forces fund members to bear risks they are ill-equipped to manage, and provides significantly poorer returns on investment than could reasonably have been expected.”
Professor Morris said that in Australia, the best-performing funds were closed, in-house corporate and public-sector funds that were managed for staff.
“The greater the degree of separation between managers and beneficiaries, the worse the performance seems to be,” he said, “partly because less attention is given to how the members fare, partly because there are more layers of cost.”
Fees for funds that are open to the public were three times higher than those for closed funds.
Professor Morris was highly critical of regulators who take “insufficient responsibility for controlling overcharging and other rent-seeking behaviour”. No one takes responsibility for the efficiency of the industry as a whole, he said.
The ASFA said that far from lagging behind the rest of the world, Australian funds had delivered superior returns, and that over the last five years, returns had averaged 10.4 per cent after fees, higher than the 8.2 per cent rate of inflation.
“It is important to compare like with like when making fee comparisons. For example, investing in government bonds may come with a lower fee, but Australian super funds achieve high returns from unlisted infrastructure, property and other investments and these cannot be obtained by investing in indexed funds,” ASFA said in a statement.
“Furthermore, fees in Australia have reduced over the past five years following the introduction of MySuper and other reforms.
“The Australian superannuation system is one of the very best in the world and while there is always room for improvement, it is important to get the facts straight, because not doing so simply reduces confidence in the system, disengages the community and leads to worse outcomes in retirement.”
From 1 July 2019, the Federal Government will cap fees for super members with balances of $6000 or less at three per cent.
Do you check the fees associated with your super or pension accounts? Do you compare them with other funds? Do you compare them with funds overseas?