Can’t We Do Better With Our Super System?

The Grattan Institute’s Jim Minifie of has some clear pointers on how to halve Australians’ super fees. Given the commentary that government expenditure in the superannuation arena predominantly benefits the well-off and is therefore ‘sacrocanct’, could we see a $10 billion saving and politics by-passed through clear-headed microeconomic super fee reform?

High Fees Reduce Amount At Retirement

The average Australian fee of 1.2 per cent reduces the amount of superannuation at retirement more than 15 per cent. High fees hurt account-holders and also taxpayers, who pay more for pensions when superannuation runs short.

The Grattan Report says that on conservative assumptions:

“A 50-year-old Australian will have his or her super balance reduced by almost $80,000 in fees at ­retirement. A 30-year old will lose more than $250,000 or about a quarter of his or her total balance. Under a fairer and more transparent fee structure, at least half that money could be saved.”

What We Pay

According to the research:

• Australians pay about $20 billion in fees, including the expenses of self-managed funds
• Customers of superannuation funds pay an average of $1300 per account-holder every year
• Australian funds charge their customers fees on average three times the median OECD rate

AND

“High fees cannot even be justified by high returns: Australian funds that charge the highest fees consistently deliver lower returns than others once their fees are taken out. Since 2004, our most expensive super funds have delivered a negative return after fees and inflation.

Costs are too high in Australia because the system is poorly ­designed. It assumes account-holders will choose low-fee funds thereby forcing others to lower their fees. Yet this approach has not worked for ­decades. Nor has it worked ­overseas.”

Lessons From Overseas

“Most superannuation systems overseas that offer choice are cheaper because governments themselves run a default fund or ­because they force companies to tender for the right to run the best-priced default fund. Australia can learn from Chile, where default fees have dropped by two-thirds since the government tender started in 2010.”

Two Recommended Reforms

FIRST, government should select a small number of default funds every few years by running a tender based on fees. Unless they opt out, new job-starters would pay into these funds.

SECOND, to push down fees for existing accounts, tax time at the end of June should also be superannuation choice time. A new step in the tax return process should enable taxpayers to compare their current fund with the low-cost winners of the default tender and to switch funds on the spot if they choose.

With the 1992 goal of compulsory superannuation being to ensure workers made adequate provision for their retirement, and to take the pressure off age-­pension payments as the Australian population ages, The Grattan Institute concludes that:

“Excessive fees are eroding these policy goals. Effective ­reform is long overdue.”

Over to our decisionmakers