How funds can meet Sherry’s demand for fee reductions

Super funds are being asked to reduce fees at a time when market forces are pushing the costs of running a fund in the other direction. Some funds have been forced to raise administration costs to levels that better reflect the time and effort they’re spending on member education and communication, and more are expected to follow suit.

As the industry searches for ways to cut the average super account fee by around 20 per cent, funds management and commissions on advice have been identified as the areas containing the most ‘fat’. But what part can funds mergers play? And is cheaper necessarily better? KRISTEN PAECH reports.

Superannuation funds are experiencing negative asset growth and negative member growth for the first time since the compulsory superannuation system’s inception. The combination of these two forces is putting pressure on the fixed costs of running a super fund, and in turn pushing up fees at a time when the Government has thrown down the gauntlet to super funds to reduce the average super account fee from 1.25 per cent to 1 per cent or less. Further adding to the conundrum funds face is the fact that members are arguably more engaged with their superannuation than ever before. Ostensibly, this is a positive for the industry, which has been espousing the benefits of super to members for many years, and encouraging greater awareness of the importance of retirement savings.

However at a time when super balances are plunging, increased engagement could act as a double edged sword; with members acutely aware of their negative returns, they are likely to question the fees they are paying for the privilege. According to research from consultancy Chant West, industry funds returned -15 per cent over the 12 months to March 31, 2009, while master trusts returned -21.9 per cent. While super is a long term game, this is little consolation for members approaching retirement with a significantly smaller retirement nest egg, and for those who fail to understand (despite your best efforts) the ups and downs of market cycles.

There has been strong downward pressure on super fees for some time now, with Rice Warner’s Superannuation Fees Report 2008 revealing the average fee has fallen from 1.26 per cent as a percentage of assets under management in 2006 to 1.21 per cent in 2008. (Senator Nick Sherry, Minister for Superannuation and Corporate Law, puts the average fee at around 1.25 per cent.) However a number of industry funds are bucking this trend, raising administration fees by up to 50 basis points. Rice Warner believes that the reinvestment in systems and the broader services provided by some industry funds today is increasing the underlying cost structure of these funds.

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