“Yes, but the people paying the price never get the benefits.” So the fund managers, super fund chiefs, consultants and industry media in the room were prepared for a comeuppance from Bird and Jack Gray. Both are ex-GMO funds managers-turnedacademics, although Gray also works for alternatives placement firm Brookvine, and is therefore still an agent. The activities of super fund staff and service providers ultimately resulted in a big transfer of wealth from members to these “agents” that amounts to 3 per cent each year, the academics claim, in addition to the indirect, but enormous, costs of asset bubble bursts and their impacts on economies. “We’re over-serviced,” Bird said. “Jack and I have an idea of the problems, but no idea of the solution. But one thing we know is that competition rarely works for the benefit of the member.” According to economic theory, competition should drive the prices of goods closer to the cost of production.

But this did not apply to active funds management, Gray said, which remained expensive no matter how many competitors brought products to market. “And why would a manager compete on costs? It’s a symbol of poor quality.” [He qualified this observation by saying that some active management was necessary to create a decent level of price efficiency in markets.] “Fiduciaries have the members’ money. They should say: ‘We don’t want two and 20. We want 5 basis points’. And if the managers don’t like it, where are they going to go? There’s nowhere else to go. But that won’t happen because there is competition [for access to top managers].” Bird said opportunities for agents were greatest when consumers had limited time or expertise: agents provide knowledge and can often perform tasks conveniently, resulting in a premium being paid for their services. And the vast information asymmetry in superannuation – in which members have little idea of what is happening with their money – provided many opportunities for specialist service providers.

He flagged the recent survey by the $10 billion GESB finding that 21 per cent of its members did not know which fund their super was invested in, and 50 per cent did not know their account balance. This situation is hazardous because, in a defined-contribution system, these uninterested members bear all the risk of their retirement incomes. This led both researchers to argue that a defined-benefit system was superior because pension fund executives owned the risks of investment outcomes, and their captive memberships meant they can take a long-term view. Like Bird, Gray was scathing of the free-market thinking championed by Greenspan and others, but used a classical reference to back his view, and quoted economist Adam Smith: “A free market left to its own devices will ineluctably result in collusion and corruption”. Internal teams must also face scrutiny

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