While many of the recommendations, such as SuperStream – aimed at modernising the backoffice operations of super funds by adopting electronic commerce and compulsorily using tax file numbers – have been generally well accepted by the industry, some aspects of the review will attract extensive debate. Underpinning the recommendations, which were reached after 13 months of industry research and consultation, is the concept of MySuper: a universal default fund with low fees and limited investment options. But many local consultants believe it over-emphasises cost savings at the expense of innovation and value. Worldwide partner at Mercer, David Knox, says MySuper, which might spur a push for all funds to gain scale and have one investment strategy, is being driven by costs rather than value for members and could produce the unintended consequence of ruling out from alternative investments.
Australian super funds were early adopters of private equity and infrastructure, and continue to support these unlisted investment strategies. “With the MySuper route it advocates a single investment strategy, so then investment options become less popular. Investments (such as) infrastructure and private equity may appear to be more expensive – and I emphasise appear,” Knox says. Similarly, Warren Chant from research house Chant West, says MySuper is a mistake and unnecessarily distracts funds from the real goal of developing efficient, high-quality superannuation products. He says retail funds are likely to interpret the push for ‘simple, low-cost product’ as support for passively managed investments with little or no exposure to alternative assets, which will be cheaper than industry funds which generally favour active management and significant investment in alternative assets.
“But there is ample evidence that, over the long-term, industry funds, with their higher investment costs, have provided better returns than retail funds – net of investment fees and tax,” Chant says. “Not only that, they have also produced better net returns than funds which are 100 per cent passively managed. Cooper does not understand this. He quotes US research showing that higher-priced retail funds do not on average deliver higher returns. We do not argue with this US data, but the Australian experience is different. In Australia, higher-priced industry fund investment options have more than justified their higher costs. MySuper will only put pressure on industry funds to lower their costs by dismantling the very elements that have led to their superior longterm performance. Let’s hope they resist this.” Similarly, Towers Watson questions whether the strong focus on cost reduction will discourage funds from investing in highercost investment vehicles that can provide members with significant diversification benefits.