The Government’s announcement before Christmas that it would accept the main Cooper Inquiry recommendations and move towards proposed legislation this year has set the scene for an intensification in lobbying by industry groups. The Government has promised further consultations in the process but these will be less formal than in the inquiry process. Meanwhile, funds managers are preparing themselves for an extended period where lower costs will be a key component of their adapting business models. Putting aside the continuing fee-for-service evolution in the retail advice market, the central plank of the costs issue for super funds and their managers is MySuper. MySuper will force all super funds to have a low-cost default option. Both ASFA and AIST have argued against this, but their arguments have primarily focused on the extra administrative burden for funds, and with little-or-no evidence that it would actually benefit members.

One suspects, too, that the main game for them is to have the SG successfully lifted to 12 per cent, which will be the major political issue. Let’s think about the second part of that: little-or-no evidence that MySuper would actually benefit members. Warren Chant, of fund researcher Chant West, was the first to point out last year that the best-performing super funds of the past 10 years tended to have higher management fees. A few others have chimed in. From the legislative standpoint, this will be a classic case of the devil perhaps being in the detail. How does one properly define “low-cost”? Chant West has long railed about how different funds disclose their fees and charges differently, and standardisation of this would, indeed, be a good thing. Crucially, will a fund need to disclose, somehow, the costs of management fees based on performance?

No-one has a problem with that for historical performance, but it is difficult to see how a generally applied “low-cost” option could adequately estimate what the current or future total costs will be. So, the industry has assumed that MySuper will lead to widespread indexing, because it is clearly “low-cost”, as defined by current and future management fees. Vanguard and the other index providers are obviously looking forward to the new environment. Who cares if you are paying very low management fees if you get very low returns? That is not in the members’ interests. And then there is the whole indexing versus active management debate, which has raged for the past 20 years and will probably do so for the next 20.

Leave a comment