Compared to the perceived MySuper model, default industry superannuation funds are too complex and, therefore, expensive. But they have satisfied the most important challenge presented by the recommendation, writes SIMON MUMME. The core aim of MySuper is clear: superannuation fund trustees should focus on maximising long-term investment returns and justify the costs required to deliver them. But the way MySuper has been categorised – as a simple, low-cost default fund – is a “very misleading description,” according to Warren Chant, director of ratings house Chant West. It has caused more expensive return-drivers, such as active investment strategies and alternative asset classes, to be sidelined with financial planner commissions as ‘bells and whistles’ that should be foregone in default superannuation design. In the influential Super System Review, Jeremy Cooper stated that default fund members could accrue $40,000 in fee savings over the course of their working lives if their providers used less expensive investment strategies, eradicated commissions and reduced the number of investment options available to members.

“When we hear the words ‘bells and whistles’, what we really hear is: ‘too much investment choice, we don’t want commissions, and we want these MySuper products to be comparable’,” Chant told the Fiduciary Investors Symposium, a conference run by Conexus Financial, publisher of Investment Magazine, in Manly last month. On the surface, the proposed cost savings looked appealing, he said. “Why wouldn’t you want a simple, low-cost product that didn’t have bells and whistles, no commissions and a $40,000 benefit?” Treasury estimates that over 37 years, the residual fee savings gained by cutting exposure to active strategies would accrue to $33,000 in the average super fund member’s account. But Chant West analysis finds that, in the same period, the impact of a 0.3 per cent lower return each year from passive management would create a $32,000 loss, and 0.5 per cent less would deliver a $53,000 loss. “That $40,000 benefit is absolute nonsense. It’s more likely to be a $50,000 loss.”

The Cooper Review signalled a preference for lower costs by commissioning Deloitte to model the adequate operating costs of a $20 billion fund. The consultancy found that such a vehicle required a 0.36 per cent spend on investment costs and 0.30 per cent on administration, totalling 0.66 per cent. This is far cheaper than the industry average. Chant showed an analysis of the fees charged by the largest 30 industry funds – which run “complex, relatively highcost investment options” – on a $25,000 balance. Assuming these portfolios were actively managed and held a 10 per cent allocation to alternatives, members paid fees of between 1–1.5 per cent. But when Chant assessed the funds’ investment performance, he found they satisfied the longterm returns prized by MySuper. Allocations to alternative assets – such as infrastructure, private equity and hedge fund strategies – played key roles in delivering this outcome, even if they maxed Cooper’s cost budget.

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