“It is clear…. that the banking system is considerably less competitive than the superannuation system, is systemically more risky and extracts a greater cost from the overall economy.”
This extract from a submission sent by Greg Cooper, managing director of Schroder Investment Management Australia to the Financial System Inquiry, is perhaps the most damning put-down of the inquiry’s interim report, which spent so many inches picking apart superannuations failings, while making fairly modest proposals for the banking sector.
It is rare surfacing of the irritation that many feel and it is has led to an unlikely alliance between industry funds and banks in picking apart the inquiry’s most hurtful assertion that “the operating costs of Australia’s superannuation funds are among the highest in the Organisation for Economic Co-operation and Development (OECD)”.
Numerous submissions have questioned the veracity of the OECD figures. Herbert Smith Freehills’s submission, which points out many of the fees in the OECD figures are for defined benefit (DB) schemes, is the most technical in demolishing this argument. It states: “The true costs of these types of (DB) schemes are systematically underestimated. This is not only because in many cases the employer pays for aspects of the administration of the scheme .… but because the measures never take into account the implicit value of the guarantee.”
Among submissions, there is a general willingness to see superannuation’s cost benchmarked with overseas systems on a more rigorous basis than the OECD figures. AMP says the debate should consider “absolute returns or risk adjusted outcomes to consumers; and it is notable that in this regard Australian has been one of the better performers globally.” While Schroders calls for administration and investment management to be benchmarked separately.
Submissions were also very happy to pick apart the suggestion of moving to the Chilean system of a small limited group of default funds. Under this proposal only funds that had low fees, would be put forward to Australian employers in the default awards scheme.
Westpac’s submission gives the longest criticism of this proposal. It firstly alludes to the unlikelihood of a Coalition government that is avowedly in favour of the private sector, creating a system requiring great state intervention. It says: “Given the almost certain likelihood of there being higher performing funds outside of the selected few, it would also expose the government to criticism for having excluded other providers.”
Westpac goes on to add that the Grattan Institute report Super Sting, which influenced the inquiry, wrongly compared Chilean administration fees with the total of administration and investment fees for MySuper products. It cites analysis carried out by Chant West which shows the Chilean pension system actually has a total cost of 92 basis points, compared with 88 basis points for MySuper (based on a weighted average calculation).
Patience urged on MySuper
Another damning criticism of superannuation in the Financial System Inquiry interim report was that the sector showed “little evidence of fee-based competition in the superannuation sector”. The inquiry notes the MySuper system was designed to fix this, but takes a sceptical view on whether it will ever achieve these aims.
Submissions to the inquiry have uniformly replied that it is far too early to assess the success of MySuper in lowering fees. Westpac suggests a post-implementation review should be delayed until “at least” 2020 – noting the current reforms will not be fully implemented until 2017. Unisuper suggests a review after “two full years” of operation.
Active v passive
A few sentences in the Financial System Inquiry interim report wrote off the value of active management. The report stated broadly that a “large body of academic research” challenges the argument that “high-fee” funds are justified by superior performance. Speaking to Investment Magazine, David Murray also stated that “its pretty clear that the return to alpha [managers] is negative after fees.”
The responses published so far unanimously reject the sweep of this assertion for the superannuation sector. Greg Cooper, managing director of active manager Schroder Investment Management Australia, put it most eloquently by stating: “While it is clear that active management in aggregate at the asset class level is a zero sum game less fees, this is a particularly misleading statement when applied to the professional investment management industry.”
The REST Superannuation submission expands on this point by stating a fund that has the commitment and capacity to implement a successful active asset management approach should be able to beat the average investor.
Elsewhere UniSuper simply stated their returns proved they could justify the fees for active management. Commonwealth Bank cited research from Mercer showing the excess return for the median Australian active equity manager was 1.5 per cent per annum for a 15 year period up to June 2014. National Australia Bank cited JANA research showing its active mandates outperformed benchmark by 0.5 per cent per annum on average, adding that the longer the mandate had been in place, the higher the level of performance.
Westpac simply advised the inquiry not to get in the business of making investment recommendations. Its submission states: “The Inquiry should reaffirm recommendation 97 of the 1997 Wallis Inquiry which stated that “superannuation funds should not be required to invest in a particular asset class…subject to the requirements of the Superannuation Industry (Supervision) Act 1993 that they invest prudently in a properly diversified portfolio.”
The most fruitful work the Financial System Inquiry can pursue now are the wide range of ideas in the submissions on how the government might remove impediments to the creation of retirement income products, this was the only area all submissions agreed needed action.