A report from the Grattan Institute calling for a tender process to select default funds has been greeted positively by Industry Super Australia (ISA) and by the Financial Services Council (FSC), but for different reasons.

The FSC saw it as vindication of its claims against the Fair Work Commission (FWC) selection process for default awards, which it sees as limiting the reach of low cost retail funds.

Sally Loane, chief executive of the FSC, said: “Both Grattan and David Murray’s Financial System Inquiry have proposed opening the default super system to competition – we encourage the Parliament to support reform in this sector.”

David Whiteley, chief executive of ISA, saw the report differently.

He welcomed its suggestion of a merit based process to select default funds and said this should be done on the principle of returns. He pointed out that the Fair Work Commission had already proposed such a system, until it was halted in the Federal Court by an FSC objection.

Whitely also noted the shift in the thinking on unlisted assets from the Grattan Institute. While the Super Sting report favoured low cost passive investing, the Super Savings report on page 47 sees the merit in unlisted investments and that default funds should include them – ideally funds that already invest in this asset class.

But not all are convinced by the arguments put forward by the report.

The problem with tenders is there are three or four winners who become very big funds, then at the end of five years the process has to run again, potentially with one of these funds losing and a new one coming, necessitating members to move and shift, Michael Rice, chief executive of Rice Warner, said.

“It sounds good as a one off, but once you’ve done it you then end up with even more dislocation than you have at the moment,” Rice said. “A lot of what they say are problems are solvable in a different ways. There are too many funds, there are too many accounts, so the industry really does need some rationalisation and some fragmentation, but they are replacing a bad system with one that’s not much better.”

He added that $21 billion in fees needs to be put in perspective citing that the big four banks together make $35 billion a year in profits or the $41 billion the Government will spend on the Age Pension in 2036, based on current projections.

Rice Warner has checked some of Grattan’s numbers for the Super Savings report and said they were “not too bad”, as the actuary company had been critical of the Super Sting report.

Super Savings is a companion to Grattan’s 2014 report, Super Sting, and supports the findings that the system could be run for significantly less than the current $21 billion Australians pay each year in fees and expenses – large funds are collectively charging $16 billion and self-managed funds another $5 billion. The report has called on the government to run a tender of default funds claiming this would save $1 billion a year in fees, or $40,000 for each superannuation account holder at retirement.

The report says there is little evidence that funds that charge higher fees provide better member services and adds that current initiatives from the industry to reduce costs are not enough.

It claims that if default funds were charged what high-performing lean funds charge, account holders could get the same performance, but pay $4 billion a year less in administration and $2 billion less in investment management.

“Government must act to close accounts, merge funds and run a tender to select default products,” Jim Minifie, Grattan Institute Productivity Growth program director, said. “The tender would save account holders a further $1 billion a year, and create a benchmark to force other funds to lift their game.”

Minifie added that Stronger Super reforms could cut default fees by about $1 billion, but that if the remaining excess costs are not removed they will drain well over 5 per cent – or $40,000 – out of the average default account holder’s fund by retirement. The excess costs in choice superannuation are “even larger” though the Future of Financial Advice reforms could yield some benefits.

The report supports the Financial System Inquiry’s recommendation for a “competitive mechanism” and urges the government to accelerate this process as Australians have already waited “too long”.

“These are numbers big enough to make the difference between sausages and steak in retirement,” Minifie said.

 

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