Open competition is one way of reducing fees, but is no guarantee of higher returns. Tom Garcia, chief executive of AIST, makes the case for collective ideas on reducing fees that do not impact on returns.
Plenty of people seem to think super fund fees are too high, but like many of the meaty issues confronting Australia’s superannuation industry as it matures, the debate about investment fees is a complex one.
While David Murray’s Financial System Inquiry and the Grattan Institute have put the spotlight on fees, there needs to be a much deeper understanding of the fee conundrum before we can realistically expect to arrive at workable solutions.
Critically, we must not forget that it is net returns, rather than fees, that is the key issue for members to deliver improved retirement incomes.
The FSI Final Report expressed a major concern that fees remain high because the super system as a whole has been unable to realise the full benefits of scale. The final report comments that this has been partly caused through market fragmentation, consumer disengagement, and employers selecting default funds. Importantly, the report recommends to wait until 2020 to review the success of the MySuper reforms.
While AIST agrees that time is needed to assess the impact of MySuper, certain things must occur beforehand so that any assessment can be based on meaningful evidence. These include bringing forward the full transition of retail default members to MySuper, ensuring greater disclosure of fees and costs, assessing the impact of related-party costs on investment and administration fees and costs, and bringing the disclosure and reporting of Choice products into line with MySuper.
Banks are now issuing MySuper products and this makes it easier to compare some fees on a like for like basis. The transparency of MySuper fees will exert downward pressure on fees, and this is already happening.
But this is yet to be replicated in Choice investment options, that is, the non-MySuper products. There is a lot less transparency and meaningful disclosure required for these products, and implementation of Stronger Super reforms designed to bring this about has stalled. Choice product dashboards need to be implemented to sit alongside MySuper product dashboards so that consumers can make informed decisions based on capable investment return, target return, fee and risk information.
The Government opened up this and related disclosure questions for consultation in November 2013 but some 20 months later we are still waiting for their response. Given that the Government says it is serious about putting in place transparent and comparable measures to encourage greater competition to help put downward pressure on fees, we hope they act to redress this deficit very soon.
Arguments that investment fees will be automatically lowered either by opening up the default fund market or taking a heavy stick to the fund management sector are far too simplistic. There are a myriad of factors that contribute to the level of the investment management fees.
With our super fund members and other key stakeholders, AIST is currently exploring ways to reduce fee levels but not at the expense of optimal net returns. We think this is an area where the industry needs to act collaboratively in order to address perceptions of inefficiency and rent seeking.
While some research questions the value of active management, for instance, there is also plenty of evidence supporting the benefit of a diversified portfolio that includes actively managed assets. The strong weighting in unlisted and infrastructure assets is credited with helping not-for-profit super funds outperform. Yet these tend to be high-fee investments.
This is why fee-based comparisons between OECD pension funds (which tend to have a low weighting in alternative investments) and Australian super funds can be misleading.
Similarly, the jury remains out on whether or not performance fees actually deliver better performance.
We hope that APRA is seriously looking at its newly acquired prudential powers to see that the five criteria for using performance-based fees are being properly applied, and the exceptions to these provisions are not being abused.
The most important consideration in promoting increased competition, growth and scale is that it must always benefit members. In a mandatory savings system with restriction on access, it is imperative that members – not fund managers nor any other service providers – are the principal beneficiaries of our rapidly growing super savings pool.
AIST is committed to encouraging a considered, evidence-based debate on fees involving all industry participants. Over the next few months we will be building an agenda and undertaking a range of activities to support it.