The founder of Simplicity, a new charity-run, ultra-low-cost retirement savings fund for New Zealanders, has delivered a brutal message to the Australian superannuation industry.
“History teaches us that rent-seeking industries get disrupted…It’s going to happen to super,” Simplicity managing director Sam Stubbs told attendees at the Conference of Major Superannuation Funds 2018, held in Brisbane, March 14-16.
Stubbs says the Australian superannuation industry is “in the final stages of an emperor’s new clothes phase”, and the general public will soon get wise to the fact that they are paying too much.
Simplicity offers a new KiwiSaver option that charges an administration fee of $30 a year and investment fees of 30 basis points. By comparison, Australia’s largest MySuper fund, through AustralianSuper, charges an annual administration fee of $78 and investment fees of 75 basis points.
Of course, an important difference is that AustralianSuper members are invested in a highly diversified and actively managed portfolio, while Simplicity members will be invested in a limited selection of passive instruments.
“Would people be better off in an actively managed non-profit fund? I’m not sure, only time will tell if active is better than passive,” Stubbs said. “But we chose passive management because we knew that costs are the one thing you can control and we would get lower fees.”
Another reason that Simplicity can charge such low fees, in addition to its low-cost investment strategy, is that it uses a subsided, government-owned administrator.
The fund will donate 15 per cent of its fees to New Zealand charities.
Stubbs called it a “weird model” but promised to share the intellectual property behind its structure with anyone who wanted to set up a charitable pension fund.
Stubbs was speaking as part of a panel titled, “Spotlight on the super start-ups”, alongside founders from Zuper Super, GROW Super and Future Super.
The greying Stubbs, who told the audience he was prompted to found non-profit fund Simplicity as a result of a “mid-life crisis” following a 20-year career in investment banking that had left him with “plenty of sins to atone for” was unique among those on the panel in his hard-line views about the importance of slashing fees.
GROW Super co-founder Mathew Keeley said that with total fees of 95 basis points, his fund was “only making 30 bps”, arguing that a focus on pushing fees down further once they were already below 1 per cent was “a race to the bottom”.
Among the benefits he said the fund delivered to members were tools to help them think about their balance in terms of the retirement income it could generate, rather than as a lump sum.
But perhaps his most compelling argument for GROW Super’s value proposition was that its focus on consumer-friendly technology is proving successful in encouraging younger members to make voluntary contributions.
Keeley said the “spare change” function of GROW’s app resulted in members making on average $78 a month worth of non-concessional contributions.
The scepticism many people working at the large, incumbent, funds hold towards super start-ups was encapsulated in one question from the audience: “How do you justify higher fees and lower returns to members just so they can feel cool?”
Zuper co-founder and chief executive Jessica Ellerm hit back that she didn’t think the fund’s fees were high. Zuper is due to launch later this year and has promised a fee “sub 1 per cent” for a product invested wholly in index funds and exchange-traded funds.
“It’s not expensive,” Ellerm said. “Some of the big retail funds are charging 2 per cent.”
GROW, Zuper and Future Super are all for-profit companies with shareholders, although Future is an accredited B Corporation, recognising that it operates for a social purpose alongside profit motive.
Future founder Adam Verwey said he recognised that at 1.79 per cent the fund’s fees were higher than industry averages, but that he was comfortable they represented good value to members.
“It’s part of the nature of being small and running an internal investment team,” he said, adding that the fund’s returns and its ethical credentials justified the fees.
Stubbs predicted that the real disruption to the super industry would not come from any of the small start-ups, rather from one of the technological giants.
“Facebook, Amazon and Google will decide this,” he predicted. “They are all working on it. There will be a new way of charging by AI [artificial intelligence] that doesn’t need human beings.”
READ MORE: All the coverage from CMSF 2018.