Is the Australian super industry expensive?
There has been considerable commentary that the Australian superannuation industry has excessive fees. Inevitably these fees affect the retirement benefits received by Australians. No one can justify excessive fees where the same or similar benefit or product is being provided.
But what is the truth?
The OECD has recently released a report looking at fees charged to members of defined contribution plans. They publish the results for 14 countries based on 2018 data.
And do you know what? Australia has the lowest fee, when expressed as a percentage of total assets. We are less than Korea, Chile and Israel with a fee of less than 0.5 per cent of assets.
But, many other countries with well-developed pension systems, such as the Netherlands, Denmark, Canada, the UK and the USA, are not shown in this data. The reason is that these countries do not have a predominantly defined contribution system. That is, they have hybrid systems, including both defined benefit and defined contribution systems.
So, to obtain a broader international comparison, we can consider additional OECD data that looks at investment expenses and administration costs across the total system. Unfortunately, the data is incomplete and therefore it does not represent a complete picture. The following table shows the total administrative and investment expenses for the 17 OECD countries, where it is available.
as a % of assets
The Australian figure is certainly higher than some countries but is slightly lower than the average across these 17 countries. Nobody would disagree with the call for lower costs and greater efficiency within the system to provide improved benefits to Australian retirees. However, we must also remember that there are certain features within the Australian system that will add to costs, when compared to many other countries. These include:
- A defined contribution scheme is costlier to run than a defined benefit scheme as it involves individual transactions and member accounts, more member communication and often, the provision of investment choice to members. These do not occur with DB schemes.
- Employer sponsored defined benefit schemes have traditionally received in-kind support from the employer which means that many expenses are not shown as costs to the pension scheme.
- The Australian superannuation system is subject to a very complex taxation system affecting contributions, investment income and some benefits. This is in contrast to most pension systems where all the taxation is paid by the individual when the benefits are received. That is, the pension scheme has no interaction with the tax office. Inevitably, the Australian arrangements add costs.
- The Australian system features the compulsory provision of death and disability insurance. Again, many countries do not include insurance as part of their pension savings. While the insurance premiums are normally paid from members’ accounts, the inclusion of insurance adds compliance and benefit design costs as well as broadening the questions that member helplines need to answer.
- An additional key difference is that the Australian industry has a much higher allocation to equities, infrastructure and property than almost every other retirement income system in the world, as shown by recent OECD data.
This last feature increases investment expenses but also provides better investment returns and therefore higher retirement benefits. According to the OECD, Australia has had the highest real rate of return of all OECD countries over the five years to 2018 with a real return of 6.7 per cent per annum beating the Netherlands with 4.9 per cent per annum and Canada with 4.7 per cent annually.
The bottom line is that fees are important but they are only part of the story. The real purpose of the super industry is to provide better retirement outcomes to all members which must take into account the services provided as well as the net investment returns generated. On that score, Australia is doing well.