The costs associated with the current superannuation system are so blown out, says ex-Grattan Institute chief executive John Daley, that if you tried to pitch it to government as a new venture it wouldn’t even get a look in.

At somewhere between $20 billion and $30 billion per year in running costs, he says, which equates to between one and two per cent of Australia’s GDP, the price of simply managing our retirement savings is “beyond imagining”.

“If I had told you I was going to set up a brand new commonwealth department that was going to manage peoples’ money and give it back to them in retirement, but I wanted 20 to 30 billion dollars per year to run it – bearing in mind that the [Australian] Tax Office costs three or four [billion] – it’d be a pretty short conversation with the Treasurer,’ he says.

Professor Daley, who resigned from Grattan earlier this month after serving as its inaugural chief since 2009, has long advocated for superannuation reform, yet the rhetoric he uses in an Investment Magazine’s Market Narratives podcast this week suggests the ex-chief is looking to be even more direct with his views on policy.

To listen to the full interview with John Daley on the Market Narratives podcast click above or find the episode on Apple Podcasts, Google Podcasts or Spotify.

Daley, who will remain at Grattan as a senior fellow, likens superannuation to a “sharp knife” in that it can be used for good or nefarious intent. The challenge ahead, he believes, is refining the system so that it’s used for the former.

First stop in this endeavour is to dramatically reduce costs inherent in the system.

“There’s no question we are spending too much money doing this and it is a net drag on productivity,” he says, before acknowledging the “legitimate moral outrage” people have around the sector’s ability to capture a large part of the nation’s resources, “just to manage its money”.

The overblown costs are “terrific” working for people in the industry, he notes, but less so for the rest of the country.

The underlying reasons for these costs are varied, he explains, with overly generous CIO and CEO salaries being among them. As identified by podcast host and Conexus Financial director of institutional content Alex Proimos, there are “30 or so” fund CEOs earning over $500,000 per year and several CIOs pocketing over $1 million.

More importantly, Daley reckons, there are simply too many funds and not enough genuine competition between them.

The superannuation industry is asset heavy with tremendous economies of scale, he says. There are around 100 superannuation funds, yet only 30 of those are “material”. As it is, he believes, the industry cannot possibly be competitive when the other 70 providers don’t have the same level of scale.

“If it was seriously competitive the players with scale would have gobbled up the ones without scale,” Daley says.

Wholesale competition

The industry has, of course, gone through a period of organic consolidation over the last few years, with the Media Super and CBUS tie-up the latest – and possibly the most incongruous – in a long list of amalgamations. While this takes the industry in the right direction, Daley reckons more needs to be done about the default system that puts uninformed or apathetic consumers into inefficient superannuation funds.

The Parliamentary Joint Committee famously proposed a ‘best-in-show’ default system in early 2019, with funds vying for a spot in a list of ten top performers based on metrics such as performance and costs. The idea was widely panned, with SuperRatings chair Jeff Bresnahan calling it “unworkable’.

The Grattan Institute actually suggested a list of five, but these days Daley isn’t splitting hairs.

“I’m not dying in a ditch for five, ten or twenty. Either way what you’re effectively talking about is wholesale competition,” he says.

As to the argument that such a default list would be disproportionately unfair to funds that just miss out on the cut, the ex-chief has little sympathy.

“Here’s a dirty secret,” Daley told Proimos. “The system is not supposed to be worried about that kind of fairness. The system is supposed to be primarily focused on the people that are putting their money in it.”

Any errors in a best-in-show methodology would be outweighed by the greater good of the scheme, he reckons. “You might get it wrong between firms ten and eleven but you’ll get it mostly right between firms 11 and 100,” he says.

There is no point lobbying government to cull the worst performing funds, he adds, because “cutting the tail” will never happen. The funds will “lawyer up”, he says, and equivocate over performance definitions. “At most we’ll take few whiskers off,” he says.

A finite best-in-show system would, if well designed, drive the kind of competition the industry needs, he says.

“The problem with the current system is not that it’s not got enough competitors,” Daley adds “It’s got lots of competitors – it’s that they’re not competing hard.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
One comment on “Moral outrage at super system ‘justified’: Daley”
  1. Avatar Christoph Schnelle

    A bit like saying an ecosystem is only efficient if it consists purely of large animals.

    When you only have a few very large funds you have economies of scale but pretty much nothing else. A wasteland. No small fund to try out new things, to provide competition, to provide moral leadership.

    We have seen the danger in the excesses shown by HostPlus, the bad investment decision (buying an advice organisation) by FSS, the headlong rush by most funds into unlisted investments because they have big advantages in how returns can be presented, the choices made by the funds in regards to the insurance they provide etc.

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