Australians are paying up to three times more than they should for superannuation, argues this report.
Australians pay far too much for superannuation. They pay about $20 billion in fees and expenses in total. Fund customers pay $1300 on average, every year. These payments to the superannuation industry can and should be reduced by at least half, saving Australians at least $10 billion a year. It is the largest single opportunity for micro-economic reform in the economy.
High fees hurt account holders. They reduce the amount of superannuation at retirement by more than 20 per cent. High fees mean that on conservative assumptions a 50-year old Australian will have his or her super balance reduced by over $80,000 in fees (in today’s dollars) at retirement. A 30-year old will lose more than $250,000, or over a quarter of the total balance. Under a fairer fee structure, at least half that money could be saved.
High fees also hurt taxpayers, who pay more for pensions when superannuation runs short. High fees are not justified by high returns: Australian funds that charge the highest fees consistently deliver lower returns than others once their fees are taken out.
Other countries show that superannuation can be managed at much lower cost. Australian funds charge fees that are three times the median OECD rate, on average. Many countries have superannuation pools much smaller than Australia’s, yet their funds charge customers much less.
Costs are too high in Australia because the system assumes that account holders will make choices that will generate pressure for lower fees. Yet this approach has not worked for decades, nor has it worked overseas. Superannuation is inherently opaque, and few people can make or care to make an informed choice.
Some argue that the complexity of Australia’s superannuation regulations increases the cost of the system. If this is true, it exposes an urgent need to reduce regulation. Yet the wide variation in the fees charged by funds suggests that superannuation businesses are choosing to charge higher fees.
Recent reforms will not help much. MySuper — a more uniform set of products for people who do not actively choose their funds — makes funds somewhat easier to compare, but does little to increase the pressure on fees. SuperStream, a package of administrative reforms, will reduce some costs, but does nothing to address the costs of marketing, sales or asset management.
Overseas, the best superannuation systems establish tenders for the right to run the best-priced default fund — one that most employees, who don’t manage their own accounts, automatically pay into. The Australian system should follow suit. Government should select a small number of default funds every few years with a tender based on fees. Unless they opt out, all new job starters would pay into these funds.
Second, to push down fees for existing accounts, tax time — from the end of June — should also be superannuation choice time. A new step in the tax return process should enable taxpayers to compare their current fund with the low-cost winners of the default tender.
These reforms may reduce the revenues of superannuation funds. More importantly, they will reduce the unpleasant sting of high fees on the superannuation balances of Australians.