Grattan, Kohler attack super gouge

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Over the weekend, the Grattan Institute released a new report into super gouging. From the AFR:

Superannuation funds should be required to submit to a regular official auction to become the nation’s “default” super provider under a plan to cut Australia’s high super costs. The recommendation is one of two by the Grattan Institute in a report released overnight, which calls for Australians to be shaken out of their apathy over inflated super costs by being formally forced every year at tax time to consider changing funds. Research released Sunday by the institute says Australians are paying around 50 per cent – or $10 billion – more than they should be in fees.

Here’s the chart:

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Grattan suggests that the government should conduct fee-based tenders to choose which non-government funds should be default funds and that the government make tax return time an explicit process of fee comparison and choice of super funds. These tenders are based upon who offers the cheapest fees:

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The most effective way to get superannuation fees down while retaining private provision is to make firms compete for the right to manage default funds. Variants of this model are used in Chile, New Zealand, and Mexico. In Chile, government tenders for the right to manage the default accounts of individuals as well as their money. Chile’s default fund is awarded in a biennial tender to the firm that offers to manage funds for the lowest fees. Tenderers must offer five defined asset allocation options, each set at the same fee. The winning fund receives all new default accounts opened in the following two years. The account fee for the default fund is equivalent to about 0.2 per cent a year – less than one quarter of the Australian average default fee.

Alan Kohler criticies the report this morning arguing instead that:

“Fees in Australia are high for one main reason. The system relies on account-holders and employers to put pressure on fees, but many do not.” …According to the Grattan report, the average super fee last year was $1300, or $108.33 a month.

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…If Australians got a monthly bill for $108.33 that they had to sit down and pay by cheque or Bpay, they would soon start taking notice of the service they were getting and putting pressure on the provider to get the fees down..far better would be banning the funds from taking their fees out of the accounts, and forcing them to send out bills instead.

It may help but has not worked terribly well in either the power or telco sectors given the over-concentration in both. Greater transparency and a basic fee tender looks like a winning combination to me.

Full report here.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.