Super fee gouge rolls on

By Leith van Onselen

There are arguably few better businesses to be in than Australian superannuation.

Thanks to compulsory contributions, set at 9.5% of employee wages currently, along with a largely fixed cost structure, the superannuation industry continues to rake it in, earning fat fees on everyone’s retirement nest egg.

Last night, ABC’s The Business aired an interesting segment revealing that Australians paid super funds $20 billion in fees last year, up 8% and equating to around $2,000 per member.

It wasn’t all bad news, however, with average management fees declining, courtesy of reforms under the My Super and Freedom of Financial Advice (FoFA) schemes. Although fee reporting is opaque, which makes changing funds more difficult.

The Draft report of the Murray Financial System Inquiry was particularly scathing of Australia’s superannuation fees, noting that we have amongst the most expensive system in the world:

The operating costs of Australia’s superannuation funds are among the highest in the Organisation for Economic Co-operation and Development (OECD), and the Super System Review concluded superannuation fees were “too high”. The Grattan Institute estimates fees have consumed more than a quarter of returns since 2004. Although the Inquiry notes the difficulties of comparing costs or fees across funds, especially internationally, the evidence suggests there is scope to reduce costs and improve after-fee returns (see Chart 4.1).

ScreenHunter_3313 Jul. 15 13.06

The Draft Report also found that fees had not fallen in line with what could have been expected given the substantial increase in scale, which will dramatically reduce consumer’s retirement nest eggs:

ScreenHunter_3314 Jul. 15 13.08

Fees can significantly affect retirement incomes. The Super System Review found that reducing fees by around 40 per cent — or 38 basis points — for the average member would increase their superannuation balance at retirement by approximately $40,000 (or 7 per cent)…

As I have noted previously, in a well functioning and competitive market, average fees would have fallen as the value of funds under management has risen. This is because superannuation is largely a fixed cost business, and it should not cost ten times more to manage $1 billion of funds under management than it does to manage $100 million.

However, despite the huge explosion of superannuation balances since the superannuation guarantee (compulsory super) was introduced in 1993, average fees have barely changed, as clearly illustrated above.

All of which suggests that Australia’s superannuation funds are not just inefficient, but are gouging members – helped along of course by our system of compulsory contributions, which has provided the industry with a “sheltered workshop” within which to operate.

While there has been some recent progress superannuation on fees, they need to fall much further to bring Australia’s retirement system in line with global best practice. And until this occurs, along with reforms to superannuation concessions to make the system more progressive, the Government should definitely not raise the superannuation guarantee to 12%, as this would only further feather the nest of the superannuation industry.

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Leith van Onselen
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  1. Chart 4.1 shows Australia’s expense ratio at 0.8% pa.

    World’s best practice seems to be about 0.2%pa to 0.3%pa

    A saving 0.55%pa on $2 trillion would amount to $11 billion per annum!

    And once again . . . it might be noted that superannuation failed to achieve its ostensible objective: increasing savings for retirement.

    Look here for LvO’s November 2013 article on Australia’s savings rates.

    After the introduction of voluntary superannuation in the late 1980s, and compulsory superannuation from 1991 onward, there is no evidence at all of its changing the steady downward slope of household savings.

    And look here (9th chart: household debt to GDP) to see how household debt began to skyrocket in 1991 . . . just as compulsory superannuation was introduced. (There is a smaller upward blip a couple of years earlier, coincidentally or otherwise just when voluntary superannuation was introduced.)

    It wasn’t until the horror of the GFC that savings rates began to rise sharply. Nothing to do with superannuation.

    Attempts to increase savings through compulsion do not appear to t worked in the past. There is no reason to believe they will work in the future.

    • Yes. While there are some that seem to think that super is such a marvellously wonderful saving vehicle, most Australians don’t share that view. If voting with one’s feet is any indication.

    • Are there countries you are aware of where the vast majority of citizens will provide for their own retirement without some form of compulsory savings scheme ? I appreciate the Howard/Costello changes to super have turned it into an absolute rort for the wealthy, but what alternative are you actually proposing ?

      Look at where those household savings rates really start to decline if you go back to the 60s. Well before the introduction of super, suspiciously aligned to the period corresponding to the deregulation of the financial sector and floating of AUD.

    • Stephen, your vehement argument against compulsory super is very interesting but I would like to hear broader debate to examine it.

      I still have certain prejudices, that is, inclinations without evidence, that run counter to Stephen’s proposal:

      1. Does compulsory super save some proportion of the population, who might otherwise blow their income every week? That is, is compulsory super a structural support that may assist a proportion to achieve the discipline they not otherwise muster.

      2. Stephens idea of a pay as you go notional defined benefit scheme is basically an unfunded super scheme, associated with large liabilities. Many might consider the unfunded nature of the scheme highly risky, even a ponzi. I would like to hear more debate on the pay as you go option

      3. I remain uncertain that savings under no super scheme would necessarily match those of a compulsory scheme. More debate is needed on the conclusive ness of existing data.

      4. I strongly support the current 9.5% of savings in compulsory super but strongly doubt whether it should be raised to 15%.

      Here is my argument. I think the tax savings in super are a retirement WELFARE scheme. I think super should serve as an incentivised way to assist people bulk up their retirement income from the anti-destitution level of the age pension to a level of moderate adequacy. Currently, however, superannuation is a rort and on-shore tax haven for the upper and upper-middle. I don’t begrudge the upper and upper middle their wealth- but that wealth should not be maximised through the Government welfare of retirement super after moderate adequacy is reached. We need a super benefit cap, after which those shooting for gold should do it by their own means.

      • 2. Stephens idea of a pay as you go notional defined benefit scheme is basically an unfunded super scheme, associated with large liabilities. Many might consider the unfunded nature of the scheme highly risky, even a ponzi. I would like to hear more debate on the pay as you go option.

        In relation to this argument I would merely note that the same is true of the current system.

        The recycling of “savings” into public spending via the rort of public-private “partnerships” has the same net effect. And the proposals currently floating around to have such “investments” made compulsory would open the floodgates.

        Politicians might raid a notional defined benefit scheme, but they are also raiding the current system.

        The difference is that the current system incurs much higher transaction and administration costs.

  2. How about this for an idea: Compulsory Super rules change to allowing the choice to receive your compulsory super payments as cash, opposed to going to your fund once you achieve a certain super balance.

    I acknowledge this will never happen, and I understand their are a lot of changes one would make before this (i.e. structurally). But this would be so much better than providing funds for the super industry to ‘clip the ticket’.

    Alternatively, I’m all for scrapping compulsory super altogether!

  3. Another thing to note is that because compulsory super started in 1992, total amounts in super will continue to increase well above inflation, taking this super gouge to an even higher level.

    The other reason that a focus on super fees is important is that if fee reduction and tax reform are done as a package, it is much easier to sell reform. The reason for this is that extra taxes/less concessions can be balanced by fee reform. It is much easier to say to people, yes you will pay more tax, but much of that is balanced out by fee reform.

  4. Super has never been a competitive open market. For much of its existence people were tied tot he fund their employer used. Choice had little impact because people rarely understood their options.

    I don’t know if the recent changes have had much impact (way too soon to tell), but things like the MySuper product dashboards, much as the industry may not like them, have the potential to bring actual competition. I suspect that the requirements around the disclosure of performance fees will probably cut the fees in the area that has been least subject to competition and oversight.

  5. Interest article. I did not realise that fees have consumed nearly 25% of all returns since 2004. It is the percentage fee base of total asset value that is the real killer.

  6. These numbers quoted above appear to be nothing like anything I have seen. I am only familiar on the UK/US side of things – although have dealt with a number of European Funds, which are usually inevitably run out of London.

    Just to make sure – before I posted this reply, I checked several hundred funds fee structures and associated fees, and on the sample I looked at (which included many of the big global funds) the results are nothing like those quoted above. For instance, Blackrock UK fund has an initial 5% fee – then a 1.5% fee continually after that. A large number of UK Funds have very similar fee structures. Scottish Widows on low volatility funds (e.g. Corporate Bonds) charge 1-1.5% pa – or a 1% on a cash account. They do have retirement accounts that range from 0.68% to 0.1% pa if you have over £2m. I assume these are for ISA’s (so they have additional fees associated when you buy and sell). Fidelity UK charges 1.5% plus 0.2% pa

    US funds are far more variable, for instance, PIMCO total return fund charge 0.85% (with a 3.75% front end load), A passive Vanguard fund can be as cheap as 0.17% and 0.05% respectively (depending of the class of share) – but that is not an investment fund strictly speaking. American Euro Fund is A shares carry a 5.75% front end load and 0.84% pa expense, while the C shares annual expense ratio comes in at 1.62%. Some very good (risky) leveraged funds take 35% of what ever capital gain you have above and beyond a certain benchmark price. There are quite a few of these in the US

    I also know a number of other big European funds (mainly French and German) that have big holdings and cross-holdings, and they all are around the 1.5% pa rate.

    I do not know how that data in the first graph is generated. Unless the person collating this data has used Pension organisations in the US (e.g. teachers/fireman’s fund) that may charge a 0.15-0.2% pension fee – on top of what ever the monies the pension fund has been allocated to. But understand, they don’t disclose the aggregate fees those funds have charged that particular pension collective.

    Even if you look at large state run pension funds (e.g. Norway, or UAE) – virtually 100% the monies are allocated among a large number of UK and US pension/investment funds (including the names mentioned above) and these of course incur the same fee structures as everyone else.

    There are too many dubious numbers here, a lack of knowledge, an un-skeptical mind that will accept any information confirming bias, group bias in fact, which is dangerous. Most of what is written above is absolute fiction.

    Its fine if you don’t want superannuation, H&H says as much – but be clear that any additional monies will be taxed at the marginal rate, which is likely to be substantially above the 15% for the majority of peoples. In additional, the public liability will increase dramatically, because there are no enforced savings.

    So ultimately you pay now – or later… you will inevitably pay your gold to the ferryman. Personally, I think people are seriously uninformed. Australia is not too bad. On a global scale, its probably among the cheapest, IMHO.

    • No way pension funds of any scale pay those fees you are referencing across their entire risk allocation. Not even close. Those sound like retail-middle market rack rates.

      • Of course. We are the retail market! Insto’s get an entirely different rate because its bulk money and cheaper to move around and manage (i.e. less paper work, equivalent legal entities most of the time). You have to compare like with like.

        The numbers are publicly available. You can either defend above narrative (and honestly I wouldn’t expect anything else) – or spend 90 seconds looking up a couple of those names and see if I am telling the truth.

        Not that it matters of course – lets not let facts get in the way of a good story.

      • I’ve lived it, chump. Go and do some more research, but propelry this time. Your little story there doesn’t really stack up, sorry to say. Looks like you wasted a whole afternoon cold calling hundreds of asset managers for nothing.

    • So RT if I head over to the Morningstar Fund Screener and look at the free structure for various super funds, is that telling me the whole story, because the fees on most industry funds don’t look too bad.

  7. $20 billion of fees is just the start of it.

    What about all the fees and interest that citizens pay to the banks and finance companies for loans to buy goods that they would be able to pay cash for if they didn’t have 9.5% of their wages forcibly removed and put in super??

    • Not to mention all the fees and expenses of recycling the “savings” back into public spendng through public-private “partnerships”.

  8. I wish I could remember the name of the guru who said back at the time of “Keatings Savings Revolution” that ‘this will end in tears & be one big fat ticket clip for a bunch of cash raiders who have gorged on other peoples money all their lives!” (not a direct quote..)
    That person was also very heavily criticised at the time & demeaned as an anti workers person….blah blah! I just can’t remember who it was? But the system is full of bloated ticket clippers who add absolutely zero value but can charge what they like because like lots of Oz industries they are protected. That is their right just like everything in OZ! Think everything…..