Banks’ superannuation fee gouge rolls on

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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.

Nowhere is this cozy arrangement more evident than with bank-run superannuation funds, who are creaming it. From The Canberra Times:

Australians are paying $31 billion in superannuation fees every year, with half that money going to funds that manage just 30 per cent of all accounts, according to a report commissioned by Industry Super Australia.

And banks are raking in about $8.7 billion of those fees, making super “a honey pot for Australia’s scandal-prone banks”, according to Industry Super Australia chief executive David Whiteley.

Meanwhile, not-for-profit funds collected $13 billion worth of fees while managing 42 per cent of Australia’s $2.2 trillion worth of super savings. But the retail sector, which includes banks, collected $15.5 billion for managing just 29 per cent of funds, according to a quantitative assessment of fee revenue by the Rainmaker group…

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If superannuation was a well functioning and competitive market, average fees would have fallen as the value of funds under management has risen. After all, it should not cost ten times more to manage $1 billion of funds under management than it does to manage $100 million.

Yet, despite the huge explosion of superannuation balances since the superannuation guarantee (compulsory super) was introduced in 1993, average fees have barely changed, according to the Grattan Institute (see below charts).

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According to Grattan:

A larger system of larger funds should have incurred lower costs and charge lower fees, because big funds have lower costs…

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.

The Draft Report of the Murray Financial System Inquiry (FSI) noted similar concerns, and included the below chart showing that Australian superannuation fees are high by global standards:

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And that super fees had not fallen in line with what could have been expected given the substantial increase in scale:

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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” by which to operate.

The above fee-gouging partly explains why Australia’s financial sector has experienced such explosive growth over the past few decades:

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With the other key ingredient being the explosion in Australian mortgage debt:

Is there a bigger economic parasite than Australia’s banks?

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.