Costello attacks the super fee gouge

By Leith van Onselen

Former treasurer Peter Costello has argued that compulsory superannuation contributions should be taken out of the hands of bank-run retail super funds and union-backed industry super funds, who are gouging members with excessive fees. The chairman of the $133 billion Future Fund contends that this money should instead be invested in a government-run fund such as the Future Fund, or one structured along the lines of the Canada Pension Plan Investment Board. From The Australian:

Mr Costello criticised the ­efficiency of compulsory superannuation, a system established by the Keating government in the early 1990s, which now requires 9.5 per cent of workers’ earnings to be diverted into private accounts that are collectively worth more than $2.3 trillion, and can’t be touched until they retire.

The sector, which critics claim is inefficiently run, is on track to earn $23bn in fees this year.

“There is a fair argument that these compulsory payments should be allocated to a national safety-net administrator — let’s call it the Super Guarantee ­Agency,” Mr Costello said.

He suggested the Canadian Pension Plan Investment Board, which manages $C317bn ($325bn), offered a better model…

“The system has created an industry, which has certainly ­delivered benefits for those in it,” Mr Costello said.

About 400,000 “first-timer” employees make about $800m in annual super contributions a year, according to the Productivity Commission.

“This is such a valuable stream of income, mandated by the state,” Mr Costello said…

“There would not be another western country where the stock exchange is so dominated by ­financials and in particular by the main banks — the quad­ropoly,” he said…

“You can see why an air of impregnability and complacency has seeped into the management in Australian banks. Market discipline is negligible,” he said.

It’s hard to disagree with Costello on this issue.

The Canberra Times earlier this year reported that bank-run superannuation funds, in particular, were creaming it:

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…

Indeed, 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.

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).

ScreenHunter_2942 Jun. 23 15.51
ScreenHunter_2943 Jun. 23 15.52

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:

ScreenHunter_3313 Jul. 15 13.06

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

ScreenHunter_3314 Jul. 15 13.08

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 (the other key ingredient being the explosion in household debt):

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

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  1. So…..Australia is bloody corrupt, see Michael West’s recent dispatches on the gas cartel.

    A lonnng time ago now, those (I thought) tin foil wearing folks at Money Morning claimed that the govt could nationalise steal your super at any moment.

    This to me seems a logical first step.

    • The future for Aussie super is a mandatory portion (who knows how much) to be committed to a government controlled ‘infrastructure fund’ — several trial balloons have already been floated in the media over the years.

      So, yes, the government will have their way with our retirement savings at some point.

  2. This guy is an insufferable asshole. I would no more trust default private super to look after my money then this mofo in a government run scheme. There are no doubt ways to brings costs down but govt takeover isnt one of them.
    The feds look to fck the public over at every opportunity we would we trust them with our super. Better the Corporate crooks you know.

  3. 1.Good to see Costello supports at least semi-nationalisation of superannuation (but let’s wait for the fine detail of of “the Future Fund”)
    2. If we are talking about “gouging” of superannuants, Costello is very, very rude in bracketing the not-for-profit mutual super funds with the extractive private bank super funds.
    3 Costello rarely opens his big gob unless there is something of interest in it for him. What is his personal angle in this?

    • he is trying to future proof his position. he is a politician, i.e. an expert at telling which way the winds are blowing. feel the vibe around, what does it tell you.

      • bolstroodMEMBER

        Yes, Pistol Pete advocating nationalisation. The end is surely nigh for neo-liberalism when this weather vane is turning.

  4. If we just had one large government run fund, everyone’s returns would be equal. So instead of making super contributions, why not just change the terminology to “retirement levy” and instead of superannuation we could just call the annuity a “pension”.

    • Switching is easy! Call the super fund you want to join and they will be sure to take care of everything for you with your existing fund. Exit fees? $75 at most!

      The real issue is the lack of financial literacy in this country, and additionally apathy towards superannuation until one reaches 55, or sometimes even 60. 60% of Australians fail a BASIC financial literacy test.

      A financial literacy unit should be taught in high schools each and every starting with year 10 and it should cover the basics, then get into more complicated stuff in year 12.

      • Hah. I got charged 4% to be automatically moved to a different type of account in the same fund when I changed jobs.

        What a crock

      • You have been ripped off big time myne. Always best to check and ask, then tell them to remove an exorbitant fee like that. It’s like advisers who charge contribution fees – it should be outlawed. Essentially it is a charge on contributing your own money to super.

      • It is only worth educating people if the educators themselves know what they’re talking about.

        Financial literacy is all relative. I doubt a single educator understands how the banking system truly works, how money is created etc.

        On the other hand, highlighting what a rort the Super management industry is would be well worthwhile, no doubt.

      • “Financial literacy is all relative. I doubt a single educator understands how the banking system truly works, how money is created etc.”

        I’m talking about basics. Not complicated stuff financial system architecture, which the vast majority of economists barely understand.

        Year 10:

        – How compound interest works
        – What is super, how does it work, a basic rundown
        – Savings and investment. Why it is important to save. Budgeting. Wealth is a function of savings, not earnings
        – How to identify and avoid financial scams
        – Basics on interest rates
        – Personal insurances and what it is used for + importance
        – General insurance and what that is used for + importance
        – Set aside liquid cash of 3 months for emergencies
        – Goal setting. Financial and lifestyle. What’s the difference, but why are they related?
        – Tax
        – Something as simple as what bills to expect, and how much they usually cost

        Year 11 and Year 12 should build on these basics. By that i mean:

        – different asset classes
        – allocating assets
        – calculating how much insurance you need, and when this changes
        – how to choose a financial adviser. What questions should be asked?
        – salary sacrificing to super. Why it works
        – How to own insurance and the different definitions of life insurance. How to assess an insurance provider
        – Loans, interest and principal. How to structure them, what is deductible, and what isn’t.
        – Concepts covering leverage

        etc. etc.

        What use is understanding how the banking system works? It is not useful to the average Joe. Teach them stuff they can control. Financial Literacy 1: The Basics, Financial Literacy: Applying the Basics, Financial Literacy 3: Advanced.

        I have just written a virtual policy platform here for schools, that will arm people with basic financial skills for their lives, and reduce the work regulators need to do in financial services. The problem arises from information asymmetry in the hands of charlatans. Some of that needs to be taken away.

        I realise that like in any industry it will exist, like going to the mechanic. IF you don’t know the basics you will get ripped! But in reality, it may be a few hundred or even a thousand dollars. No one can rape you over a long period of time quite like the FIRE industry.

  5. TailorTrashMEMBER

    Nice little earner !………… ..not sure I’d trust my money easily to Arfur Daley Costello either …….

  6. How about taking a look at the 15% A Gov’t ‘contribution’ tax (clip) which turns that 9.5% super guarantee contribution into 8.0% at the fund? And while you’re at it Pete, how about talking to the golfing buddies about reducing /removing the taxation on the ‘earnings’ so the account can grow faster? Your ‘income tax-free’ income from super above age 60 was idiotic and cannot last and will most certainly be scrapped as the budget continues to emit black smoke. A fair and equitable tax system CAN be assembled instead of the current one which favors only the VIP club members.

    • Remember that for most people the money coming out of the super fund is largely capital that they contributed plus inflation which would adjust the cost base for capital gains tax purposes. For most people with say $400,000 in super the income component would be below the tax free threshold if they were in a balanced fund, al the rest of their drawdown would be a return of capital plus untaxed inflation gains.

  7. Fees haven’t fallen because compliance costs have increased substantially. Compliance functions are the single biggest area of employment growth in the financial services industry. Is Costello suggesting that the FF will not have to meet those requirements?

    • This.. plus from memory the future fund is around 0.85% cost. The big guys are around that now… so tell me what’s the benefit?

  8. It’s also worth adding that the FF does not have a liquidity requirement whereas most retail and industry funds have to be able to allow an investor to take their money out with a month’s notice. This alone substantially hampers what those funds can invest in and increases costs.

  9. “Is there a bigger economic parasite than Australia’s banks?”
    Unions? Let’s remove their tax exempt status and apply FBT to them?

  10. Philly SlimMEMBER

    Yep – this is one thing that would be more efficiently managed by a central provider. You can still pick what funds you want to be involved in. But this would be a big win.

  11. Why does it take homo sapiens so long to recognise the bleeding obvious?

    From “The Economist”, more than 6 years ago:

    This problem has been obvious from the day compulsory superannuation was implemented.

    It’s a pity he didn’t also point out that the system did nothing to increase household savings. Household savings – including superannuation – went negative after its introduction and didn’t recover until the GFC.

    I desperately need to find another planet.