Superannuation funds use COVID-19 to lift fees

One of the biggest knocks on Australia’s compulsory superannuation system is the exorbitant management fee structure.

As noted in the Murray Financial System Inquiry, Australia’s superannuation management fees are among the very highest in the world despite having one of the biggest pools of funds under management (FUM):

ScreenHunter_3313 Jul. 15 13.06

This defies the notion of ‘economies of scale’. That is, as FUM grows, management fees should shrink proportionately.

This is because it should cost superannuation funds little more to manage $3 billion of FUM than $300 million of FUM. Accordingly, average management fees should have shrunk as Australia’s superannuation savings pool has grown nearly exponentially:

To make matters worse, the Grattan Institute has shown that Australia’s superannuation system has become less efficient as it has ballooned in size:

ScreenHunter_2943 Jun. 23 15.52

The upshot is that Australian households are being milked for fees, paying twice as much in superannuation management fees than they spend on electricity every year.

With this background in mind, Mercer acting CEO Joanne Bloch has warned that super fees will likely rise due to the decline in the number of accounts following the Morrison Government’s early release scheme:

Ms Bloch said about 7 per cent of customers accessing their savings had reduced their accounts to zero…

Ms Bloch said fee increases as a result of the shrinking account numbers was “a very real conversation” happening between Mercer and its funds.

These conversations had started more than a year ago as a result of the Productivity Commission and royal commission recommendations to reduce multiple accounts in the $3 trillion super system…

In total, super members pay a collective $32 billion in fees each year…

“It’s a difficult situation,” Ms Bloch told The Australian Financial Review. “Everything is going up except membership.”

Clearly, the massive honey pot of fees available under compulsory superannuation has created a giant parasitic industry. Lifting the superannuation guarantee to 12% would only feed this monster, creating a bigger pool of FUM available for super funds to drain.

It’s time to starve the beast!

Unconventional Economist
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Comments

    • No it isn’t. Mandatory saving has zero to do with capitalism and everything to do with cronyism.

      It’s important to understand the distinction – not many do.

      In the US where some semblance of capitalism still exists, you can be charged fees as low as 0.2% (perhaps less).

  1. A terrible industry full of lazy spivs who seem to have contempt for their clients.

    • Never let a crisis go to waste.

      We didn’t want to do it but our hand was forced …

  2. Well it stands to reason in any superfund the primary OPEX driver is headcount, so a decade of payrises for staff would largely account for the difference you are seeing. Pay has probably gone up 10-15% over the past decade in that industry and that’s most of the increase in management fees. And, as you note, funds under balance have also increased dramatically which would drive the need for further headcount.

    It also probably highlights that there are many superfunds out there who haven’t kept up with IT investment and probably maintain bloated headcount to keep the wheels turning under old and inefficient processes.

    A friend of a friend maintains that Colonial First State has this very issue, much of its IT platforms are old and out of date. They’re currently performing a revitalization, but their e.g. quarterly performance reports are still all crafted in MS Excel. Real backwards.

    • Andrew2MEMBER

      Nothing wrong with Excel as a front end for database queries or stored proc results. Better than those cumbersome BI reports 🙂

      • Sure, but contrast it to how say for example the MB fund is set up today for instance…

    • This is a huge aspect of it. Not just IT (which APRA insists should be as up to date as possible) it is also the cost of regulatory compliance which is stupidly high given how often the rules change. MySuper did bring costs down somewhat but the base line will always be high because of the complexity of the system.

      In addition, when the Productivity Commission did their monster report on the Super System a couple of years ago, they were clearly frustrated by the lack of information across the industry when it came to fees and costs. Not so much what was being charged but more what it was being spent on by the Trustees and how those expenses were categorised.