The Australian superannuation industry has been subjected to criticism for charging high fees relative to its international counterparts.
The Grattan Institute report Super Sting published in April last year finds that Australian superannuation fees are approximately three times the median rate of developed countries – at 1.2 per cent per year. The Financial System Inquiry (FSI) Interim Report released last July similarly identifies Australia’s superannuation fees as being “high by international standards.”
The FSI Final Report is also critical of the Australian superannuation industry due to the industry’s failure to pass on benefits realised through economies of scale in the form of lower fees. Since 2004, assets managed by the average superannuation fund have increased from $260 million to $3.3 billion; however, average member fees have fallen by only 0.2 percentage points over the period.
But why are Australian superannuation fees so high by international standards and are such high fees justified?
Differences in the structure and features of the Australian superannuation industry have driven fees higher in Australia. For instance, over the past decade, there has been a proliferation of new products and increased member flexibility in the choice of products. In addition, a continually changing regulatory landscape and growing regulation complexity have increased compliance and operating costs, offsetting many of the estimated benefits from economies of scale.
Another reason for the relatively high management fees in Australia is the high investment allocation towards actively managed growth assets. A research paper by Deloitte Access Economics commissioned last year by the Financial Services Council attributes high Australian superannuation fees to the heavy weighting towards equity investments, which tend to be actively managed. Investment fees for actively managed products are significantly higher than equivalent fees for fixed income, index and other passive investment classes.
Encouragingly, the costs of managing active investments in Australia are relatively low compared to other advanced countries. The Deloitte paper finds that Australia has the second lowest active investment management fees in the world. This, combined with the increasing superannuation guarantee and the high long-term returns earned by growth assets, has contributed to Australia’s superannuation system being ranked highly in terms of system adequacy, sustainability and integrity.
In addition to differences in the structure and features of the Australian superannuation industry, a lack of domestic fee-based competition also appears to be driving higher Australian fees. The FSI Final Report finds that a lack of strong fee-based competition – largely the result of member disengagement and difficulty in comparing fees across funds – is undermining operational efficiency and increasing costs in the superannuation industry.
To increase operational efficiency, measures should be introduced to increase competition between funds. These measures could include the introduction of a government default fund and the centralisation of account maintenance to reduce costs and increase the comparability of fund fees. A recommendation of the FSI Final Report is that a competitive process should be introduced to allocate new default fund members to high performing superannuation funds.
While there are legitimate reasons underlying Australia’s relatively high superannuation fees, legislators should consider measures to lower fees where high fees are caused by unnecessary costs, such as regulation complexity, or are not justified by performance. Reductions in superannuation fees would have widespread benefits for society, by increasing retirement balances and reducing costs for taxpayers when retirees’ retirement balances run short.