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Politics, fees and complexity among concerns in super inquiry submissions

Glenn Freeman  |  14 Sep 2017Text size  Decrease  Increase  |  

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Super regulations used as political play-things, excessive complexity, and high fees for active portfolio management are among concerns raised in submissions to the Productivity Commission's Australian superannuation system inquiry.

 

Now in its third and final stage, the Productivity Commission (PC) is tasked with assessing the competitiveness and efficiency of the super system against 22 assessment criteria, and making recommendations on improving outcomes for members and overall system stability.

Among the 73 submissions received so far--from a broad range of industry stakeholders including corporate and industry super funds, individual members and various interest groups and lobbyists--the SMSF Association says a lack of stability in the system is a considerable impediment to retirement savings outcomes for fund members.

"The system needs a sustained period of stability free from significant changes, especially changes to taxation settings, to allow members to have confidence in the system and make long-term savings plans," says SMSF Association CEO John Maroney.

Its submission calls on the government to obtain industry consensus on the objective of super, and to remove it from the annual Budget policy cycle, with "political instability and ongoing change to the superannuation laws [having] created a level of distrust and instability".

"The objective for the superannuation system should be based around the provision of retirement income, as recommended by the Financial System Inquiry, and supported by a set of guiding principles that can be used to give context to the primary objective," the submission states.

"It is essential that the objective not only has a focus on providing retirement income but also ensures that retirees are able to build adequate retirement savings ... to manage the financial risks of ageing and retirement."

Maroney cites a 2015 study from Vanguard and Rice Warner that noted 88 per cent of SMSF trustees were concerned about the potential impact of changes to super and tax legislation.

Some of the most recent changes to super concessional caps and tax rules will be discussed by the SMSF Association's head of technical, Peter Hogan, at the Morningstar Individual Investor Conference 2017 next month.

Too much red tape?

A submission from the Association of Superannuation Funds of Australia raises many of the same points around what it views as "excessive regulation" and "unduly frequent changes in the regulatory framework and requirements ... [that] adversely affect efficiency, productivity and innovation" in the system.

In terms of compliance costs, it notes super funds unavoidably pass these on to members, which in turn impact individual fund performance.

ASFA refers to a study from actuarial firm Rice Warner, that showed compliance and trustee support expenses per member increased by almost 70 per cent between 2011 and 2015.

During this time, the industry spent $2.75 billion implementing systems and processes to remain compliant with government reforms, according to another 2015 study from Tria Partners, commissioned by the Financial Services Council.

A submission from consumer advocacy group CHOICE raised concerns around high fees for actively-managed super funds--particularly some of the newer entrants within the space--and ethical super funds.

"A consumer switching out of a safe default option into some heavily-marketed 'ethical options' in the 'choice market' may be unknowingly putting a comfortable retirement at risk," it says.

As examples, the submission mentions new funds Future Super, Spaceship and Grow Super, with "fees ... well above the industry average, which according to Rice Warner is 1.03 per cent".

Fees eating returns

"Spaceship has fees of 1.756 per cent on a balance of $50,000. By comparison, Australian Super's default option fees are 0.796 per cent. This large difference in fees can have a catastrophic impact on a member's retirement balance."

CHOICE references the standard disclosure on a superannuation product disclosure statement, which states "total annual fees and costs of 2 per cent of an account balance, rather than 1 per cent, could reduce a final return by up to 20 per cent over a 30 year period (for example, reduce it from $100,000 to $80,000)".

Before compiling its submission, CHOICE assessed feedback from around 2,500 survey participants and members of its subscription service. It indicates many were "complimentary of the core system design" but many indicate there are "aspects of the system which are not working for consumers".

It notes that fee levels are always a key area of concern for consumers, particularly for those with lower super balances. Noting that actively managed funds invariably charge higher fees than passive equivalents, CHOICE references a SPIVA Australia study.

"Over the 10-year period ending on 31 December 2016, more than 80 per cent of international equity and Australian bond funds and more than 70 per cent of Australian general equity and A-REIT funds underperformed their respective benchmarks," according to the submission.

"This begs the important question, what value do fund managers deliver for their fees? CHOICE would like to see the Productivity Commission further examine the value of active fund managers in superannuation as part of its analysis."

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Glenn Freeman is a senior editor at Morningstar.

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