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Regulator puts heat on super funds to lower fees

Nicki Bourlioufas  |  28 Oct 2019Text size  Decrease  Increase  |  
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Superannuation fees have fallen for the first time in six years and the financial regulator hopes a new “heatmap” will cement this trend and allow trustees to rate funds according to cost and performance.

The 2019 Rainmaker Information super fund fee study analysed fees charged by more than 500 superannuation funds and 50 self-managed super fund administrators. The study found fund members are now paying 1.1 per cent in fees on average. This is down from the 1.2 per cent they were paying in 2018.

Deputy CEO of the Association of Superannuation Funds of Australia (ASFA), Glen McCrea, said lower fees were a function of competition in the market, the increasing use of innovation and technology to increase efficiency, and economies of scale being achieved with more funds under management. Total superannuation assets were $2.87 trillion as at 30 June, a jump of 6.2 per cent from a year earlier.

“The royal commission has proposed reforms that should help build confidence in a system that is already delivering strong outcomes for Australians,” McCrea said.

“Research by ASFA indicates that over the 25-year period to 30 June 2019, average fund investment performance has been 7.5 per cent a year, exceeding inflation growth by around 5 per cent a year; well ahead of the long-term target for funds.” 

According to Scott Keeley, a financial adviser with Wakefield Partners in Adelaide, many of the retail platforms have aggressively reduced fees in the last 12 months, or are about to, and Australians are benefitting.

“This is making them significantly more competitive in the broader superannuation market,” Keeley said. “This has been a welcome change, ensuring greater choice (and ultimately a greater return) for consumers. With many of the major retail platforms significantly lowering their fees in recent times, the fee structure between these types of funds and industry funds are closing the gap.”

Reflecting that, in 2015, the average retail MySuper product charged 0.24 per cent more than not-for-profit MySuper products. Today, this gap has narrowed to just 0.04 per cent.

Retail funds are behind the biggest fee drops, but industry funds too have dropped fees. This year, super funds with the biggest reductions in their MySuper Total Expense Ratios (TER) were for-profit funds: AMP Super Direct for Business, with a fall of 97 basis points to a TER of 1.19 per cent, and AMP’s SignatureSuper Select and SignatureSuper funds, both which saw their fees fall 63 basis points to 1.21 per cent in 2019 from 2018.

Even some industry funds lowered their fees, including Hostplus, LGS Division A and ACSRF Employer, reflecting a strong competition for member funds.

Super funds with the biggest reductions in their MySuper Total Expense Ratios between 2018 and 2019 were:

Super funds with the biggest reductions in their MySuper Total Expense Ratios between 2018 and 2019 were:

Source: Rainmaker

“These reductions show an industry shifting towards a greater commitment to improving super for the members,” said Jason Ross, head of superannuation at Rainmaker Information.

But there are still areas that can be improved, including fees for Choice superannuation products. A recent Productivity Commission report, Superannuation: Assessing Efficiency and Competitiveness, found “a tail of high-fee products remains entrenched” in Australia.

According to the Productivity Commission, annual fees exceed 1.5 per cent of balances for an estimated 4 million member superannuation accounts which hold about $275 billion. Almost all these accounts are in Choice products offered by retail funds and they accounted for 17 per cent of all superannuation assets in 2017.

“While some may be receiving exceptional investment returns or member services, the evidence indicates that funds that charge higher fees tend to deliver lower returns, once both investment and administration fees have been netted off,” the report found, noting that high fees in superannuation Choice products “persist”.

Further declines in retail fund fees are likely to hinge on the effectiveness of regulator efforts to shift members out of retail legacy products, the Productivity Commission said.  Australia’s 13.5 million super fund members still pay $2400 on average each year in fees, according to Rainmaker.

APRA to keep heat on super funds

More heat is coming from the regulator. APRA is finalising its heatmaps methodology which will cover four areas:  investment performance, fees and costs, sustainability and, eventually, insurance. Initially the heatmaps will only be for MySuper products.

APRA deputy chair Helen Rowell recently said the heatmaps will indicate performance across these metrics and are “intended to be a starting point for member outcomes and performance assessment.” Red will indicate a relatively poor performance.

APRA plans to publish the heatmaps by the end of the year and will present the data in a way consumers can understand. “This initiative is designed to provide clearer, simpler insights into how trustees are performing in terms of member outcomes – initially for MySuper, and expanding to Choice products and options over time,” Rowell said.

is a Morningstar contributor.

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