Low-cost super: It’s not that hard

SUMMARY: Get real. There is plenty of low-hanging fruit if governments really want to cut the cost of Australia’s baseline super.

Stop with the pussyfooting on superannuation. If governments really want to strip costs out of the system, the recipe is pretty simple.

Recent Super Stream changes are no more than the tip of the iceberg. And if you really want to build a low-cost super system for Australia, the changes aren’t that hard. As for MySuper, it’s more like a missed opportunity than a great saviour.

So says the Grattan Institute, which this week rejigged its plan to cull what it believes are easily removable costs from the compulsory super system.

MySuper should deliver $500 million of savings, says the Grattan Institute’s report. But the first three of Grattan’s own recommendations would deliver more than $1.5 billion in savings, it claims.

And that would add around $40,000 to the average super balance in retirement.

At the heart of its plans, Grattan wants the government to immediately set up a reverse auction (that is, the lowest bidder wins) to run Australia’s default super funds. This would deliver savings of $1 billion a year. It’s the single most important, and easiest, saving a government could make, they believe.

The Grattan Institute’s productivity growth program director Jim Minifie believes planning for the reverse auction should begin immediately. Every year is bleeding money out of the system and people’s retirements.

Next, the number of excess accounts needs to be culled. Too many of us have more than one fund when most people shouldn’t. This would save $360 million. (I have issues with some of their plans here, but I’ll come back to that.)

Governments have made headway into making it easier to identify lost funds and attach markers such as tax file numbers to them. But more could be done to stop the total number of accounts in Australia growing like topsy.

And plan three is to force further platform consolidation. Fewer platforms would lead to lower costs, Grattan claims. There’s an easy $200 million in savings to be made there.

Hopefully, all of these savings would find their way into the super savings accounts of Australians.

Grattan argues that while recent reforms have been positive, the pace of reform must quicken.

What was legislated in the way of Super Stream and MySuper from Jeremy Cooper’s Super System Review needs to be followed up with a sledgehammer.

“Current policy initiatives will remove some excess cost from the system, but much more can be done. To make default superannuation more efficient, government should build on recent policy initiatives and act on the findings of the 2014 Financial System Inquiry (FSI),” Grattan’s report said.

“There are too many accounts, too many funds and too many of them incur high costs,” Minifie said.

Grattan’s report separates “choice” funds, predominantly those run for profit by large managers, from the “default funds”, which are largely industry, corporate and government funds.

The latter three tend to be default choices of employers, but which Grattan believes are still massively more expensive, both from a platform administration fee perspective, but also in the cost of the investment options that they offer, than they should be.

Administration costs could be driven down from their current average of above 1% to closer to 0.5%. Grattan’s number-crunching believes that the charge for the low-cost default funds to come out of the reverse auction would be no more than 0.65% for both platform and investment costs, but could come down below 0.5%.

The average annual administration fee should fall to well below $150 and could even fall below $100.

“Policymakers can do much better. As the FSI review argues, policymakers must do more to prune out poor products and, unless efficiency improves markedly, create a market mechanism to push for strong performance.”

The report also goes into detail on the cost borne by super members in regards to investment manager fees, which are usually separate to the administration fees of the platform holding the investment.

Account holders pay about $7.9 billion in investment management fees, or about 0.6% of their balances.

There is the usual series of graphs that, to me, only serve to show the benefits of using index funds for investment – low fees for near benchmark returns, over higher fees for what can be a wide variety of investment returns, though on average are probably lower. In fact, the report goes into some detail to give credence to the argument that active fund managers fall below the line in investment performance over the medium and longer terms.

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As with most reports of this nature, there are elements that concern me. For one, there’s a plan to provide Australians with a comparison of their own fund with the cheap default fund when you do your tax.

Included with that comparison would be the paperwork to allow the member to switch funds on the spot.

Dangerous? Absolutely. Allowing anyone to make an impulsive decision like that would be running huge risks, particularly when it comes to insurance. A lot of funds have insurance attached. If you sign to switch out of one fund where you have insurance into a national default plan that doesn’t, your insurance will be gone.

And if you have health issues, getting new insurance might be problematic, or impossible.

NEVER switch out of a super fund without first considering existing insurances in that fund. Insurance might not be top of mind for many. But once a contract is cancelled, that’s it. It’s gone.

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There are none but passing references to self-managed super funds in the report. SMSFs are, generally, started by those with a super-keen interest in their superannuation and are, essentially, willing to take on the role of administrator and fund manager for free.

Their super balances are larger, they are more engaged with their super. And they are far happier with their management of those funds.

SMSFs aren’t for everyone. And the Grattan report is predominantly aimed at the “don’t care” and “sort-of care” market, which is often where people are before their balances hit a certain target and greater control is sought.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.