Some recent comments from Federal government members and Treasury’s budget papers on super questioning the merit of Australia’s super system call for a clear response based on facts, not one based on sentiment or ideology, says Ian Fryer, General Manager of leading super research and ratings agency Chant West.
While Ian believes no-one is questioning the need to improve some aspects of the super system, he said the Government needs to ensure the issues are addressed in a way that doesn’t simply create other problems for funds or, more importantly, for fund members.
“Some of the recent critical commentary on super doesn’t seem to align with the facts,” he said. “If we look at the relevant data to validate that commentary, it tells a very different story.”
Recent comments and Chant West’s responses
“Our super system is a failure, it makes people worse off”
The long-term performance of the median super fund has far outstripped typical return objectives – a return of 8% p.a. since the introduction of compulsory super in 1992. Ian argues this is an outstanding outcome and much greater than the typical return objective of CPI plus 3.5% p.a. (ie 5.8% p.a. since 1992).
“Even when you look at the past 20 years, which includes three major share market downturns, the median growth fund has returned 6.3% p.a. which is still ahead of the typical real return objective. And these returns have been delivered through a concessionally taxed system that adds even greater value for members,” he said.
“Owning a home is the best, fastest path to financial security in retirement”
Not surprisingly, the Retirement Incomes Review recognised that owning a home should be done in conjunction with super savings. However, Ian warns that focussing solely on housing for retirement adequacy will lead to many more asset-rich but income-poor retirees. “I think the super industry has a role to play in helping members better understand how home ownership and super can work together to achieve financial security in retirement,” he said.
“Costs incurred by Australian super funds are some of the highest in the OECD”
The latest OECD data (2018) shows Australia’s administration costs at 0.4% of assets is on par with other leading retirement income systems such as Canada, Denmark and Finland. But Ian asserts that any comparison of fees across systems must be treated with great caution. Further, the Australian super system is consistently ranked in the top 5 systems in the world in the Mercer CFA Institute Global Pension Index. During 2020, it was ranked 4th.
“There’s been a 13.6% increase in the average MySuper fee on a $50k balance since 2014”
Ian believes this claim is a bit disingenuous as it ignores the introduction of a new fee disclosure regime in 2017 that required the disclosure of a wider range of costs than required previously. “When we account for the change in disclosure requirements, administration fees are the same as 2014 and investment fees have actually fallen by 12-15% since 2014”, he said.
“$30 billion was paid last year in super fees, more than the $27 billion on electricity bills, $12 billion on water bills”
“Can super fees be reduced? Yes. Are they reducing? Yes, they are and recent APRA initiatives to reduce the number of funds and increase transparency should keep pushing fees down,” Ian argues. “However, it’s always dangerous to simply look at the cost of any service without considering the benefits it generates.”
What benefits do super funds generate? For the year to September 2020, APRA-regulated funds, which represent about two-thirds of fund assets, accepted $120 billion in contributions, paid out $110 billion to members and typically generate over $100 billion in investment income each year (after investment fees and costs have been deducted). “The benefits generated by the super industry are far greater than the costs incurred,” Ian said.
Acknowledging that there are some issues in the sector that need to be addressed, he remains concerned that this dialogue can destroy both confidence in the super system and engagement of everyday Australians with their retirement savings. “This can only be bad for members and the long-term prospects of the whole retirement income system. We absolutely need to address issues to make the system work better but not in a way that seems to keep communicating that ‘super is bad’,” Ian said.