Comparing apples with apples on super fees

The recommendations of the Financial System Inquiry brought superannuation fund fees into the spotlight but a Super Review roundtable has concluded that, largely influenced by data provided by the Grattan Institute, apples were being compared to pears. This is part one.

Mike Taylor, managing editor, Super Review: And the topic, as you all know, is superannuation fees. I thought we’d start off with the whole question of the financial systems inquiry and the Grattan Institute data that was handed in there suggesting that Australian superannuation funds are expensive when compared to others. Now there’s a suggestion being made by quite a number of people that, in fact they were comparing apples with pears.

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So, Leeanne, are Australian superannuation funds expensive when rated against others?

Leeanne Turner, CEO, MTAA Super: Well, I think you’ve hit the nail right on the head.  We should be comparing apples with apples, and I think what’s come out of the Grattan Institute findings, there’s plenty of data to say that we’re actually not comparing apples with apples.

A lot of it is based around passive investment, and that of course is one side of things, but the Chilean experience, for example, doesn’t take into account insurance which is a big differentiator in the Australian market with Australian superannuation funds, and I think there’s been too much of an emphasis put on investment costs and I think we definitely need to see some efficiencies in fees, but there’s a bit of a dichotomy between fees and costs.

Looking just at investment fees from the superannuation fund perspective is of course just one part of the pie.  You’ve got the administration side of things as well, and I think everybody would agree that there hasn’t perhaps been enough investment in administration, that you’ve got to have money to be able to do that. So its the member’s perspective, which I think none of this has actually focussed on.

Let’s look at it from the member’s perspective.  It’s not just about investment returns and again you could say well, if we look at net benefit to members, so returns less fees and taxes, you can go through periods where your returns can either go up or down, but you look at the admin side of things which also goes to the cost to the member, that’s got be fairly stable.  And do you want to continually drive down costs there that are going to be at the expense of what your membership might want.

MT: Paul Cahill?

Paul Cahill, CEO, ClubPlus: Well, I think comparing Australia to Chile is ludicrous because our system is far more sophisticated than they are.

It’s not comparing an apple with a pear.  It’s comparing an apple with a motor car.  That’s how far off it is.  If they want to do an intelligent comparison it should be an Australian system with a 401k, a European mutual or some of the UK funds. Compare like with like if you want to get an idea about what’s comparative. To pick out a small South American country with an unsophisticated setup against something like we have in Australia is just absolutely off the–it’s just not any fun. I don’t think Grattan did itself any favours as a result of that.

On the fees, yes, look, I’m probably a little bit different to others in that we are a low-cost fund and we strive very hard to be in that position, and for us it’s all about the value to the member.  There are a lot of funds out there that are still very high in fees and have a lot of inbuilt inefficiencies, be it at the investment level, at the administration level, at that cost level, and I think there are a lot of opportunities for a lot of funds to take links out of the chain, but some of them have got very used to that sort of largesse, while funds like us run it as lean as we can and then start from there.

I take Leeanne’s point that you can cut it right back to the bone but at what cost?  You know, if you drive your admin down all you’re doing is actually sucking out services from your members.  If you look at what happens to be invested going forward in the digital space, sometimes it could be penny-wise and a pound foolish.  You drive your costs down on one side and then your administrator’s got nowhere to go.  What’s that going to do in the future?  And if you look at the competitive landscape in Australia you don’t want to be left behind when the world is changing at a mile a minute, especially with digital and all the related actions around that.  But I still believe there are a lot of funds out there that carry a lot of cost too.   

LT: Yeah, don’t get me wrong, I agree with that.  And just looking at recent comparisons of fees, we’re top quartile and we’ve done a lot about driving down our fees and costs, but it’s about the efficiency, and I think that’s the most important aspect.

PC: We were third or fourth overall, and the only ones in front of us were bank products, and they were all indexed, they were low-cost, no service, all digital.  That was last year.  I’m sure the world’s moved in the last six to eight months.  But if you look at what we’re up against, the four that were in front of us were bank products which were basically product with indexation through the middle of it and the funny thing was they weren’t that far in front of us.

For me, I reckon they were overpriced, seriously overpriced.  If we indexed everything we did, we would’ve been cheaper than them.  Simple as that.  Then some of the government funds have quite a lot of subsidy inside of them.  The government still picks up the tab on a lot of that, so to compare an industry fund like ourselves that competes in an open market against a government fund where at the end of the day they just round it off, [that’s]not right.  If you want to look at inefficiency, some of those governments are going to look pretty healthy too.   

MT: Paul Rohan?

Paul Rohan, head of Sandhurst Trustees: Yes.

MT: You’ve got a bank fund.

PR: Yeah, I do, and it sits second.  Look, I endorse most of the comments made by my other two colleagues here.  Definitely, there is evidence that cost is coming down and we’ve seen that.  Part of that is through competition, part of it’s through scale, whatever it may be, but we are seeing those fees coming down across the industry.

I really do pick up Leeanne’s point on customer experience and customer outcomes.  We want people to be more engaged in their superannuation.  The admin platform is fundamental to that and the service platform is absolutely fundamental to it, and if we’re not investing in it and we just want some bulk vanilla outcome, I think we’ll get less attachment to people’s super at a time where one of the clear things is that they’re unattached to it or disengaged from it.

So investment is necessary and investment comes at a cost, but it will drive a better customer outcome.  

MT: Okay, Andrew, your views?

Andrew Creber, COO, JP Morgan Asset Management: Yeah, I mean again I agree largely with most of the things that have been said, but I think the key thing in the Grattan report is that the focus really needs to move away from fees.  It needs to move to net of fee outcomes.

It’s our fiduciary responsibility as asset managers of industry funds that we need to get the best outcome for investors and the best risk adjusted return for our investors.  Costs are increasing, particularly for manufacture as well.  There’s a lot of regulatory compliance costs associated now with managing products, and I think we’ve moved along a lot since the GFC as well where there’s a lot of additional cost associated with running product.

I think again we should be comparing our fees here locally in Australia versus more like-minded markets. We are very competitive, I think.  I used to work in Singapore and looking at the costs in Singapore they were actually on a par if not higher than what they are here in Australia, so I think it definitely isn’t comparing apples to apples in terms of other industries around the world.