One of the Investment and Financial Services Association’s (IFSA) key values is a commitment to fostering competition — it generates innovation, drives up service, drives down prices and generally results in a strong, healthy industry delivering good consumer outcomes. So, while it is great to see increased media coverage of competition in superannuation, it’s a shame that some of the debate and conclusions are fundamentally flawed.
The first flaw in the debate has been a case of product confusion. Our marketplace is a sophisticated one, offering a wide range of products and services. Quite simply, not all superannuation is the same. Because of a failure to acknowledge the variety of products and services on offer in the marketplace, commentators have erroneously compared apples (basic, simple superannuation products) with oranges (products that offer wide choice of managers, 24×7 reporting and services and comprehensive advice).
Most Australians have what could be described as ‘plain vanilla’ superannuation products, and pay fees for administration and investment management accordingly. The range of choices on offer is limited and servicing is basic. IFSA’s best estimate is that these super fund members are paying fees between one and 1.5 per cent for administration and investment management. The Phillips Fox Actuaries & Consultants data on recent corporate superannuation tenders reveals total expense ratios ranging from 0.88 per cent to 1.12 per cent.
However, like other product markets, many consumers look for a wider range of features and are prepared to pay for the value they attribute to these.
In response to such identified needs, the industry also offers consumers a range of ‘extensive service/advice’ products. These specialised superannuation products are tailored to meet individual needs. Consumers with specific requirements and who value financial advice typically seek out these products. IFSA estimates there are far fewer people in these sorts of products, and that the fees range from 2.1 to 2.4 per cent (inclusive of fees for advice) and increasingly there are discounts for volume being offered.
Finally, some people are prepared to pay not only running costs, but also invest their own time, to manage their own superannuation in a DIY arrangement. The real costs of these funds, personal time included, is not well-known, but the extra it may cost these members to manage their own super, appears to be a ‘control’ premium that they are willing to pay.
The good news for consumers is that comparing apples with apples is about to become much easier. From March 11, 2002, the new superannuation regulations under the Financial Services Reform Act mean that all funds will be subject to consistent fee disclosure requirements. Fees will be shown as both a percentage and as a dollar illustration. The percentage, in the form of an Ongoing Management Charge (OMC), is calculated as total expenses divided by net assets. The dollar illustration will require all expenses to be shown on the basis of a $10,000 investment.
With the legislation resolving the issue of the presentation of fees and the availability of this information, the other critical issue in any retirement strategy is choosing the right product.
It is important, therefore, to acknowledge the benefits that a competitive market delivers in terms of the generation of a wide range of offerings, to meet differing needs of consumers. We are not all the same. We don’t all choose to drive the same car, live in the same house or invest the same way. Similarly, our retirement savings needs are not the same.
Competition in our industry has delivered exactly what consumers want and need — a variety of products and services at a range of prices. From low-cost industry funds, simple retail funds and corporate master trusts, to public sector and corporate defined benefit schemes, to retail master trusts (largely for self-employed people looking to make significant additional contributions). By and large, there’s a product out there to meet most people’s needs.
The recent debate on fees has confused the various products on offer. Some of the press has been very damaging — it has given a false impression to consumers that they are in high cost products and that there is little point in making further contributions.
In the current climate of uncertainty, it’s essential that the correct information on fees and the range of products is readily available, so that we can all make informed decisions about our retirement savings strategies.
— Lynn Ralph is CEO of IFSA.
