this product is unavailable for purchase using a firm account, please log in with a personal account to make this purchase.

Superannuation: Fee transparency: still some way to go

Every Issue

Cite as: (2008) 82(10) LIJ, p. 75

Any investigation into super fund fees should consider the way fees are charged to fund members by investment managers.

The recent spotlight on super fees has occurred in part because most super fund members had negative returns on their super last financial year. When returns are negative the effect of super fund fees is more apparent.

Many superannuants may not be aware that even small differences in super fund fees can make a big difference in how much they have when they retire. For example, if you pay an extra 1 per cent each year in fees, you could lose up to 20 per cent from your retirement benefit over a 30-year period.

The renewed attention on fees is also due in part to recent comments by the Minister for Superannuation, Senator Nick Sherry: he announced that the current average fee of 1.25 per cent of funds under management should be lower, given the maturity of the $1 trillion-plus superannuation market in Australia.

Fees are an understandably less welcome part of a super fund account, although most members are comfortable paying a “fair” fee so that their savings are well managed by an organisation with sound principles, experience, expertise and the appropriate governance structures.

At the same time, members want super fund fees to be as low as possible so that their retirement savings are maximised. For this reason, an inquiry into super fund fees is a timely initiative.

The government has said it will review super fund fees; it would seem logical that such a review should examine the largest contributor to super fund fees – investment managers’ fees.

Investment managers are organisations employed by super funds to manage the assets of their members. Most funds employ a number of investment managers to increase diversification. By way of example, legalsuper currently employs 30 investment managers across its 11 investment options.

Investment management doesn’t come cheap. As an aggregate across the industry their fees might be as much as $7 billion annually, given the $1 trillion in super assets invested and the 0.7 per cent fee for a typical default super fund investment option.

For legalsuper, investment manager fees make up more than half the costs we charge our members – 58 per cent of our total fees.

Another important point is that many investment managers charge the same fee regardless of how they perform. Their fee model is to charge fees as a percentage of funds under management, as opposed to a fee for service. In some cases investment managers may be paid more when they perform above benchmark.

This fee approach seems even less fair when you consider that any one investment manager can provide the same or very similar investment products to multiple super funds, and charge each fund a percentage of funds under management.

One of the questions that needs to be asked is: if a fund places $100 million with one investment manager, and then places a further $100 million with that manager, should the super fund pay double the fee?

Also, are the benefits from the economies of scale created by substantial inflows of mandated employer contributions being shared equitably between investment managers and members of the broader Australian community who are the ultimate beneficiaries of the retirement savings being accumulated?

If we’re going to have a debate about super fund fees, as Superannuation Minister Nick Sherry has been indicating, it’s important for policy makers, regulators and superannuants to remember that investment managers are the single largest contributor to costs of super funds, and in most cases they collect their fees regardless of investment performance.

To date, the debate about costs from commissions for advice to super fund members has not included the percentage-based fees that investment managers levy, which are equally deserving of attention.

While investment managers would have us believe otherwise, if we are serious about bringing costs of super funds down the federal government should turn its attention to the investment management industry from where the majority of costs come.


Andrew Proebstl is chief executive of legalsuper, Australia’s largest super fund for the legal sector. He can be contacted on ph 9607 9401 or aproebstl@legalsuper.com.au.

Comments




Leave message



 
 Security code
 
LIV Social
Footer