(Pictured: Adam Gee and Geoff Warren)
by Greg Bright
How can all these people be so wrong: Jeremy Cooper, two successive Federal Governments, the Financial System Inquiry and the Grattan Institute? But there is growing evidence that the focus on fees resulting in MySuper is failing members and that all those people are wrong.
Two independent studies published in the past two weeks highlight both the failings of the MySuper low-fee system and show how the system is at odds with what the super funds themselves believe is in the best interests of their members. The studies were by Geoff Warren, the research director at Centre for International Finance and Regulation (CIFR) and a former asset consultant who is on leave from Australian National University, and SuperRatings.
Warren, who spoke to his findings at last month’s workshop for the Paul Woolley Centre at the University of Technology, Sydney, interviewed 28 executives from 20 funds about how they designed their MySuper offerings.
He concluded that there were shortcomings with the “one-size-fits-all” approach of MySuper and most fund executives wanted to increase tailoring to individual member needs.
“The industry’s intent to tailor towards members sits at odds with the FSI’s [Financial System Inquiry’s] focus on competition, costs and potentially commoditisation through a competitive tender [which was a proposal of the Grattan Institute],” he said. “The FSI is going against the grain.”
SuperRatings produced a report last week, marking the 12th year of super industry benchmarking by the firm, which concluded that fees were not the most important factor to make comparisons between funds. SuperRatings said:
> Low fees have little correlation with fund performance or retirement outcomes.
> Despite a drop in fees across the industry, particularly through MySuper, this has not provided any materially better outcomes for fund members.
> Fee structures may continue to move away from fixed-dollar amounts to asset-based fees.
> There is a danger of a ‘race to the bottom’ when it comes to fees.
> The total cost of passive investment management often exceeds the benefits.
These results concur with those of the other major super fund research firm, Chant West, which showed last year that there was actually an inverse relationship between after-fee returns and absolute fee levels – that funds which paid higher fees to their managers tended to deliver better net returns to members. Chant West also showed that the vast majority of commercial retail MySuper products used passive management exclusively, whereas the not-for-profit funds tended not to – continuing to employ active management.
Adam Gee, chief executive of SuperRatings, said: “While some commentators [Grattan Institute included] suggest a tender process to appoint default funds is the best way to drive fee savings, SuperRatings believes this is an ill-conceived concept and any assessment based on only one criterion is fraught with danger.”
He said that “net benefit” – investment returns less all implicit fees and taxes – was the only meaningful basis for comparison of fees and investment performance.
Annoyingly, super fund executives seemed to intuitively know this when they set out to design their MySuper default funds, as required to do so under the former Labor Government’s “Stronger Super” legislation, which was subsequently adhered to by the current Coalition Government. A low-fee MySuper default was one of the recommendations of the 2010 Cooper Inquiry into the super system. Jeremy Cooper, who chaired the Super System Review, had been deputy chairman of ASIC and is now chairman of retirement income at Challenger.
In his interviews with executives of the 14 not-for-profits and six for-profit funds, Warren reported:
> Almost all – 13 – of the not-for-profits mentioned the demographics of their membership base in designing MySuper options, compared with only one of the for-profit funds.
> Nine of the not-for-profits sought member behaviour information and feedback compared with two of the for-profits.
> Nine of the not-for-profits discussed the language of life-cycle theory (adjusting asset allocation for member age and other specific factors) compared with three of the for-profits.
> Only two of the not-for-profits reported being primarily focused on sequencing risk, compared with five of the for-profits.
> Half (seven) of the not-for-profits said the cost or fee budget associated with My Super impacted on asset choice, compared with all (six) of the for-profits.
SuperRatings recently concluded a study of major super funds with a 10-year performance history. This showed that the funds which had the lowest fees generally also showed underperformance in relation to their investment earnings. Conversely, the funds which produced the highest net benefit for members did not have the lowest fees. For instance, the fund with the second-highest net benefit was ranked 78th on the low-fee scale in the study.
“Our analysis suggests there can clearly be an inverse relationship between fees and outcomes for members,” according to SuperRatings’ Adam Gee. “This certainly supports our view that a tender process based purely on fees will not improve the retirement outcomes for most people.”
While fees paid by members have been reduced with MySuper products, SuperRatings is concerned about how this has been achieved. Gee said: “In some cases fund managers have moved their entire portfolio from being actively managed to a fully passive index approach, with investment returns simply aiming to replicate the underlying indices, in a virtual race to the bottom based on fees.”
To make matters worse, SuperRatings discovered that even among the completely passive MySuper products, there was an “unjustifiable” disparity in fees. It would be reasonable to assume, the research firm said, that such products delivered similar returns for similar fees (given similar asset allocations). But the fee range was between 0.038 per cent of funds under management to 1.34 per cent per annum.
“We are concerned that substantial profits are being made by some funds charging excess investment fees for their passive investment products,” Gee said. “Whilst we believe there is a place for passive investment products, they must be appropriately priced to ensure that the net benefit to the member is reasonable and competitive.”