News Limited Network
October 28, 201212:00AM
IT certainly has been a super industry, delivering fabulous returns for each of the 20 years that it has been in operation.
Palatial beach houses, foreign built convertibles and luxury saloons, the odd yacht and frequent trips to exotic destinations. That’s your superannuation at work. Except that those benefits have flowed to those fortunate enough to work in an industry that has a government guaranteed and regulated inflow of cash but no rules regarding fees or performance.
For those it was supposed to benefit, a rapidly ageing Australian workforce, it has been a different story, particularly in the past five years as the Global Financial Crisis and a lacklustre Australian stockmarket have savaged returns.
There are two main reasons. The fees being skimmed off the $14.2 trillion in national savings are way too high. And the performance has been abysmal.
“You can see why it is such a honeypot,” says Alex Dunnin of research group Rainmaker. “It would be a different story if there was some decent returns but for most people, their superannuation has gone backwards in the past five years.”
The reason? The main one is the manner in which fees are applied. Rather than charge a flat fee for a service with maybe a bonus for good performance, our superannuation industry charges a percentage of “funds under management”.
So the bigger the pot becomes, the more money the industry earns, regardless of performance.
No wonder the industry is overjoyed at the Federal Government’s recent decision to lift the mandated contributions to 12 per cent of wages.
Another reason relates to the industry structure. It is built like a Sara Lee cake; layer upon layer upon layer. For a start, there are more than 400 superannuation funds, resulting in an enormous duplication in administrative and back-office functions.
It doesn’t stop there. The super fund manager has to choose where to invest the money and for this, a specialist asset allocation consultant is employed. That job done, the funds then are deployed to various investment funds. Many of these investment funds are run by the AMP and the big four banks. Those running the investment funds use brokers to conduct transactions. And each step of the way, fees are paid.
Despite all that highly paid expert advice and administration, the returns for an alarming number of funds have failed to keep pace with inflation, even over a 10-year period.
Even those figures are incorrect. For on top of the 15 per cent tax and the unregulated fees, superannuation schemes include life insurance policies, the fees for which are deducted after the returns are calculated. So in many cases, the returns are simply paying the insurance premiums.
The Australian head of one of the world’s biggest investors, Justin Arter of BlackRock, recently highlighted the need for change and for consolidation in the industry, arguing it was time for super funds to merge and then run their own affairs in house, rather than outsourcing investment decisions.
In recent months, many of the retail superannuation funds have claimed that fees finally are falling. But in many respects that simply is a manipulation of the truth. Many of the retail funds – those supposedly run by professionals – have split their fee structures. Even though they still largely distribute through financial planners, they’ve conveniently isolated the planner’s fee. So the fee is the same but you get two separate bills instead of one.
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