Superannuation members pay a collective $32 billion in fees each year but fee increases are a very real prospect, according to Mercer interim chief executive Jo-anne Bloch and Rice Warner.
That “very real conversation” was happening between Mercer and its funds as a result of shrinking account numbers and the plundering of many accounts under the government’s early super release scheme.
More than $13 billion has been withdrawn from super accounts since the government permitted fund members experiencing hardship due to COVID-19 to access up to $20,000 and Ms Bloch said close to 100,000 superannuation accounts had been completely drained of savings.
She said conversations relating to fee increases started more than a year ago as a result of the Productivity Commission and financial services royal commission recommendations to reduce multiple accounts in the $3 trillion system.
Forgotten accounts were yielding about $2.6 billion annually and subsidising the administration costs of the broader super pool. That was no longer happening and the volume of super transactions had also increased as COVID-19 triggered a wave of customers switching investment options, forcing funds to rejig their portfolios.
“It’s a difficult situation. Everything is going up except membership,” she told the Australian Financial Review.
Superannuation consultancy Rice Warner warned in March that fees charged by super funds might have to rise. It said that most funds subsidised their operational costs, at least to some extent, from asset-based fees on their investment portfolio. As markets fall, so too does fee revenue, it said.
“These contributions to fee income will have fallen considerably, and several funds will now be in a position where they will need to cut services or increase member fees.”
Meanwhile, there is a long line of critics ready to blast the fees currently applied by many funds.
Leith van Onselen, chief economist at the MB Fund and MB Super, says our superannuation system is highly inefficient. “Australia’s management fees are among the highest in the world with Australian households spending twice as much each year on superannuation fees as they do on electricity,” he told MacroBusiness.
“The number of people employed in the superannuation industry is also astronomical, dwarfing Australia’s entire welfare system and on par with our entire defence force and its bureaucracy.”
Australia has one of the biggest pools of funds under management (FUM) and that “defies the notion of ‘economies of scale’,” he said. “That is, as FUM grows, management fees should shrink proportionately.
“… it should cost superannuation funds little more to manage $3 billion of FUM than $300 million of FUM. Accordingly, average management fees should have shrunk as Australia’s superannuation savings pool has grown nearly exponentially.
“The upshot is that Australian households are being milked for fees …
“Clearly, the massive honey pot of fees available under compulsory superannuation has created a giant parasitic industry. Lifting the superannuation guarantee to 12 per cent would only feed this monster, creating a bigger pool of FUM available for super funds to drain.”
Alex Dunnin, director of research and editorial at Rainmaker, said the average fee on super funds today is about 1 per cent and trending lower, but that many people were stranded with much higher fee products.
Liberal Senator Andrew Bragg has taken aim at not only fees but also the entire superannuation system in his newly published book, Bad Egg: How to Fix Super.
Senator Bragg says the super system needs “drastic surgery”, does not work hard enough for its members and the fees are too high.
Do you understand exactly how much you are paying in super fees? Are you happy with those fees?
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