- Reasons for ‘sticky’ fees in super are rarely acknowledged or understood by politicians.
- The free market theory that competition reduces costs doesn’t work very well in superannuation.
- Some members may decide they prefer cheaper costs over ‘independent’ directors.
The stock market’s immediate reaction to the Murray report suggests there’s not a lot to worry about the shares of the big banks, which are stuffed into most SMSF portfolios. And the “not to worry” reaction probably will also apply to its superannuation recommendations.
Many of the super recommendations appear to be several years away. This applies particularly to the suggested changes to introduce more formal competition over fees and default funds. The idea of pushing more people into a formal income product in retirement also will require a lot more reforms for example, on annuities. Recent governments have shown little enthusiasm in this area and, in general, it seems the government will leave the tough decisions and work to the regulators, APRA and the ATO.
Promises, promises
Almost every review of superannuation – and there have been plenty – has tackled the question of fees, leading to regular promises of reduced fees and higher account balances at retirement. But fees haven’t fallen much, though MySuper lower-cost model funds now seem to be making some very modest progress. Anyway, it seems any formal action on the Murray recommendations won’t begin until 2020.
There are several obvious reasons why fees are “sticky”, which are rarely acknowledged by the politicians who designed the system. The first reason is that by offering a bewildering range of fund choices, the Liberals imposed high cost structures, all in the name of giving some members unlimited choice of investment. The choice regime also imposed restrictions on many funds, which had to retain liquidity to handle members switching.
Second, politicians still haven’t twigged that the free market theory that competition reduces costs doesn’t work very well in superannuation. This is largely because the majority of super fund members are still disengaged from their super accounts. In addition, the continual tinkering with super has meant funds have had to spend millions to update systems over the last decade.
Harmony required
The chance of any effective government action depends in part, as the Murray report notes, on the need for “broad political agreement” on the objectives for super. But it’s clear that the deep ideological divide in the industry hasn’t lessened after more than 25 years of squabbling. And now this report has re-ignited the anti-union arguments about industry funds, with the predictable reaction from the industry funds.
The Murray report’s argument against representatives of employers and unions sharing board seats (with an independent chairman) appears to elevate a desire for “governance” over actual member returns. Given the recent scandals in the CBA and other financial planners, this seems ironic timing.
Industry fund members might prefer better returns rather than independent trustees. Indeed, the long history of outperformance of industry funds over retail funds, suggests there could well be an argument to change the boards of retail funds – and adopt the low-cost business model (as is happening with the new MySuper funds).
A long time coming
As for current SMSF fund members, there’s probably a likely time gap between David Murray’s recommendations and any future Federal Government action. Current political reality is that the government is scrambling just to regain momentum in its May Budget measures, let alone take on a new round of reforms involving a fight with the banks.
With a major discussion paper and then a debate on tax reform to come, it’s unlikely that any decision on prohibiting borrowing by SMSFs for direct property investment is on the immediate horizon – assuming the government had the stomach to act.
Existing arrangements would have to be grandfathered – which will be an invitation to property floggers to push more SMSFs into borrowing at what might be an inopportune time in the property market. More likely, any limit on borrowing seems likely to be enforced by the regulator leaning on lenders to limit their loans for property.
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