Managers grab bigger super fees

WHILE superannuation returns plummet, fees and charges continue to rise with the average person now slugged an extra $60 a year.

Managers grab bigger super fees

WHILE superannuation returns plummet, fees and charges continue to rise with the average person now slugged an extra $60 a year.

Super members are not only seeing the local and international investment markets eat up their savings but managers and trustees of their super money are also taking a bigger bite.

Investment fees on a typical super account increased 10.5 per cent in the year to June 2007, according to research house Superratings.

For someone with the most popular balanced investment option, investment management fees increased from 0.57 per cent to 0.63 per cent of the account balance, during 2007.

On top of that, ordinary account keeping fees have gone up about 3.1 per cent. For the average superannuation account balance of around $50,000, these charges now represent an overall slug of about $659 during 2007. That's a $60 increase in fees and charges compared with the costs the previous year.

A new report also suggests that fees paid by super funds to global investment managers are too high and do not represent good value for investors.

"Investors have naturally assumed that they are paying these fees to reward manager skill but in many cases they are wrong,'' according to Graeme Miller, head of investment consulting at Watson Wyatt Australia.

In a report titled A fairer deal on fees, the firm says that many super funds have been paying outperformance fees to managers for simply achieving good returns in a growing market.

The research found that investment fees charged on money in pension or super funds now averages around 1.1 per cent compared with around 0.65 per cent in 2002.

The vast majority of these costs are being paid by super funds to external investment managers and brokers.

Fees charged back to members depend on the investment options they have chosen, according to David Elia the chief executive of hospitality industry super fund, HostPlus.

"If you have a higher allocation towards infrastructure investments and private equity, clearly you pay more for exposure to some of the unlisted assets.

"If you have your money in our Aussie shares option you will be charged 45 basis points. In our balanced option, which is a combination of all the asset classes, you would be looking at about 70 basis points.''

Mr Elia said that when managers outperform the market and generate higher than expected returns for members, they will also be paid more.

"Clearly where managers have outperformed, there will be a requirement to pay them performance fees, so fees may appear to go up but overall in HostPlus our total investment fees have gone down,'' he said.

However, government regulation is also putting pressure on fees and charges, according to Mr Elia.

"You can't understate the compliance costs on funds as a consequence of the dual regulatory model,'' he said.

"The licensing that APRA has introduced and the licensing that ASIC has introduced in the last few years has really increased compliance costs,'' he said.

As investment markets weaken and returns fall into negative territory, performance fees should be expected to disappear but not necessarily so.

Investment managers are on a very good wicket according to Graeme Miller from Weston Wyatt.

Annual performance fees can amount to a free option for the manager, as the upside is uncapped but the downside is limited to the base fee, he says.

"Performance fees have been less than effective because they are generally poorly designed and tipped in managers' favour,'' Mr Miller said.

"While we strongly believe managers should be fairly compensated, fees are currently too high for the value they deliver, particularly as we enter a lower-return environment.''