Super shake-up: Creeping costs the concern at all levels

Self-managed super funds got a surprise clap on the back from the Productivity Commission report, which shows self-directed investors, with annual returns of about 5.6 per cent a year, are doing just as well as bigger funds.

But the catch is that the good news is heavily tilted towards wealthier SMSF operators with more than $1 million in superannuation. The report says smaller funds — those with investments below $100,000 — continually face higher costs that drag on ultimate investment outcomes.

In fact relatively high costs in super are a concern at all levels: as the report explains “entrenched underperformance” and “multiple accounts” are the two biggest problems facing the system.

Proposed reforms to create a single, lifelong default fund coupled with the removal of multiple insurance policies would greatly benefit all workers, the report says. “Even for a 55-year-old today, the difference could be up to $60,000 by the time they retire. And for today’s new workforce entrant, they stand to be $400,000 ahead when they retire in 2064,” it says.

Separately, there is mounting evidence that the standard picture of SMSF operators as older, conservative investors is challenged by data in the report, which says SMSF members are getting younger and richer. Just 23 per cent of new SMSF operators have less than $100,000 on commencement, compared to 35 per cent in 2010.

The higher fund flows going into SMSFs will be needed because SMSF costs are escalating — the report shows costs on average rising from $5100 a year in 2013 to $7300 just three years later.

More broadly, the report suggests most people who have default funds “outperform the system on average” — especially if they are in an industry fund.

A big cause of poor performance is workers being defaulted into poorly performing funds; such funds are in the minority but that is little consolation for those stuck in them. The report says most, but not all, underperforming funds are in the retail category.

More broadly, the report says:

• A third of all super accounts — about 10 million — are “unintended multiples”;

• Reported fees have trended down on average, driven mainly by retail funds’ administration costs falling from a high base;

• Choice of fund is crucial: the commission offers a cameo where being defaulted into a single top-performing MySuper product would lift the retirement balance of the median 55-year-old by up to $61,000 when they retire;

• The commission sees the bewildering array of products on the market as a negative, suggesting there are more than 40,000 products to compare, although competitiveness can be superficial at some levels;

• Regarding insurance, the commission says funds must provide better value to members. It notes “not all members get value out of insurance in super” and that many see their retirement balances eroded, often by more than $50,000, by duplicate or unsuitable policies.

James Kirby is The Australian’s Wealth editor.

WEALTH P22-23