The FSI report recommended the introduction of a formal competitive process to allocate new default fund members to MySuper products unless superannuation fund fees come down by 2020.
In the report, David Murray asserts that funds could lower fees “without compromising returns to members”.
Furthermore, default super fees have not fallen by as much as would be expected given the “substantial increase” in the scale of the super system, the report says.
The report highlights “costly asset management and active investment strategies” as the second most significant supply-side issue driving higher costs and fees within superannuation.
The way Tria Investment Partner managing partner Andrew Baker sees it, Mr Murray believes superannuation funds could switch over to cheaper passive strategies at “no cost to members”.
Average total fees to members have only declined by 20 basis points (bps) since 2004, whereas the FSI believes they should have declined by 60pbs, Mr Baker said.
“Of the 40bps of increased costs offsetting scale benefits, 15bps relates to investment expenses. So it’s a big target for the FSI,” he said.
The message in the FSI report is that spending so much on investment costs is “a waste of members’ money”, Mr Baker said.
“The FSI argues that lower fees and costs means higher net returns and retirement incomes – that is, that reducing investment costs has no downside,” he said.
“This implicitly says that active management of major public asset classes such as equities and fixed income either produces no net benefit, or imposes net costs on members,” Mr Baker said.
This attack on active management has been “glossed over” in the discussions of the FSI report since its release on 7 December, he said, but it is one of the more controversial super-related conclusions.
After all, Mr Baker points out, the “great majority” of super funds and their chief investment officers believe in active management – so the FSI is effectively criticising one aspect of their operating model.
Furthermore, the dismissal of the benefits of active management by Mr Murray is “obviously damaging to the business model of active managers”, Mr Baker said.
“There’s a big target painted on active managers, both internal and external,” he said.
“If they don’t want to get shot, they need to find their voice and make the case for active management in a more effective and sustained manner than at present,” Mr Baker said.
Rather than an inwardly focused discussion about investment philosophy, active managers need to convince their members of the value of active management, he said.
“The critics will maintain their anti-active campaign, and it’s largely one-way traffic at the moment,” Mr Baker said.
“If they believe in what they are doing, active managers (funds and external managers alike) need to engage and regain the initiative in the debate,” he said.
