Super fund industry consultant and managing partner at Tria Investment Partners, Andrew Baker, said the Grattan Institute argument that you “can slash costs in super without any negative consequences” fails to provide a complete view of the super cost debate.
Mr Baker said the Grattan Institute report for example ignores the fact that “for many members, their biggest cost is not administration and investment fees at all – its insurance premiums”.
“Apart from getting your priorities right, insurance demonstrates that there aren’t any free lunches,” said Mr Baker.
“If you want lower costs, it involves trade-offs – you can have lower insurance premiums, but you have to trade off benefits.”
Mr Baker said it’s the same for superannuation.
Active asset management he said for example is the biggest cost driver for the not-for-profit super fund sector and a significant cost for retail super funds as well.
“So if you want to drive down costs in not-for-profit, you are talking about switching to passive management of public market assets, and removing relatively expensive private market assets entirely,” said Mr Baker.
However, most not-for-profit chief executive officers, Mr Baker believes, would consider this a “bad trade-off” leaving their members “worse off in net terms”.
“Especially, funds like REST which have done well from their active managers.”
Mr Baker said a transition from active to passive management will also mean a “national trade-off”.
“The government wants the super system to fund new infrastructure, the needs of growing local companies, and to bail out the financial system when it gets into difficulty – that’s active management,” said Mr Baker.
“You can’t have it both ways.”
Mr Baker argued that if Australia wants a flexible super system that can make significant investments in infrastructure and respond with large amounts of capital during times of great national need, “you have to accept higher costs”.
“The financial crisis demonstrated that what mattered when the chips were down was not the cost of the super system, but its ability to step up with urgent recapitalisations when banks and major companies might conceivably fail and take the economy into depression,” he said.
“What’s the cost of that scenario? A passive system might be low cost, but it’s going to struggle to do much else.”
