The Stronger Super reforms are unlikely to reduce the $21 billion Australians pay in super fees each year “by much more than 10 per cent”, argues a new Grattan Institute report.
Public policy thinktank The Grattan Institute has released a report titled Super savings which restates the case for a competitive tender process for default super.
The report, penned by Grattan Institute productivity growth program director Jim Minifie, echoes arguments made in his April 2014 report Super Sting: How to stop Australians paying too much for superannuation.
The new report argues that the average administration fee is too high, with Australians (excluding SMSFs) paying $5.9 billion to administer their accounts.
"Administration fees in choice and default superannuation are higher than they need to be for three main reasons. First, about 12 million superannuation accounts are not needed. Second, there are still too many funds. Third, many people are in funds that are inefficient or provide low-value services," said the report.
The average administration fee is also higher than it needs to be, with "lean single-sector products" charging well below the average for MySuper products, said the Grattan Institute.
A move away from active management and towards more passive management would also strip costs from default superannuation, Mr Minifie argued.
In general, the lack of member engagement with superannuation in Australia has created a relatively expensive system, he said.
"There are too many accounts, too many funds, and too many of them incur high costs," Mr Minifie said.
"Australia has many high-performing but lean funds. If other funds charged what they charge, account holders could get the same performance, but pay $4 billion a year less in administration and $2 billion less in investment management," he says.
Looking at the Stronger Super reforms and their impact on fees, the Super savings report found MySuper may save members "about $500 million"; SuperStream data standards could save about $300 million; and FOFA will "help reduce fees for choice superannuation products over the long run".
But all of these recent policy initiatives will only reduce fees by "less than 10 per cent", said the report.
"Policymakers can do much better. As the FSI review argues, policymakers must do more to prune out poor products and, unless efficiency improves markedly, create a market mechanism to push for strong performance," the report argues.
"[The reforms proposed by the Grattan Institute] would sharpen competitive pressure on superannuation fees by making funds tender for the right to run a low-cost default fund that all new job starters will pay into unless they make other arrangements," it said.
The Financial Services Council (FSC) welcomed the release of the report, acknowledging that super fees are "higher than they should be".
FSC chief executive Sally Loane said her organisation has always supported an open market in the default superannuation system to drive competition.
"Both Grattan and David Murray’s Financial System Inquiry have proposed opening the default super system to competition − we encourage the Parliament to support reform in this sector," Ms Loane said.
The FSC said the current Fair Work Commission (FWC) selection process for default funds creates "unnecessary duplication and cost".
"The FWC process is also anti-competitive because it favours incumbent award default funds," the FSC said.
Industry Super Australia (ISA) said the Grattan Institute report "adds to the consensus of other recent reviews that a merit-based selection process is essential for Australia’s default superannuation funds".
However, the ISA cautioned against "reinventing the wheel" with a national tender process.
"ISA believes the existing process to a select super safety net of high-performing funds can be expanded and strengthened in a number of ways," the ISA said.
"Prohibit banks or related entities from selling default super fund services to an employer where the bank is already the main business banking provider to the employer; and ensure retail and bank-owned funds have delivered median returns to their default super fund members before they are permitted to pay dividends from their wealth management business," the ISA said.
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