The Productivity Commission’s final superannuation report missed an opportunity to show how the industry’s pre-tax investment focus is penalising members who retire on after-tax returns, according to investment manager Parametric Portfolio.
Parametric’s latest research analysis in its After-Tax Returns: Filling in the Productivity Commission’s Report states that members are losing, on average, nearly $200,000 at retirement date based on the commission’s average balanced account over 46 years.
The firm said it used hypothetical modelling to show how members could benefit at around 59 basis points a year for a balanced portfolio (post-all fees and costs) if their fund adopted more tax-effective strategies.
Raewyn Williams, managing director, research (Australia) at Parametric said that while the report provided some insights into Australia’s $2.7 trillion super industry, it stopped short of calculating the impact of tax naivety on an individual’s retirement outcomes.
“The commission was right to ask an important question about superannuation funds’ after-tax investing practices,” she said.
“But it lacked the data and insight to interrogate the matter and provide answers – and superannuation funds and their advisors, by and large, were unable to help.”
Ms Williams said the fact that superannuation funds pay tax on their investment earnings (in contrast with overseas superannuation regimes) should drive differences in their investment approach compared with their global peers.
“Yet in the superannuation landscape, it’s hard to see where the after-tax mission of APRA-regulated Australian funds is shaping their approach to investing,” she commented.
Ms Williams added that after-tax investing is well accepted in principle but minimally used in practice, giving a sense of unexploited opportunity for most funds.
“The Productivity Commission laid down some paths to better member outcomes, including higher returns and lower fees, which make sense in theory but are controversial in practice. Our message is that tax efficiency can be as effective, is less controversial and has hardly been exploited to date,” she said.
“This is despite the exhortations of the Productivity Commission and predecessor inquiries, including the 2010 Cooper Review and the 2014 Murray Inquiry, as well as apparent support for an after-tax investing philosophy from the peak superannuation industry bodies, ASFA and AIST.”
Ms Williams said two conclusions can be drawn from the research.
“It’s valid to group tax efficiency with higher (pre-tax) investment returns and lower fees as levers superannuation funds can use to meaningfully improve a member’s retirement outcomes,” she concluded.
“The benefits we modelled seem reasonable in that they are broadly in line with conclusions from other research we have conducted and are consistent with live investment experience.”
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