The Australian government is considering a massive shake-up of how super funds are run

Win McNamee/Getty Images

A national auction for the right to run Australia’s default superannuation fund is being proposed as a way to reduce fees and increase returns to wage earners.

Australia’s deep pool of superannuation funds, now at $2 trillion and still growing, is an attractive honey pot for the finance industry.

The fees to advisors and managers of superannuation were about $16.9 billion in the 2013 financial year, according to actuarial research house Rice Warner.

And the Financial System Inquiry noted that these fees have not fallen by as much as would be expected given the substantial increase in the scale of the superannuation system.

The reason? There’s little consumer-driven competition, particularly in the default fund market. That’s funds the compulsory 9.5% of wages get tipped into if an employee doesn’t nominate a super fund themselves.

Now the Productivity Commission has been tasked with finding a way of inserting a little competition into the process and reducing those fees charged.

The average fee charged is 1.12% of the annual value of the funds held but varies a lot. The fees can be as low as 0.48% or as high as 1.8%.

Cutting the average to just 1% would save at least $1.6 billion a year. That’s extra money going directly to be used at retirement.

“An efficient superannuation system is critical to help Australia meet the economic and fiscal challenges of an ageing population,” says the Productivity Commission in an issues paper.

The commission says MySuper, the current default system, has been a strong step in the right direction but more needs to be done to reduce fees and improve after-fee returns for fund members.

Among the competition models being considered is an auction or tender by funds wanting to be the default provider.

The tender would focus on the fees charged.

One example is Chile where in 2008 a public tender system was introduced to increase competition between authorised pension funds and to reduce fees.

This involves a tender every two years where funds bid on being the default fund for new employees entering the workforce.

Since that scheme started, the fee paid by new default account holders has fallen 65%.

This chart shows how Australia compares to the fee system in Chile:

Source: Grattan Institute 2014

“The simplest approach would be to run a tender based solely on fees (also known as a reverse fee auction),” says the Productivity Commission.

“This would be objective and transparent, and might be lower cost to run, implement and monitor than more complex sets of metrics.”