Australians pay up to three times more in superannuation fees than they should, costing $10 billion a year in retirement savings, a new report from the Grattan Institute argues.
In Super sting: how to stop Australians paying too much for superannuation , report author Grattan Institute Productivity Growth Program Director Jim Minifie, finds that Australians pay fees of 1.2%, on average, on superannuation account balances, which is more than three times the median OECD rate.
That figure equates to a massive 15% of total savings over the lifetime of the super fund, but Dr Minifie says higher fees don’t lead to higher returns. Australian funds charging the highest fees consistently deliver lower returns than other funds once fees are taken out.
The report also found that fees reduce as a percentage the larger the super fund, the actual fees charged have grown across the board over the past decade.
Dr Minifie argues in his report that reducing fees by at least half would inject $10 billion back into the system and retirement accounts. The current shortfall has a flow on effect for taxpayers, who are forced to pick up the tab via pensions when superannuation runs out.
“It’s the largest single opportunity for micro-economic reform in the Australian economy and it is long overdue,” Dr Minifie.
The report recommends two reforms to reduce superannuation costs: a new low-price default fund for new job starters, plus using the tax return process to allow taxpayers to match their fund against the new fund — and switch on the spot.
“These reforms might reduce the revenues of super funds, but more importantly, they will take the nasty sting out of super for most Australians,” Dr Minifie says.
He says costs are too high because of assumptions that market choice will see account holders choose low-price funds, thereby forcing others to lower their fees to compete.
“But this approach has not worked in Australia or anywhere in the world,” he says. “Superannuation is inherently opaque and most people do not make an informed choice, instead paying into a default fund chosen by their employer.”
Calculations in the report suggest that even with conservative assumptions someone turning 30 this year will lose more than $250,000, or about a quarter of the total balance, when they retire.
A 50-year old will have their super balance reduced by almost $80,000 in fees (in today’s dollars) at retirement.
The total fees paid in Australia now exceed $20 billion per annum.
Dr Minifie says comparable systems overseas deliver similar value to the Australia industry for just $5-to-$6 billion. The result is that Australians are losing between one third and a quarter of their retirement savings to fees.