The Productivity Commission released its draft report this week into the efficiency of the Australian superannuation system. Its findings are concerning, and all Australians must take an active role in choosing the most appropriate superannuation fund for them. If you don’t, the Productivity Commission suggests it could cost you between $61k and $407k, depending on your age.
What the productivity commission found
The productivity commission found that many superannuation funds recommended by employers failed to deliver adequate investment returns. They described it as a bit of a lottery. That is, if you’re lucky enough to land in a good fund, chances are you could be several hundred thousand dollars better off.
Also, they were critical of the fees scales that the superannuation industry is charging. They noted that whilst the industry has grown significantly in size, that that growth hasn’t translated to economies of scale.
Finally, another key finding was that many Australians have multiple superannuation accounts which attract separate fees and erode retirement savings.
So, how do you know if you’re in the right fund? Let’s have a look at your options.
A retail fund is not a good option
A retail superannuation fund is one that is operated by a for-profit business such as MLC, AMP, ANZ (OnePath) and the like. These products are almost always more expensive and deliver inferior investment performance (as noted by the Productivity Commission).
If you’re in a retail superannuation fund, typically, my advice is to move your super into a better option. Of course, before switching your super you must understand the repercussions of doing so as it could impact your benefits, insurance and so on. The best thing is to get independent advice.
A Self Managed Super Fund (SMSF) is probably not a good option either
SMSFs are the largest sector of the superannuation industry representing about one third of superannuation savings. I believe, SMSFs are over-recommended by accountants and financial planners.
Assuming that you don’t have complex financial affairs, significant wealth, estate planning challenges or any other complexity, the only reason you would need a SMSF is if you wanted to invest in direct property. If you don’t want to invest your super in direct property, then there are superior lower-cost and simpler solutions for your superannuation.
Many prospective clients that I come across that have a SMSF are typically under invested. That is, the SMSF holds a lot of cash that is yet to be invested. This is a good indication they set up the fund without a clear strategy. Therefore, before you establish a SMSF, make sure you have a clear investment strategy in mind so that you can maximise your super fund’s performance.
Industry super fund
Industry super funds are not-for-profit businesses. However, I feel a more apt description of them is not-for-productivity. Whilst industry super funds are typically a better option than retail and SMSFs, I do have some concerns with their transparency and productivity. The Productivity Commission also shares similar concerns to me.
In the past, I have written about the industry funds lack of accountability in reporting and comparing investment returns. In addition to these concerns, the problem with a not-for-profit business is that the absence of a profit motive is worthless if there is no focus on productivity.
For example, it is common knowledge in the financial services sector that industry super funds tend to pay a higher salary compared to the salary that would be offered by the corporate sector for the same role. In fact, a recruitment executive that I have known for many years and trust, admitted to me that one of his clients (an industry fund) intentionally offers a salary 20% higher than the market rate.
Another indication that productivity enhancements can be made is the number of people employed by each industry super fund. One industry fund that manages $44 billion employs approximately 330 people. Another industry fund that manages $65 billion employs 750 people. By comparison, low-cost index fund manager, Vanguard would only need to employ 25 people to manage $65 billion (as it employs 16,600 people worldwide and manages $6.4 trillion). Of course, it’s not meaningful to make a straight comparison but you understand the theme of my argument.
Industry super funds are heavily influenced by the unions and as such, I doubt they will optimise employee numbers any time soon.
A more transparent solution
Typically, we invest our clients’ super using a wrap platform. The benefit of this approach is that it is very transparent. Firstly, it allows us to invest in low-cost index funds that employ various index strategies (which I written about previously). This means we can see exactly what each investment manager is charging us and their performance. Investors also pay an administration fee to the wrap platform provider and this fee is separately identifiable. Finally, as a fee-for-service advisor any fees that I charge for my advice are also separately identifiable.
Therefore, using this solution a client can very clearly see what we are investing in, how we are investing (methodology) and what fees they are paying and to whom. Transparency and accountability ensures there is nowhere to hide. In many cases, it is considerably cheaper than an industry fund.
The ‘holy grail’ of a solution
I believe that the solution mooted by the Honourable Peter Costello makes the most sense. That is, the government should establish its own super fund for all Australians and that fund should become the default fund for all workers.
The Australian government has a proven track record for managing a large amount of money. For example, the Future Fund turned 10 years old last year. It’s investment return for the 10 years ending 30 June 2017 was 7.8% p.a. That compares favourably to AustralianSuper’s (the largest industry fund) return of 5.56% p.a. A government operated fund would provide the much-needed competition to encourage the industry super funds to focus on productivity.
So, what should you do?
If you have multiple super accounts, you must consolidate them (its not difficult or time-consuming to do).
Whilst I have reservations with industry super funds, they are typically a better solution than retail fund and SMSF. However, if you have more than $200,000 invested in super, there is merit in engaging the services of an independent financial planner if you desire greater transparency and accountability.