When governments decide to force citizens to save privately for retirement (as in Australia), they are inevitably drawn into increasingly complex regulatory oversight: to prevent savers from not doing the things they ought to be doing and from doing the things they ought not to be doing.
Many similar issues require the detailed regulatory oversight of the providers that are delivered a business opportunity they would otherwise have had to obtain through normal commercial practices.
The report suggests that Australians pay far too much for superannuation. The cost (in 2013) was $A20 billion in fees and expenses and that may not seem a lot in an industry that manages A$1,800 billion (June 2014). However, “…customers pay [A]$1,300 on average, every year. These payments to the superannuation industry can and should be reduced by at least half, saving Australians at least $10 billion a year. It is the largest single opportunity for micro-economic reform in the economy.”
The report analysed the long-term impact of fees on account balances:
“High fees mean that on conservative assumptions a 50-year old Australian will have his or her super balance reduced by over $80,000 in fees (in today’s dollars) at retirement. A 30-year old will lose more than $250,000, or over a quarter of the total balance. Under a fairer fee structure, at least half that money could be saved.”
Under Australia’s means-tested ‘Age Pension’, fees will have an indirect effect on future taxes. Higher-than-necessary fees will mean lower-than-possible retirement incomes and so higher-than-needed Age Pensions.
The report also notes that the size of the fees are not reflected in investment returns:
“Australian funds that charge the highest fees consistently deliver lower returns than others once their fees are taken out.”
The report suggests that “Australian funds charge fees that are three times the median OECD rate, on average.”
The report suggests that higher-than-necessary fees are caused in part by the complexity of Australia’s Tier 2 arrangements. We should have expected market forces to temper the fees charged but that seemingly has not happened. The system is “opaque” and so “…superannuation businesses are choosing to charge higher fees.”
“Recent reforms will not help much. MySuper — a more uniform set of products for people who do not actively choose their funds — makes funds somewhat easier to compare, but does little to increase the pressure on fees. SuperStream, a package of administrative reforms, will reduce some costs, but does nothing to address the costs of marketing, sales or asset management.”
The report suggests a tender system that would award the contract for default enrolments to “…a small number of default funds every few years with a tender based on fees. Unless they opt out, all new job starters would pay into these funds.”
Also, the government should supply information at annual tax return time to encourage greater participation in employee choice of provider:
“A new step in the tax return process should enable taxpayers to compare their current fund with the low-cost winners of the default tender.”
PensionReforms draws two lessons from this report: first, that no matter how well a system might be structured and no matter how ‘successful’ it all might look to a casual observer, people and institutions tend to respond in predictable ways. Financial self-interest is a powerful influence.
Secondly, whatever regulatory regime the government establishes (in this case for Tier 2 retirement savings but it also applies elsewhere), growing complexity is inevitable, particularly where there are financial incentives involved. Once governments have painted themselves into a regulatory corner, more paint is usually requested. So it seems is the case for Australia’s Tier 2 (SG) scheme. Any number of reviews have discovered a range of difficulties – see here, here and here for examples.
So it continues. (File size 698 KB; 40 pp) 724