By Alan Kohler and Ian Verrender
October 27, 2012

WHEN Jeremy Cooper was tasked with examining Australia’s superannuation system almost three years ago, he and his fellow committee members were stunned with what they discovered.

Almost 20 years after the introduction of compulsory superannuation, the Cooper Review once and for all debunked the myth that Australia’s superannuation scheme was a world beater.

‘’It was a fabulous idea by Paul Keating to introduce it,’’ one of the Cooper Review’s seven panel members told Eureka. “But the government was hugely naïve in just handing the whole thing over to the private sector to run.’’

What the Cooper panel discovered was an industry riddled with conflicts of interest, focussed almost entirely on enriching itself and a woefully inadequate back-office structure.

“There were literally billions of dollars floating about the system that were simply unaccounted for. All these super accounts were just missing. This was people’s retirement savings. I mean, how often does a bank lose your mortgage?”
The Cooper Review’s final report was delivered to the Federal Government more than two years ago. And while it managed to outlaw some of the blatant rip-offs that had infected the system, improved regulation, and created a low-cost default option for those disinterested in taking an active role in their superannuation, many of the problems remain.

Fees are still way too high. Performance has been woeful. The system isn’t a retirement or pension plan but rather a badly designed investment scheme. And governments continue to tinker with the system, particularly its tax treatment.

Despite the abysmal performance of most super funds in the past five years, the fee take for the industry has continued to grow.

According to research by superannuation intelligence group Rainmaker, the fee take by the superannuation industry has outpaced inflation, even in the years since the 2008 meltdown on financial markets that has seen most account holders watch their retirement balances retreat.

“Total super fund fee revenue is about $17 billion, an amount that is up 3.6% in the past three years,’’ according to  Rainmaker’s director of research, Alex Dunnin.

That old adage about lies and statistics was never more starkly borne out than in the superannuation industry.

Stung by the criticisms, industry lobby groups now claim that overall fees are reducing and at a fairly rapid clip.

That may be true. But it has nothing to do with the industry, particularly the professionally managed retail industry, lowering their cost structures or their fees.

“Superannuation system costs are sliding down ever so slightly, but before anyone tries to argue that fees are dropping they should acknowledge that it’s due not to funds lowering their prices but consumers changing their product preferences, getting wealthier and qualifying for fee discounts,” Dunnin says.

In fact, the biggest influence on the lowering industry cost structure is perhaps the most damning indictment of the superannuation industry.
More than 30 per cent of the $1.4 trillion in funds under management in the Australian superannuation industry is now in self-managed super funds. Given those funds are controlled by just 10 per cent of account holders, it is clear that it is the richest Australians, disillusioned with the performance of the industry, who have opted out of the system and elected to take matters into their own hands.

That leaves the vast majority of the population – middle and low income earners who were supposed to be protected by the system – at its mercy.

The cost of running a self-managed fund is at the bottom of the scale, way below the costs incurred by the professional industry. So given the exodus in recent years out of the professionally managed industry and into self-managed schemes, overall costs should have plummeted. That simply has not happened.

According to Dunnin, overall fees now average 1.26% of assets under management, down from 1.32% in 2008.

“In an era of technological advancements and efficiency dividends, for superannuation fees to be reducing so slowly shows the sector is largely immune from normal competition forces,” he says.

And the problem largely lies in the way fees are charged and measured; a percentage of funds under management. The fund manager makes a fee regardless of performance. Your balance may shrink. But the fee flow goes on. So the incentive for a fund manager is to aim for mediocrity, to stay in the middle of the pack. For every week, 9 per cent of every Australian’s wages flow into the system, adding to the pot and, as a consequence, the fees.

Another trick employed by the retail funds industry to claim credit for fee reduction is by splitting the fees between themselves and financial planners. Where once they were amalgamated, now they often come in two lots. You pay the same. But it looks as though your fees have been slashed.

Australians have been mandated into superannuation by law. It was an industry created by the sweep of government pen. But the laws and regulations around its operations have been geared not towards performance and building a retirement benefit for an ageing population, but towards ensuring the probity of the players.

And any time there is a suggestion of greater legal or regulatory oversight, there are howls of protest from the industry through its very vocal lobby groups.

But the question needs to be asked. If utilities like power and water – the essentials of modern life – are regulated by what they must deliver and what they can charge, why is something so fundamentally vital as superannuation left to the whims of a free-wheeling, profit seeking industry that has so comprehensively failed its customers.

Where once we had a defined benefit scheme, where you knew how much you would receive on retirement, we now have a defined contribution scheme. The only guarantee now is that you know how much you are paying. But the benefits are subject to the vagaries of the stockmarket. Essentially, the investment risk has been transferred from governments and employers to workers.

Compare the state of our super with that of senior public servants and defence force personnel. They remain on the old style defined benefits scheme, funded by the Future Fund; a sovereign wealth fund created from the sale of the Federal Government’s stake in Telstra.

With a board of guardians, and a team of professional managers, since its creation in 2005, the Future Fund has notched up just one year of negative returns. It has a clear mandate; to invest for the long term and produce a 5 per cent return above inflation and despite some criticisms, it has clearly outperformed the rest of the industry.

While the furore over fees attracts most of the media attention, it really is only half the story about the inadequacy of our superannuation system. The cancer that is eating away out our national savings pool is the lack of performance.

One of the unique features about the Australian system is its over-reliance on stockmarkets, particularly the local market. In the five years to 2007, when the market was running hot, super balances grew, often in double digits, and there were few complaints. But that fundamental flaw in the system – with many funds restricted by mandate to be fully invested in local shares – became abundantly apparent during 2008.

The Future Fund, by contrast, has just 10 per cent of its portfolio allocated to the local stockmarket with debt securities and “alternative” assets accounting for just under 40 per cent. Almost 10 per cent of its portfolio is in cash while forests, infrastructure, property and private equity account for a further 20 per cent.

It is a model for what could have been. Accountable, transparent and subject to public scrutiny, it is everything that our superannuation industry is not. Each year the fund produces a set of accounts on a publicly available balance sheet. Our privately managed funds, by contrast, have their accounts subsumed in other corporate structures, primarily our big banks or the AMP.

Successive federal governments have been unable to avoid mucking around with the system. Incentives are put in place, then removed or diluted. In recent weeks there have been persistent rumours that the Federal
Government, intent on producing a Budget surplus for political reasons, was considering another assault on the tax treatment of superannuation.

Housed within Treasury it is viewed as a taxation liability rather than a long-term social service. In other countries, such as the US, it is administered by the Department of Labour. Our bureaucrats, most of whom will be handsomely rewarded by the Future Fund on retirement, fail to understand that the rest of the nation are foregoing current earnings by socking cash away in superannuation and so should be given a tax break.

Very few Australians understand just how expensive retirement can be. We all are living longer, thanks to improved lifestyles and better health care. That means we will have to save more. But we have a system in place that is failing us as it enriches itself.

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