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Australians have $2 trillion sitting in superannuation, which has attracted fund managers like bees round a honey pot — and they are raking it in big time.
Key points:
- Superannuation fees totalled $230b in the last decade
- Fees are rising because they are calculated as a percentage of the total money in the fund
- Therefore, the more money there is in a super fund (which is ever increasing), the more everybody pays
"That's being paid by Mum and Dad taxpayers, voters you see walking around the street," said Alex Dunnin, director of research at Rainmaker.
"They would be stunned by how much they're paying in super fees."
According to Rainmaker, a leading research house, superannuation fees totalled $230 billion in the past decade — nearly a quarter of a trillion dollars.
To give some context - it is the equivalent of 230 Sydney Opera Houses, or 531 Airbus A-380s or 55 of the new submarines the government is planning to build in Adelaide.
"Australians are paying some of the highest prices in the world for what are quite simply basic financial services," said Richard Denniss, the chief economist of The Australia Institute.
In 2016, the single year figure for superannuation fees was $31 billion according to Rainmaker — up from $20 billion just three years ago.
About 26 per cent (or $8 billion) was for administration, $7.8 billion went to investment managers, and the biggest item (at $8.4bn) was for insurance sold through superannuation.
Financial advisers received $5.9 billion and $600 million went towards asset consultants and custodial services.
"There's old fashioned coupon clipping going on here," said Mr Denniss.
"It's an incredibly profitable industry and if you look at the BRW Rich List, you'll see just how profitable it is."
Why are superannuation costs rising?
Superannuation costs are skyrocketing because the fees are calculated as a percentage of the total money in the fund — as opposed to a fixed cost.
So the more money there is in super, the more everybody pays.
This is an issue that rankled former federal treasurer and now Future Fund chairman Peter Costello — who three years ago gave the superannuation industry a very public dressing down.
"Some of the spokesmen for the industry show all the awareness of spoilt brats," said Mr Costello in 2014.
What really irked him was his belief the super industry does not really earn what is now $31 billion a year.
"Mostly the returns in the industry follow the equity market," Mr Costello said.
"We've had two good years of returns as the equity markets are up, and we've had two bad years of return when they're down."
Mr Dunnin agrees with the former treasurer's sentiments.
"He gets wiser with years, Mr Costello, but what's really fascinating about what he is saying is that if you look at the returns of super funds, they are 90 per cent correlated with the returns you get out of the stock market," Mr Dunnin said.
Which again begs the question, why does super cost so much?
Pauline Vamos, who ran the Association of Superannuation Funds of Australia (ASFA) for nearly a decade, said: "There's no doubt fees have got to come down."
She says the status quo is not good enough.
"Let's unpack where the fees are and where people are clipping the ticket where they shouldn't be - including agents, including advisers, including fund managers, including all parts of the value chain."
The good news is the tide is slowly turning as banks try to make themselves competitive with industry funds in the lucrative default fund space, where fees of less than 1 per cent a year can be found.
"Five years ago, we would have said if you're paying less than 2 per cent, you are getting a good deal," Mr Dunnin said.
"Now if you're paying more than 1 per cent, you are on the high side."
Despite that, he still believes the total cost of superannuation is about 50 per cent higher than it should be.
Mr Denniss believes the Future Fund could be used to bring genuine competition.
"If ordinary citizens just wanted to invest in that, the funds management capacity's already there," he said.
"Why not let the public sector compete directly with the private sector and let the customer decide who gives them the best product?"
For now, the massive transfer of wealth from retirement incomes to the superannuation industry continues.
Topics: business-economics-and-finance, superannuation, australia
First posted