Superannuation and technology were two key areas of change recommended by the Murray FSI Report which both have the potential to benefit consumers to the tune of tens of billions of dollars in savings.
1) Superannuation fees still too high –
Superannuation fees are too high in Australia and reform is required to better benefit consumers. This was one of the key findings of the Murray Financial System Inquiry (FSI) Report, Chaired by former Commonwealth Bank CEO, David Murray and released on December 7th. The Report stated that “fund fees could be lowered without compromising returns to members”.
The decline in superannuation fees over the past decade has only been modest given the economies of scale that the sector has achieved. The size of the average fund increased from $260 million in assets in 2004 to $3.3 billion in 2013, whereas average fees fell by just 0.20% in total over the same period. As a result, fees paid to the average superannuation fund have ballooned 988% over the past 10 years.
In general, competition has led to more features and investment options at the expense of lower costs and better after-fee returns for superannuation members. In part this reflect that that many consumers are not fee sensitive so switching rates are low. The Report highlighted two broad explanations for why superannuation fees have failed to fall significantly over time;
• Supply side issues: market fragmentation; costly asset management and active investment strategies; taxation and provision of insurance; and government policy changes.
• Demand side issues: weak member-driven competition due to lack of member interest; complexity; lack of comparability of fees and performance; and agency and structural problems.
The Stockspot Fat Cat Funds Report1 discussed how a number of these factors have lead to higher fees within super, namely the high costs active asset management (where most super funds are invested), lack of comparability of fees and performance, and agency issues.
The FSI Report also highlighted higher marketing expenses as a driver of higher fees between 2004-2013. The 0.05% of annual marketing expense mentioned in the report might not sound a large number but equates to $900 million spent each year on super fund marketing.
In the past Stockpsot has questioned the justification for such advertising, particularly in the non-profit superannuation sector whose sole purpose is to act in the best interest of current members. Evidence would suggest that more aggressive marketing to attract new members over the past 5 years has not benefited existing members through greater efficiencies or lower fees.
The FSI Report also looked into the impact that the MySuper reforms have had on superannuation fees and was disappointed to find a relatively minor reduction in fees of 0.15% across comparable default options between 30 June 2011 and 31 March 2014. This compares to the Super System Review which suggested that fees could be reduced by up to 0.70%.
While the FSI Report recognises that “it’s too early to draw any firm conclusions around the impact of MySuper”, the early results are clearly underwhelming and demonstrate that further reforms are required to drive effective fee-based competition.
To combat the fee issue, the FSI Report has recommended a tender process to allocate new default fund members to MySuper products. This would appear to be a sensible recommendation and in line with successful international precedent in Chile. A tender based system would increase competition significantly above the level that currently exists within MySuper and force funds to actively compete on price. The median MySuper fee is still around 1.00% per annum or double the fee levels charged by similar sized default pension funds around the world. The Grattan Report2 suggests that this fee level could be significantly reduced through a tender process. The Stockspot Fat Cat Funds Report found that the fees within S&P ASX/200 benchmarked super funds would need to fall 32% in order for even half of superannuation managers to outperform their benchmark.
Unfortunately for consumers, the FSI recommendation to develop a default super tender process is unlikely to be considered before a review of the Stronger Super reforms in 2020 and not implemented before 2025. If average fees in APRA-regulated funds have the potential to be reduced by a further 30 basis points from such a tender process, then around $3.5 billion per annum or $40 billion in total of potential consumer savings will be forfeited – largely into bank profits – over the next 10 years.
2) Technology can improve financial outcomes for consumers –
Technology is a powerful force for change in the financial system, potentially improving efficiency and competition, and benefiting consumers.
The Murray FSI Report confirms that technology can reduce costs for consumers, decrease risk and improve the quality of and access to advice. Digital empowerment has the potential to give consumers have better access to information and products to meet their needs, and financial services companies can use it to better customise products and enhance internal processes.
Australians are showing themselves to be rapid adopters of technology with 7.5 million Australians accessing the internet via their mobile phones in 2013, an increase of 33 per cent from 2012. More Australians shop online for insurance and financial services than their counterparts in the United States and major European economies. This has contributed to the swift growth of services such as mobile banking and electronic payments.
Competition is emerging from technology-enabled alternative business models, new entrants and services like SocietyOne and Stockspot. Trends, such as the increasing adoption of cloud technology, provide the ability to enable companies to offer products direct to consumers without clunky software, expensive technology platforms and layers of middlemen.
KPMG estimates that $27 billion of current banking industry revenue is under threat of digital disruption.
Stockspot welcomes the Murray FSI Reports’ recommendation to establish an Innovation Collaboration (IC) including representatives from financial sector start-ups and innovators; consumer groups; academia; and relevant Government agencies and regulators. Such a Collaboration has successfully existed for some time in the UK through Project Innovate which supports industry innovation that improves consumer outcomes. The United Kingdom’s ‘fintech’ industry also has its own industry body, Innovate Finance, to support technology-led financial services innovators. This body has fostered a strong fin-tech startup community in the UK.
Stockspot was fortunate to meet some of its founding members at the Sibos Conference in Boston. We forward to participating in the Innovation Collaboration in Australia.
To support the financial system’s shift to an increasingly online environment, the Government has the ability to facilitate industry coordination and innovation to balance the benefits against the risks. This includes improving digital identity solutions to address privacy and data security risks, and ensuring automated advice platforms have the opportunity to compete against traditional providers. The aim should be to enable transactions and business to be carried out digitally end-to-end; and not make it more difficult and expensive to conduct business through purely digital channels. This will ensure we can use technological innovation to improve financial system efficiency and help reduce fees to consumers.
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