A key architect of the compulsory retirement savings system lauds its many achievements, stretching from the national economy to the individual. Where it’s double faulting is in serving members – and it needs to be addressed promptly.
With performance and diversification driving demand, these funds are expected to experience four-fold global growth over the next decade to nearly $AU65 trillion.
Why profit-for-member funds continue to outperform
The latest annual study commissioned by AIST, using SuperRatings research and analysis, shows profit-for-member funds continuing to dominate commercial and retail-orientated funds for performance, and why. But the gap between the two opposing groups is narrowing.
The study looks at the three main investment categories of fees, asset allocation and performance. The advantage profit-for-member funds have historically had in fees is being chipped away, but two factors remain in their favour: their much-higher asset allocation to private markets, which boosts after-fee returns, and the continued trend to insourcing investments, which reduces overall investment costs. Also, commercial super funds offering MySuper tend to have a higher exposure to plain-vanilla index funds.
An important ingredient in these comparisons is the introduction of MySuper and APRA’s initial regulation of that, which focused on headline fees. The regulator, belatedly, is at pains to point out that low fees should be assessed on a net-return basis – after fees and tax. In investments, like a lot of other things, you pay for what you get. Alternatives managers, such as those in private markets, cost more at the headline level and don’t handle after-tax investing very well, but tend to deliver a net higher benefit to members.
The report says: “The gap between the different sectors remains, although we expect to see this close at a faster rate in coming years. For retail master trusts, the removal of legacy products and administration fee compression will accelerate this trend, supported by greater prevalence of lower cost default solutions. By comparison, not-for-profit providers face administration fee pressure, driven by the removal of inactive accounts and the ongoing investment in products and services.
“In addition, … other variances within fee disclosure continue, particularly around tax deductions and how they are treated by providers. This remains a key industry focal point of discussion regarding fee disclosure and we believe the industry would benefit from greater comparability.”
Kirby Rappell, executive director at SuperRatings, who was in charge of the results of the latest research, said: “While we hope to see the fees and costs framework simplified and applied more consistently across providers, the prospect of the industry being consumed by more regulatory change is very real and undoubtedly frustrating for providers.”
The make-up of fees across a myriad of investment options within a super fund’s range is a complex thing to analyse. Ordinary folk, and even investment professionals, struggle to make fair comparisons from the data. Insurance options within funds are even more difficult to analyse. But investment returns, at least gross of fee, tax and charges, are easier.
The latest SuperRatings report shows that the differential for MySuper default options between profit-for-member funds and their competitors remains significant. For instance, over the past three years, the profit-for-member funds returned 6.47 per cent a year versus 4.94 per cent for retail master trusts.
A big distinguishing feature helping the profit-for-member funds is that their allocation to alternatives, within MySuper, is a lot higher. The latest SuperRatings numbers put the profit-for-member funds’ growth options at 12 per cent alternatives versus 5 per cent for the commercial/retail funds.
Making a comparison with five years ago is interesting. That AIST-commissioned study produced by SuperRatings shows that the short-term differential between profit-for-member and retail funds favoured the profit-for-member funds. Because MySuper had only just been introduced, the comparison is not so significant. The one-year difference for MySuper was 5.55 per cent for profit-for-member funds and 5.16 per cent for commercial funds. But when you get into the options, the difference is much greater in favour of the profit-for-member funds, which outperform by a wider margin.
– G.B.
