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Why are we paying so much?

16 July 2014  |  News

The Murray report has identified something that was already confirmed by the Treasury. Superannuation fees, which are running at a lazy $20 billion, or 1% of Australia's GDP, are far too high when compared with systems overseas. Somebody is making a lot of money.

It is one reason why people prefer to set up their own super.

Here is a graph showing fees as a percentage of funds under management. The next graph shows that fees do not fall as the size of super accounts rise, as should happen. That is because they are calculated as a per centage. It is a great lurk, enabling managers to take rewards for something they did not bring about, the simple increase in super funds over time:

ScreenHunter_3313 Jul. 15 13.06

 

Mercedes

 

 

 

 

ScreenHunter_3314 Jul. 15 13.08

It should cost less in percentage terms to manage a large fund than a small one. Yet average fees have barely changed.

There is also some disturbing use of debt (leverage) in SMSF funds. It recommends the removal of the capacity to borrow. The report found that the proportion of SMSFs with borrowings increased from 1.1 per cent in 2008 to 3.7 per cent in 2012. The average amount borrowed increased over this period from $122,000 to $357,000. Total borrowings in 2012 were over $6.2 billion. More recently, Investment Trends research found that, over the year to April 2014, the number of SMSFs using geared products increased by more than 11 per cent to 38,000.

There are equity concerns and questions about the extent to which the super concessions will reduce pressure on the pension system:

ScreenHunter_3315 Jul. 15 13.20

This chart shows the lack of equity, at least in terms of the tax concessions:

ScreenHunter_3316 Jul. 15 13.21

It all adds up to greater pressure on super. Withdrawing super as a lump sum, and then relying on the pension, may be taken off the table. Not that such a strategy is all that sensible anyway, given the low level of the pension. But it seems only a matter of time before there are new taxes on some super, especially at the high end.

 


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Mercedes