Australian Super Offering Lower Fees, Better Returns

Australia | Nov 02 2021

Superannuation fund fees are in decline in Australia, with retail funds closing the gap with their not-for-profit competitors. Industry expert Rainmaker thinks Australia might become the world's best value superannuation system over the coming five years

-Superannuation fees in Australia are falling, and expected to continue their decline
-Retail funds are seen closing the fee gap with not-for-profit competitors
-Industry enjoyed a record year in FY21
-ESG superannuation fund investment managers appear to be underperforming their benchmark

By Danielle Austin

Superannuation fund fees have declined -1% in the financial year ending June 30th as superannuation funds race to improve efficiency and undercut competitor fees. Industry experts expect the declining trend to continue among heightened competition.

Rainmaker Information notes fee declines may lead to a change in the way investments are made by superannuation funds given investment costs represent a large share of fees. Rainmaker analysts expect superannuation funds to consider indexing larger shares of portfolios to allow for fee reductions.

While currently the average superannuation fund fee ratio sits at 1.01%, Rainmaker forecasts, based on current trends and continuing pressure to reduce fees, average superannuation fund fee ratios could reduce to as much as 0.85% within five years, making Australia's superannuation one of the best value systems globally.

The declining trend in fees coincides with Australian superannuation funds achieving record returns for FY21, with Default MySuper members enjoying on average 18% in return; the highest annual investment return in 34 years.

Retail superannuation outperforming not-for-profits

While not-for-profit superannuation funds have traditionally been able to offer a lower fee option for customers, improving efficiency is allowing retail superannuation funds to become more fee competitive and offer lower fee products within their range.

High return growth coupled with improved operational efficiency is leading to a trend of declining administration fees that is allowing the traditionally higher fee retail superannuation sector to compete with the not-for-profit superannuation sector.

In 2010, admin fees for retail superannuation funds were 3.5 times that being charged by not-for-profit funds, but Rainmaker reports that ratio has declined to just 2 times, while overall fees have reduced by around -25% over the last decade.

Where investments are seeing highest returns

Record return levels saw Australia’s 13.5m superannuation fund members earn $520bn in investment returns in the last financial year, averaging out to almost $39,000 per person. To quantify this, Rainmaker calculates gains from returns equated to three-times the amount Australians contributed to their funds, and six-times that of compulsory contributions.

Delivering a 33% return, listed property returns were a key driver of fund growth, closely followed by investments in Australian and international shares, which each reported returns of 28%. Global infrastructure rounded out top performers with 20% returns for the year.

At the other end of the spectrum, Australian bonds reported a -0.8% return on investment, while cash reported 0% returns, international bonds contributed 0.2% in returns, and unlisted direct property offered a 3.6% return on investment.

While ESG superannuation indices have outperformed standard indices in recent years, it was noted this trajectory has halted. In commentary on its Superannuation Benchmarking Report, Rainmaker Information noted that as of the end of May, the Rainmaker Diversified ESG Superannuation Index trailed -1.6 percentage points behind the standard index for the previous twelve months.

The report further noted that given ESG indices, such as the MSCI Australia ESG Leaders and the MSCI ACWI SRI (ESG), are continuing to marginally outperform the market, ESG superannuation fund investment managers appear to be comparatively underperforming.

FY21's Record Performance

Rainmaker's assessment of a record performance for Default MySuper for FY21 (at 18%) is after all fees and taxes. Comparable benchmark performances for the four years past are:

-FY20: -0.9%
-FY19: 7.0%
-FY18: 9.0%
-FY17: 10.4%

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Data from Rainmaker Information’s Superannuation Benchmarking Report has the Rainmaker Default MySuper Index poised to report 18% returns for its members for FY21.

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