Fees really do matter – particularly for retirees

Fees retirees superannuation Australia savings
Six of the largest 10 funds for retiree assets are now not-for-profit funds.

When markets are rosy and rising, nobody wants to talk about fees.

After all, what’s a percentage basis point or two when you’re looking at double digit returns?

However, when a chill wind blows through markets then fees – along with investment success – becomes much more important.

That is particularly the case for retirees and some interesting research shows they are increasingly voting with their feet when it comes to investing their super.

Retail funds once had a lock on retiree super savings

If we look back seven years to 2015, 66% of retirees super was in the hands of retail funds.

Just 34% was in the hands of industry and other not for profit funds.

Since then, though, there has been a Royal Commission into the banks which resulted in a withering focus on retail super funds – at least part of which was on the level of fees charged, sometimes even to dead people.

Most banks have now disposed or are in the process of disposing of their fund management and super operations while at the same time, the (in general) lower fee charging not for profit funds have made huge inroads in market share terms.

Not for profit funds now hold the whip hand

Now not for profit funds control around 60% of all retiree super savings while retail funds now have a market share of just 43% as measured at the end of 2021.

That is one very lucrative opportunity that the retail funds are missing out on because – somewhat counter-intuitively – retirement is the time where super funds generate the majority of their investment and administration fees.

Rainmaker research has shown that around two thirds of super fees are paid during retirement.

If you are managing a retiree’s super, you literally have them for life – unless they get really unhappy and switch – so the benefits of scale continue to accrue for the successful fund.

With around $30.1 billion in superannuation fees paid every year, that is a really great advantage to have.

Retirees have larger balances and are the most lucrative

Retiree investments are naturally larger than those of younger fund members and they tend to be sticky if the fund is doing a good job of charging low fees, investing well and handling administration well.

Rainmaker research shows that six of the largest 10 funds for retiree assets are now not for profit funds and of those same top 10 funds, almost half of their total funds under management is made up of retiree assets.

That is a big chunk and is likely to grow as the large Baby Boomer cohort continues to reach retirement age and also as the large, low fee not for profit funds continue to grab market share from the retail funds.

The Rainmaker research found that the combination of high balances and a high proportion of total funds under management meant that the retiree cohort is by far the most lucrative part of the super industry for fund managers.

It makes sense when you think about it – it is a lot easier to manage a handful of large accounts compared to a multitude of smaller ones, although all super funds must also try to get a good mix of ages on their books to reduce risks.

All funds obviously need to be growing their member base over time even if that means small, troublesome accounts owned by young members because they will be the lucrative retiree accounts in a few decades.

From an investment point of view as well, it is better to just take an overall view to get solid returns rather than concentrating solely on the retiree cohort’s income needs.

In the circular way super funds work, one member’s contribution could effectively be another retiree member’s super pension payment, even if the accounts are obviously quarantined in a strict sense.

Is the retirement income covenant a chance for retail funds to strike back?

It will be interesting to see if the industry and other not for profit funds continue to grab market share from the retail funds – particularly the lucrative retiree market.

That is particularly the case with the legislated retirement income covenant which is set to come into operation on 1 July 2022, which requires super trustees to develop a retirement income strategy for their members that improves the financial outcomes for Australian retirees.

The trend towards not-for-profit funds may continue but it would be surprising if the retail funds – some of which are in the hands of optimistic new owners – don’t get their act into gear and compete more strongly for retiree funds through really well-designed retirement income products.

Good returns, benefits of scale and low fees are the keys to competing in the super arena, so the smart, large retail funds will be trying their hardest to win back super members both old and young.

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