Superannuation fees finally heading down

Superannuation fees Australian Prudential Regulation Authority APRA heatmap

It has taken a long time but there is finally some evidence that superannuation fees are heading down – although there is still plenty of room for improvement.

It appears the controversial Heatmap approach taken by regulator the Australian Prudential Regulation Authority (APRA) is having the desired effect of bringing down fees and encouraging funds to merge.

The first Heatmap was released last December in the wake of the Banking Royal Commission and showed that some big MySuper default funds were charging excessive superannuation fees and were still producing mediocre returns.

By naming and shaming poorly performing funds, APRA was hoping that they would be forced to improve their offerings or look to merge with other funds to become more efficient and the latest Heat Map which covers the period to the end of June shows that there has been some early – but marginal – success.

Naming and shaming reduced fees

APRA found that funds servicing 6.1 million members of MySuper default funds – which cover 42% of the market – had reduced account fees by a total $110 million a year.

That is a drop in the bucket when you consider the $3 trillion total superannuation pool but at least it is finally a sign that costs are coming down.

If you look at funds that cut their fees, each superannuation fund member would be $33 a year better off while the average increase for funds that hiked their fees came in at $20.

APRA deputy chair Helen Rowell described the lower fees as “a promising start’’ but said there was a long way to go before trustees were optimising outcomes for members.

“It’s pleasing to see that millions of members are already paying less in total fees, especially given the additional challenges and operational costs funds have faced in relation to COVID-19,’’ said Ms Rowell.

MySuper products still have a long way to go

She also said it was encouraging that some funds had closed and moved members to better performing products.

“It’s disappointing to see so many funds still displayed on the Heatmap in shades of red and orange when it comes to fees and costs,’’ Ms Rowell said.

“Although member outcomes can’t be measured on one factor alone – and superior member services or investment performance may sometimes justify higher fees – trustees should remember that MySuper products are designed to be simple and cost-effective.”

Red funds can expect intensive supervision

Ms Rowell said APRA would intensively supervise funds that were underperforming, particularly those that remain in the red zone.

“APRA is writing to the trustees of more than a dozen MySuper products that continue to seriously underperform on fees. The letter will put these trustees squarely on notice that APRA is seriously considering its response to their failure to swiftly address these issues.  Any response may include formal enforcement action,” she said.

Due to the considerable volatility of the past year, APRA is now looking to refresh the design of the Heatmap to take into account how that will impact investment performance.

Heatmap set to cover more funds and insurance

Despite controversies around the use of the Heatmap – which some funds say downplay the more important issue of total returns after costs – the Heatmap concept is going to be expanded by APRA to cover superannuation choice products and also insurance.

Interestingly, the biggest improvements since last year were made by for-profit funds rather than industry funds.

While industry funds continued to have lower administration funds than their for-profit competitors, they had overall increased fees while for-profit funds had increased them.

Investment fees were universally falling right across the MySuper default category, with the average cost of managing investments across the industry falling from 0.79% of funds under management to 0.70 %.

While that might seem like a small change, it is actually a highly significant achievement when you consider that MySuper default funds are the biggest sector of the market.

Costs coming down but focus should be on net returns

Industry Super Australia CEO, Mr Bernie Dean, said investment fees were dropping in the industry funds sector through investment innovation.

“We’re starting to see the benefits of scale translate into lower fees through things like in-housing of some investment functions in some industry funds,” Mr Dean said.

“Industry super funds are actively exploring options to obtain scale benefits for members including mergers – most of the activity is occurring in industry and public sector funds.”

Mr Dean said while fees were important, net returns were more important and said that some industry funds had higher fees because they invested in more complex products, such as unlisted infrastructure, private equity and hedge funds.

He also strongly backed APRA’s move to expand the Heatmap to cover all superannuation funds.

“We would like to see an extension of Heatmaps to choice super products, which is where the highest fees and poorest performance exist”.