The wide range of super fund charges should be reviewed and exit fees abolished.
The government's Super System Review, the Cooper Review, is looking at the fees charged by superannuation funds. Big changes are in the wind.
Next month the review is due to release preliminary recommendations on the second phase of its inquiry, which has focused on the efficiency of the super system.
In an issues paper in October, the review asked a lot of questions about fees - whether they should be capped, whether some types of fees should be banned and how best to present information about fees to members.
According to the issues paper, the average annual fee for super is 1.21 per cent of assets. Fees vary according to the type of fund. The average fee for corporate super funds is 0.73 per cent, for industry funds it is 1.07 per cent, for public sector funds 0.69 per cent and for retail personal super it is 2 per cent.
Retirement income funds charge an average fee of 1.8 per cent a year, retirement savings accounts 2.3 per cent and eligible rollover funds 2.49 per cent (see box, right). Self-managed super funds have average annual charges of 0.98 per cent.
What bothers critics of the system is that fees have stayed fairly stable over the past decade, as the volume of funds in the system has risen above $1 trillion. Total fees on super funds in 2008 were $14.1 billion, including $1.4 billion of commissions paid to planners.
Former minister for superannuation, Nick Sherry, has said that as the industry matures, fee levels should drop.
Fee data supplied by the consultant Rice Warner shows that average fees came down during the past decade but figures submitted by Rainmaker show that fees for "workplace super funds" went up between 2004 and 2008, from 1.3 per cent to 1.4 per cent.
In a 2008 survey, Watson Wyatt found super and pension funds globally were paying more in fees than five years earlier.
The main reason was that funds were paying higher investment management fees for access to alternative investments. The report says higher returns are not being delivered.
In its submission to the inquiry, The Australia Institute says: "Despite differences in the exact figures, it is clear from all these data sources that there has not been a widespread downward movement in management fees and there are significant fee differentials between different segments of the market. People with lower balances, such as women, young people and people on low incomes, tend to pay higher fees as a proportion of their assets."
The Cooper Review issues paper asks whether there should be a ceiling on fees. It also asks whether fees should be broken down into components, such as investment management, advice and administration, to allow members to decide whether they want advice and adjust their fees accordingly.
Cooper also asks whether trustees should be allowed to pay trailing (ongoing annual) fees and whether shelf-space fees should be allowed (fund managers pay fees to master trusts for inclusion on their investment menus and trustees pay dealer groups for inclusion on their approved lists). Cooper wants to know whether exit fees should be limited or banned, especially in cases where buy/sell spreads are also charged.
He wants to know whether trustees should be allowed to "flip" a member out of an employer wholesale plan into a higher-cost retail plan when the member changes jobs and ceases to be employer sponsored.
And it wants to know whether default funds should be cheaper than fund options that members choose.
Most submissions favour the idea of having fees broken down so that members can see what their charges are made up of but there is disagreement about how the fee components should be categorised.
The Association of Superannuation Funds of Australia says funds should have to categorise their fees and use standard definitions. It says: "A major issue ... is the lack of consistency and transparency in the way fees are disclosed to members."
ASFA says a benefit of such an approach will be that if members do not want advice, they may prefer to choose a fund that does not offer this service. CPA Australia says it would support the introduction of uniform fee naming conventions and disclosure to ensure fund members are fully aware of all fees and charges levied against their accounts.
The Financial Planning Association says it supports uniform disclosure of fees and charges and the idea that limited categories of fees and charges be permitted.
The most contentious proposal is that government regulate fees by setting ceilings and banning certain types of fees.
The Combined Pensioners and Superannuants Association says: "It is counterproductive to have compulsory super that forces workers to contribute 9 per cent of their income to super but not regulate fees charged by those funds." It recommends entry and exit fees be abolished because super is mandatory for most workers and they should not be "penalised" for making a compulsory contribution to their fund.
Typical of the industry response, Commonwealth Bank's submission says: "We believe competitive forces should be allowed to drive fees down."
One question asked by the Cooper Review is what to do with money that goes into Eligible Rollover Funds (ERFs). The role of ERFs is to look after super accounts, such as lost member accounts and small protected accounts, that other funds do not want. There is $5.5 billion in 5.9 million ERF accounts, with an average balance of $930, and $12.9 billion in the lost-member register. ERFs are designed to provide some protection against the impact of fees but fees can still be charged and tax is payable. ERFs have the highest fees of any type of super fund. The Cooper Review has asked whether the government should run a single ERF as a way of cutting costs. Consultancy firm Watson Wyatt advocates funds being able to use tax file numbers as an identifier. It says if there is to be a single, low-cost ERF, then the level of fees charged should be regulated or that ERF should be provided by government.