HOUSE OF REPRESENTATIVES, 12 SEPTEMBER 2019
It's a pleasure to follow the members for Whitlam and Kingsford Smith in discussing the important bill before the House—the Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019. About 12 million Australians hold insurance - for life, total and permanent disability, and income protection - through their superannuation funds. Total premiums, according to the Productivity Commission, are around $9 billion. It's worth noting that not all of that money appears to be well spent. The best example of that is that the Productivity Commission estimates that, of that $9 billion, $1.9 billion is for unintended duplicate policies.
The Productivity Commission's report points out that current settings are more a function of history than of considered policy design. It notes that many members benefit from lower costs and the ready access of default group insurance in superannuation but that problems remain. The Productivity Commission points out that insurance accounts for one-third of the complaints made on superannuation.
The Productivity Commission has noted that 'balance erosion can be can be excessive and highly regressive', giving examples where the impact could be as high as 14 per cent, or $85,000. It notes too that there are members who have policies that are of little use of them—so called 'zombie policies' that can't be claimed against, with income protection being the main culprit, according to the Productivity Commission.
As the member for Whitlam has noted, Labor believes this bill is about 95 per cent right, but we're concerned that the process has been rushed and that the lack of a public hearing has compromised the ability to get things right. Labor wants to get the balance right, but we believe that to do so requires pushing back the operative date to allow for a reasonable period for superannuation funds to implement these changes. We did this when urging the government to push back the operative date for its changes to the GST low-value threshold, and I think it's generally acknowledged now, in retrospect, that Labor's move to delay that measure was the appropriate one to make sure we got it right. We'll also propose amendments to protect workers in high-risk industries, as the member for Whitlam has foreshadowed.
But this is just one of the ways in which member balances are being eroded. The Productivity Commission's same report pointed to the challenge of fees in the superannuation sector, and the fact that, for many members, fees are simply too high. One of the real problems in engaging with the issue of fees is the number of funds that are snubbing the regulator—that are not reporting to APRA the true fees that they're charging on accounts. APRA, through the Cooper review, has look-through powers, but it's not exercising those powers with regard to superannuation funds. When the Productivity Commission looked at the fund-level data provided to APRA on fees, it found that an extraordinary 28 per cent of member accounts were in funds which were not reporting fees to APRA. That's predominantly a problem in the retail sector. Only five per cent of not-for-profit funds are reporting zero investment expenses to APRA, but a full 56 per cent of retail funds were reporting zero investment expenses to APRA. More than half of all retail funds are snubbing their noses at the regulator on this critical issue of fees.
What impact do excessive fees have? Well, they can be pretty considerable. The Productivity Commission gave the example of a worker aged 21 starting off on a full-time salary of $50,000. The commission pointed out that if they were in a high-fee account they could end up with $100,000 less in retirement—a 12 per cent lower balance in retirement as a result of being in a high-fee account. When it made comparisons across countries, the Productivity Commission found that Australian administration and investment costs were high—that our superannuation system had pretty high overheads compared to other countries. We have higher overheads than Greece, Switzerland, Mexico, Finland, Hungary, Austria, Belgium, Italy, Norway, Iceland, Denmark, Luxembourg, Germany and the Netherlands. Australians pay some $30 billion a year in fees in their superannuation accounts. So, if the government is keen to tackle the $9 billion that's being spent on insurance products within superannuation, I hope they will move to the $30 billion of fees that is being paid. They did note that fees have fallen over the course of the last decade, pointing out that that fall occurred after the MySuper reforms and is almost exclusively within retail funds. The Productivity Commission estimates that in the decade up to 2013 fees in retail funds were around 1.4 per cent. Since then, they have come down to average around one per cent.
In not-for-profit funds, fees averaged around 0.6 per cent during that period.
But the Productivity Commission also noted that there is a tail of high-fee products. It said that in the super ratings dataset, 15 per cent of member accounts and 17 per cent of assets were in products with fees above 1.5 per cent, suggesting that about 4 million accounts—some $275 billion in assets—were in this underperforming tail. Indeed, some funds had fees that exceeded two per cent, an extraordinarily high level of fees to be charging account holders and, effectively, a significant tax on account holders who find themselves in these low-performing funds.
One excuse which is often given for high fees is, 'Well, that's okay, the high-fee accounts are returning high returns to members.' So you're paying a lot, but you're getting a lot. It is the sort of hedge fund argument, that, really, it's okay to pay ‘2 and 20’ if you're getting superstar returns. But a key finding of the Productivity Commission went directly contrary to that. Finding 3.7 by the Productivity Commission was that ‘higher fees are clearly associated with lower net returns over the long term’. The Productivity Commission reviewed work by the Grattan Institute, which found that ‘Australian funds that charge higher total investment and administration fees deliver lower net returns once fees are accounted for’.
It cited work by Basu and Andrews, finding ‘a statistically significant and negative relationship between gross returns from Australian superannuation funds and expense ratios incorporating investment and administration costs’. They found a one per cent decrease in fees was associated with a 0.1 per cent increase in gross returns. So this gives the lie to the notion that we should be comfortable with high-fee accounts because they're delivering high returns. In fact, high-fee accounts tend to deliver lower returns to Australians.
I was quite surprised when, in a parliamentary hearing, Ms Helen Rowell from APRA was uncertain as to whether APRA supported this finding by the Productivity Commission, suggesting that there might be evidence which ran in the opposite direction. APRA agreed to take on notice my question as to whether they could produce evidence contradicting the Productivity Commission's finding 3.7. That answer on notice was returned, with APRA saying they had searched the literature and found no such evidence. So APRA now appears to concur with the Grattan Institute and with the Productivity Commission's excellent report, led by Karen Chester, that high-fee accounts deliver lower returns. That means that the issue of fees ought to be front and centre for APRA. It's not good enough for APRA to simply focus on high-level prudential management; APRA should also take as part of its mandate a concern about the underperforming tail of Australians who are stuck in high-fee funds which are taking away a goodly share of their money without producing better returns—indeed, while producing worse returns for these fund holders.
The Australian superannuation sector is headed towards $3 trillion. It's one of the reasons why our current account deficit has been coming down in recent years: we have this large pool of savings. But if we're going to reduce reliance on the age pension, which must be the principal objective of superannuation, then we need to tackle high-fee accounts. There are too many high-fee accounts in the market right now, and APRA should be playing a much more vigorous role in ensuring that high-fee accounts are addressed.
I commend the government for its willingness to tackle the issue of insurance costs and superannuation, but I call on the government now to do the same with high-fee accounts, to recognise that high-fee accounts erode balances and that it's predominantly a problem in the retail sector. It is not exclusively retail funds that have excessive fees but, overwhelmingly, excessive fee funds are retail funds. The problem of underreporting of fees to APRA, again, is predominantly a challenge in the retail space. Labor will move amendments to this sensible bill. We hope the government can get it right and will continue the process of reforming Australian superannuation to the benefit of all Australians.
Authorised by Paul Erickson, ALP, Canberra.