Inferior returns will wipe out cost savings
Much has been made of the forecast cost savings of MySuper which, according to Treasury estimates contained in the Cooper Review report, will increase the average wage earner’s final benefit over a 37 year working life by $40,000, or 7%.
That is the total financial benefit that will supposedly accrue from the combination of lower management costs and the administration savings flowing from the SuperStream initiatives (ie savings of about $33,000 and $7,000, respectively).
We have to say we seriously doubt that such savings are achievable, since they rely on what we consider to be unrealistically low investment costs of 0.36% per annum, but let’s accept them for the sake of this article.
Our view, based on the performance data we collect and analyse, is that any such saving is likely to be eclipsed by the reduction in benefits resulting from reduced returns. If we adopt Treasury’s 37 year working life model, it would take a loss of 0.31% per annum in returns to wipe out the $33,000 gain it forecasts from management cost savings (ie administration and investment fees). We believe the MySuper model is likely to reduce returns by more than that over the long term, for the reasons discussed below.
Super is not a homogeneous product, and there are qualitative differences between funds. The better quality funds, in terms of investment performance, tend to have higher investment fees because of how they invest and what they invest in. But there is strong evidence that those higher investment fees pay off because they produce better net returns. In other words, the additional return is greater than the additional fee incurred to achieve it.
Those funds producing superior investment returns have overwhelmingly been industry funds. The table below shows industry funds have been the best performing group over a long period. In fact, over most of the past decade, industry funds have represented the entire upper quartile in our performance surveys.