MySuper: Two years in, how is MySuper performing? FSC Annual Conference: Visualise Jim Minifie Program Director, Productivity Growth 6 August 2015 2MySuper was introduced to simplify defaults, promote comparability and reduce cost Super choice made comparability critical MySuper was part of a broader set of reforms aimed at cutting costs MySuper and broader recent reforms may cut costs 10+ per cent MySuper will cut about ~10 bps from average default fees all driven by retail funds Potential for larger reductions from FoFA and SuperStream mostly outside MySuper Even after reforms fully bed in, excess administration cost will remain Average MySuper admin fees per person are close to double what they should be Fund and account consolidation are major opportunities Gap to the administration frontier (~$125 per person) is $500m in MySuper There is also evidence of excess investment cost hardly touched by recent reforms Higher-cost products tend to underperform in major asset classes Gap to the frontier (of ~45bps) is $800m in MySuperPolicy can accelerate the removal of remaining excess costs Splitting defaults from awards may not reduce and could even increase costs and fees Removing 12 million excess accounts would save $360m ($300m in MySuper) Fund mergers would save $500m ($200m in MySuper) Tougher MySuper qualification (eg tender) would cut administration and investment costs Summary 30 10 20 30 40 0.00.20.40.60.81.01.21.41.61.82.02.22.42.62.83.0 Public sector Industry Corporate Retail Fees (%) on $50,000 balanceContext: broad spread of superannuation fees List fees, per cent of funds under management Note: Fees recorded for public sector and some corporate funds may not include all relevant costs as some are paid by the employer. Excludes some smaller products offering a broad range of investment options. Excludes self-managed superannuation funds. Source: Grattan analysis of SuperRatings (2014) (fee) and APRA (2014a) (FUM) data. For the past decade fees have remained highly differentiated. Industry fund fees have risen slightly; fees on simpler retail products have fallen slightly, and fees on other retail products have risen.40.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 $50m$2bn$10bn$30bn Expenses in 2004 Expenses in 2013 Context: the cost curve shifted up Expenses, per cent of funds under managementSources: APRA (2014), SuperRatings (2014) Fund size $2013 5Impact: recent initiatives may cut fees 10 per cent Fees and potential savings, $ billion 16.1 -0.5 -0.3 -0.6 14.8 0 5 10 15 20 Current feesMySuperSuperStream processing FoFARemaining costs Still to come; lower confidence Higherconfidence Notes: Collective funds only (excludes SMSFs). Sources: Grattan analysis 6Impact: potential savings in both segments Fees, $ billion 10.2 4.6 0.6 0.6 10.9 5.2 0 2 4 6 8 10 12 ChoiceDefault Savings from current initiatives Remaining fees Notes: Collective funds only (excludes SMSFs). Sources: Grattan analysis 7Impact: MySuper may cut fees by 10 per cent Fees on a $50k default account, per cent Notes:Assumes $73b of Accrued Default Amounts (ADAs) are held by retail funds and will be rolled into retail MySuper products over the period Jul 2014-July 2017. Assumes no change in market shares (Industry - 55%, Retail - 21%, Public Sector - 20%, Corporate 4%). Assumes retail products have weighted average discounts of 0.12% from list fee. Assumesthat default fees pre-MySuper were 1.6% on a $50,000 balance. Source: Grattan analysis of APRA MySuper statistics 1.03 0.90 0.0 0.5 1.0 1.5 2.0 20082009201020112012201320142015f2016f2017f2018f Precursors to MySuper MySuper80.0 0.5 1.0 1.5 2.0 20082009201020112012201320142015f2016f2017f2018f Impact: The fall is due to retail fee cuts Fees on a $50k default account, per cent Note: Estimated FUM-weighted fees. All funds where data was available were included. The industry fund series (14 products; 2014 product FUM = $116b) and public sector series (3 MySuper products; 2014 product FUM = $43bn) are weighted by the FUM of products subsequently qualified as MySuper. The corporate series (12 MySuper products, 2012 fund-level FUM = $38b) are weighted by fund FUM.Retail defaultsinc. ADAs(modelled)IndustryPublicSectorPrecursors to MySuper MySuper9MySuper admin fees vary Funds under management, $ billion 0 25 50 75 100 125 150 175 0100200300400500600 0$100 $200 $300$400$500$600 Industry Corporate Retail Public Sector Note: Some corporates report admin fees for members on a personal rate. Retail undiscounted: typical discount is 10bps across all retail FUM, or about $50 on a $50,000 balance. Estimates elsewhere in this presentation net of discounts. Sources: APRAMySuper Statistics. List MySuper administration fee - $ on $50,000 balance10-$100 -$80 -$60 -$40 -$20 $0 $100 fixed fee25th percentileMedian75th percentile Variable admin fees matter Variable fees paid Fixed fees paid Lost compound earnings - 1.7% -3.1%-6.4% -10% Reduction in retirement balance due to MySuper admin fees, $ thousand Reduction (per cent) Notes: Assumes 40 year contribution period; 1.8 per cent real wage growth; 5 per cent real investment returns (net of tax); starting wage $45,000; contributions 10% of wage. Does not adjust for capped fees (e.g. Mercer caps administration at $600/year, QANTAS caps total fees at $1300/year). Variable administration fees for the 25th, 50th and 75th percentile are 0.06%, 0.2%, and 0.38% respectively.Sources: Grattan analysis of APRAMySuper Statistics, OECD (2012). 11Fund (left) or product (right) members - 000s (log scale) Some funds run accounts for $100Notes: The number of MySuper members is not published by APRA. The chart in the second panel assumes product membership as if all accounts were $50,000. The left panel excludes two products with operating expense greater than $500 per person.Sources: Grattan analysis of APRA (2014i), APRA (2014m). 0 100 200 300 400 500 1101001,000 0 100 200 300 400 500 1101001,000 Expenses entire fund MySuper fees, $50k balance Industry fund administration expenses and MySuper fees per account, $12Feasible admin costs ~$125 per person Estimated administration fees per person, $ per yearNote: Does not include reductions in advice costs. Model is based on average MySuper account sizes of $25,000. The achievable cost factors in 1.1 accounts per person after excess accounts are consolidated. Sources: Total FUM in each sector (APRA), from number of people with superannuation (ATO, ABS), and total number of accounts (APRA).0 50 100 150 200 250 MySuper todayAchievable 13MySuper investment fees vary Funds under management, $ billion MySuper investment fee - $ on $50,000 balance0 20 40 60 80 100 0100200300400500600 0 $100$200$300 $400$500$600 Industry Corporate Retail Public Sector Source: Super Ratings (2014) 14Average annual real return after fees, 2005 2014, per cent Costly asset classes have outperformed Notes: Fees are at the account holder level. Direct property investment fees were not available in the Morningstar dataset. Industry consultation suggests that investment management fees for unlisted assets exceed 1 per cent.Sources: Grattan Analysis of superannuation products currently available and listed in Morningstars superannuation database. Direct property returns are from Morningstars Median Unlisted Property index.Cash Australian bonds International bonds Australian equity International equity Unlisted property 0 2 4 6 8 10 0.00.20.40.60.81.01.2 Investment fee (per cent)15Evidence that high-fee products underperform Notes: A single investment management product is often available at different fees across different funds and platforms. We use the lowest fee at which each product is available & its total FUM across funds and platforms. Sources: Grattan analysis of Morningstar Direct Australia Superannuation Funds dataset. Annual returns net of invest fees relative to peer group, 2004-2014, per centAustralianequityAustralianfixedincomeCashIndustryRetail-2-10120.0 0.5 1.0 1.5 0.0 0.5 1.0 1.5 0.0 0.5 1.0 1.5Investment fee (per cent)16Investment fees, per centDefault investment fee is up to 0.2 per cent too high Sources: Rice Warner (2014); APRA (2014m); Grattan analysis. Notes: Lean fund single sector products are applied to system average asset allocation (yielding cost of 0.43) and industry fund average asset allocation (0.55); public sector is likely higher in more costly unlisted products than system average; the corporate fee is for large tenders.0.43-0.55 0.52 0.45 0.64 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Lean fund single-sector products Public sector average Corporatetender Defaultaverage 17Investment management fees all large funds, $ billionTotal investment costs ~$2 billion above the frontier Notes: Todays strong performers is 45 basis points.Sources: Grattan analysis. Passive fees from AIST (2010). 7.9 5.8 3.4-5.1 0 2 4 6 8 10 Total paid todayToday's lean high performers Passive on listed (retail / wholesale) MySuper is ~1/3 of the total 18Tender Choice initiatives Tender could give high weight to fees Will probably not change the (higher) choice fees space much Dashboards on legacy and choice products Standard choice process; link e-tax to product selection What to do Consolidate accounts Consolidate funds Auto-consolidation via standard choice process Further opportunity in inter-fund consolidation? Aggressively deploy MySuper scale test Ensure tax streamlining is (remains?) available Further opportunities to facilitate account and product mergers? (FWC) Current FWC plan transition costs; may not change defaults much Splitting defaults from awards will pressure inefficient incumbents but will also intensify costly non-price competition 19Proposed program could save another 10 per cent Fees and potential savings, APRA reg. funds, todays system scale, $ billion 5.9 4.5 7.9 6.8 2.3 1.7 -1.4 -1.6 16.1 0 5 10 15 20 Pre-MySuperRecent initiativesProposed initiatives Remaining cost 13.0 1. SuperStream 2. FoFA 3. MySuper 1. Fund consolidation 2. Default tender 3. Account consolidation Source: Grattan analysis Advice Investment Administration 209.9 3.3 0.2 1.4 0.7 0.6 10.9 5.2 0 2 4 6 8 10 12 ChoiceDefault Notes: Collective funds only (excludes SMSFs). Modelling assumes that cost reductions are directly passed on as fee reductions.Source: Grattan Analysis There are opportunities in default and choice super Fees and potential savings, $ billionSavings from current initiatives Savings from proposed initiatives Remaining fees 21Back up: mergers could cut costs by one-sixthAdmin cost reduction from merging two average sized funds: per cent 67%67% 33% 17% 17% 0% 20% 40% 60% 80% 100% Current administration cost breakdown Removal of 50% of duplicated costs Resultingfund cost Duplicated fixed costs at fund level Non-duplicated costs Notes: For an average fund.Sources: Grattan analysis of ASFA (2014), SuperChoice (2009), SuperPartners Pty Ltd (2013), Australian Administration Services Pty Limited (2013). 22Back up: consolidating funds is not sufficient Total fees MySuper, $50k account, basis points 0 25 50 75 100 125 150 1101001,00010,0005,00010,000 $11bn$134bn $228bn $630m $96bn $330m FUM in quadrant Fees above 75bps FUM ($m) Source: APRA MySuper Statistics Dec 2014.Note: $73b of ADAs allocated proportionately to retail products based on superannuation market share. All retail products discounted by 15bps to account for discounts off list prices this will result in unrealistically low fees in a few cases.23Summary MySuper was introduced to simplify defaults, promote comparability and reduce cost Super choice made comparability critical MySuper was part of a broader set of reforms aimed at cutting costs MySuper and broader recent reforms may cut costs 10+ per cent MySuper will cut about ~10 bps from average default fees all driven by retail funds Potential for larger reductions from FoFA and SuperStream mostly outside MySuper Even after reforms fully bed in, excess administration cost will remain Average MySuper admin fees per person are close to double what they should be Fund and account consolidation are major opportunities Gap to the administration frontier (~$125 per person) is $500m in MySuper There is also evidence of excess investment cost hardly touched by recent reforms Higher-cost products tend to underperform in major asset classes Gap to the frontier (of ~45bps) is $800m in MySuperPolicy can accelerate the removal of remaining excess costs Splitting defaults from awards may not reduce and could even increase costs and fees Removing 12 million excess accounts would save $360m ($300m in MySuper) Fund mergers would save $500m ($200m in MySuper) Tougher MySuper qualification (eg tender) would cut administration and investment costs 24Backup 1: Baseline statistics 25Backup 2: Baseline fees; initiative impacts