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EYE-BALL Guru on – The Superannuation Funds Management Fee RIPOFF

August 12, 2011
The-EYE-BALL-GURU
Title:
The Superannuation Funds Management Fee RIPOFF …
Management Fees verses Fund Returns…
The Australian Super funds under management as at Mar ’11 and according to Reserve Bank of Australia [RBA] figures number $1.148 trillion. When the Federal Government mandated the 9% employer contribution in 1992 – the value of all Super Funds was $101.5 billion.  [Link to RBA Excel file containing research data and chart.]

There is no doubt the concept of a ‘forced savings’ plan has given aging Australians access to better prosperity during their retirement. The 9% levy represented forgone wage increases and after Labour were defeated in 1996 – the plan to further salary sacrifice to raise the contribution level to 15% were scrapped. This decision has reduced the Superannuation Funds by a $Trillion dollars in forced savings.

There is two ways to look at this – the chart below shows the quarter on quarter returns for Super funds under Management – it is important to understand that this represents all new super contributions as well as ongoing investment returns. The chart shows extremes of volatility – and the mean average quarterly return for the period 1988 – Mar 2011 is 3.37%.

This compares with the daily 90 day Bank Bill annual yield average for the same 1988 – 2011 period of 6.91% and the monthly calculated average 10 yr Commonwealth Bond rate – again for the same period of 7.37%.

SuperFundReturns

The Annual Superannuation returns would be a sum of each quarter in the calander year and those returns are further presented below: Again sourced from RBA and linked above.

SuperFundReturnsAnnual

From this review of Super Fund performance – the averaged annual 14.14% return – and the averaged 3.37% quarterly return – includes all new funds added on a quarterly and monthly basis by employers – and the investment revenue earned during the period.

Quarterly new funds amount to approximately $3-$400 million – and this can only diminish the real returns being received as these funds are included with the investment income over the period the chart represents – some 23 years worth of data.

The Management Fee structure as it applies to Super Funds and as reported in the May 2008 Cantwest Fee Comparison Report on Super Funds – linked here – gave an Industry summary on Superannuation fee structures.  The fee structures for Super Management fees disclosed ranged from 1-5% to well above 2% being paid as Management fees.

In addition there is also the 15% Federal Government tax expense paid up-front on all contributions before funds are added to existing superannuation accounts.

The point of this story is in exposing the real returns of Super Funds over the 23+ year survey – as compared to the level of the Management Fee structure.  In can be said that the Management Fees as disclosed in the Cantwest report are close enough to 15% of the returns earned by the Super Funds.

This is a disgraceful blight on the Super Industry – these fees are earned regardless of the Fund performance – in addition the entry and exit fees are not part of this survey.

Since 2008 and the commencement of the GFC – most of the Super Fund growth has come from New Funds – the investment returns on existing funds have been barely positive over the past 3 years. The Management fee structure is not regulated – industry competition is not recognise as Employers choose the fund Manager and that is largely based on reputation and past record of returns. Nobody is out there questioning the Management fee structures in relation to the real returns on Super Funds.

Prior to 1992 – the 15% tax on super funds was never paid until a person retired – Paul Keating – the architect of the 1992 Super reforms – introduced the 9% salary sacrifice deal as a trade off to bring Government revenue streams from superannuation to an up-front Tax revenue stream – as opposed to the then existing ‘end of working life’ tax payment.

This alone destroyed the real value of Superannuation – it took 15% of contributions on a weekly pay rotation as opposed to those funds remaining in the Super Fund and being part of the compounding investment value. Over a 45-50 year working life – the resultant reduction in individual Superannuation Fund Value has had extreme consequences.

This 15% in Government revenues is now being expended in yearly budgets and largely wasted – much the same way that State Governments use poker Machine revenue and Petrol excise to cover Budget shortfalls.

The summary quite simply is that the superannuate is getting screwed all round – included in this ‘ripoff’ structure are the Management Fees representing 15% of average returns over the last 23 years – the up-front 15% Government tax – and the diminishing value of capital value of the funds due to the continued GFC turmoil and their impact on equity values.

To make a further comparison – Central Bank interest rates in Europe and Nth America are less than the Management fees being applied by Superannuation Fund Managers in Australia – the Reserve Banks cash rate is currently 4.75% – these levels further highlight the ‘RIPOFF’ factor associated with the level of Australian Super Management fees.

In fact the cycle of benefits for Super is now just a revenue stream for Banks and other Fund Managers under extreme pressure to generate fee income to cover GFC fallout and mounting Bank bad debts.

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The EYE-BALL GURU …

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  1. H
    August 12, 2011 at 11:27 am

    As the ASX basks in the CBA annual profit report, and our treasurer sleeps happy knowing that the 4 pillars of our society are as strong as the rock of gilbraltar, despite the chaos every where else, I can only ask at what cost to society. The big four banks will announce annual profits exceeding 22 billion, in annual profits this year. More than $1000 for every citizen. Per capita GDP is about $13000. The banks tak about 6% of everyones hard earned.

    If that is not stupid enough, Bank fees amount to $11 billion. About $500 for every citizen. Fees for what. Your average Chinese peasant survives on not much more than that. How many starving millions could World Vision feed on that at about $21 per month.

    As Ralph Norris sits there wondering where he will buy his next villa, he is saying that housing loan rates are likely to increase because of the chaos in financial markets, ie the risk premium.

    Banks claim that there return on funds employed is low. What funds? The market capitalisation of their joint stock. These meglo maniacs personify the imbalances in the world. They just can not stop.

    What might occur if these maggots were prevented from increases spread on mortgages and bank fees and superannuation fund management fees. Would they then apply the same standards to executive bonuses they apply to junior staff, or customers. Might they actually really focus on earning their customer and winnning customer satisfaction, and reduce fear in our society.

    The bank fee equation is in the same region as so many real issues that your person on the breadline are short and causes their mortgage to start to default.

    Frank Hardy, (god rest his soul) used to love to say “When the red revolution comes, these buggers will be fighting (undercutting price) to sell us the rope we will hang them with”.

    Put it this way;
    Capitalism is the thesis, Communism is anti thesis, and somewhere between the 2 lies synthesis. The sooner the world can evolve to that, the better.

    What we observe in the world today has so many parallels to Tolpuddle, and French Revolution, and many other historical episodes it is simply uncanny. There is even the replay of the Australian 1949 nationalise the banks. Can we learn anything at all from history.

    The answer lies in attitude. Will we respect, hard work and philanthropy. Can we try to go back to such ideals. Exalted office is respected, and when you are encumbent, you too show respect for your constituency. Vast fortunes are OK when they are not ill gotten, when they are earnt. Very importantly when (courtesy of Glenn Campbell) you see your brother lying by the road, with a heavy load, do you stop and say, you have gone the wrong way.

    YOU”VE GOTTA TRY A LITTLE KINDNESS!

  2. Dong Hegre
    May 10, 2012 at 1:43 pm

    I dont usually comment and post on blogs but since I saw all these other comments I decided that I had to leave one too just to say keep up the good work, I like what you have had to say until now.

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