In the past six months, I’ve been spending a good deal of time researching and getting to know the superannuation sector. During this time one thing has become blatantly clear: it’s sort of far from super.
For those of you who aren’t familiar with Australia’s compulsory savings scheme, superannuation consists of a 9.5% deduction from every working Australian’s annual pay cheque. Since its inception in 1992, the industry has amassed a phenomenal $2tn under management. I say “under management” because despite growing and near overwhelming evidence, passive investment strategies, not active ones, are the cheapest and most effective mechanism for long-term investing – not many Australian super funds (or their armies of well-paid fund managers) seem to agree.
As early as 2015, Sunsuper was one of the few funds to buck the active trend, partnering with Vanguard to reduce its reliance on stock pickers. A more recent blow to active managers across the broader funds management industry was an announcement in May this year by the Future Fund, Australia’s biggest investor, that it too would rejig its portfolio towards passive vehicles.
It would seem passive is where the smart money and minds are moving, so why aren’t the smart superannuation companies following suit? Well, one can only speculate, but choice of investment strategy aside, there are plenty of other issues facing the sector. And considering total assets under management are predicted to reach $9tn in 2040, it’s no wonder the government has it under the microscope right now, along with the banking sector in general.
To give you some idea of what these issues are, here are just a few startling superannuation stats for the uninitiated that are well worth considering while wearing your fintech hat.
Fees and charges$12bn in fees keep some expensive lights on at superannuation head offices across the country.
According to the Productivity Commission, in 2014-15, Australians paid about $12bn in fees to APRA-regulated funds. Just over $2bn of this is attributed to investment fees alone.Why stop at 100 bps when you can exceed members’ fee expectations by 110 bps?
For FY14, a Rice Warner report estimated fees averaged out for members across the industry at 1.10% (110 bps). And while fees should never be looked at in isolation from performance and value, the lack of product differentiation across the sector makes for slim pickings on the value front.Here’s a good reason to set up a Self Managed Super Fund (SMSF) that invests an index fund that tracks the S&P/ASX 300.
According to the Association of Superannuation Funds of Australia (ASFA) March 2017 Superannuation Statistics report, the average five-year investment return for the industry is 5.2%. Compare that with the Vanguard Australian Shares Index ETF, which tracks the S&P/ASX 300 Index, which managed to return just over double that, at 10.61% over a similar five-year period, for a paltry fee of 14 bps.
Systemic implementation problemsAustralians pay multiple fees on multiple super accounts, reducing the effects of compounding interest.
According to the Productivity Commission report, 40% of Australians hold more than one super fund, paying multiple sets of investment fees and insurance premiums. There has been a lack of will and coordination by the industry as a whole to tackle this consolidation problem.Two X chromosomes cuts your retirement balance in half.
That’s right, Australian women retire with half the balance of men. In 2013/2014, men on average retired with $292,500 while women ended up with $138,150. This can be attributed in part to a gender pay gap of 16%, time out of the workforce to raise children, and no superannuation payments on the unpaid portion of maternity leave. The disparity exists today for younger Australians, suggesting the trend will continue without intervention. Oh, and need I remind you that women live longer than men? Double whammy.Mobile what?
Of the 176 retail and super funds, roughly 10 have a mobile app.Employers shortchanging employees.
Each year an estimated $3.6bn in superannuation payments aren’t even made by employers, leaving 30% of the Australian workforce out of pocket to the tune of $1,489 each year.
So what does this all mean?
What’s at stake, you might ask. Does any of the above really matter if people are saving something at least? To be fair, most people (myself included) are woeful at squirrelling away the kind of cash we’ll need on-hand for our daily meds and Zimmer frames come our septuagenarian years. Superannuation is a fantastic stopgap for this, even in its current shape.
But that doesn’t excuse us from trying to do better. And we’ll have to if this Deloitte report is correct. It suggests while someone aged 34 today will retire with a cool $1.1m, they’ll still be likely to fall short of their “comfortable lifestyle” retirement balance to the tune of $500-600k.
People need help. For example, Deloitte recommends women in particular should contribute 19.5% of their earnings into super. How often has anyone told you that? And even if you did know, navigating pre- and post-tax contributions from your salary becomes yet another headache to deal with.
Australians need to wake up to their future. No longer is it enough to bank on capital gains from property to feather one’s retirement nest. Unless there’s a significant correction to the housing market, for many this ship has well and truly sailed.
But along with that, superannuation companies and fintech startups need to wake up to the challenge this societal problem presents. This is where creative and innovative mindsets can use the power of technology to build new superannuation products specifically geared towards solving some of these problems. Solving all at once will be hard, but a niche approach could work well. The market after all is every single Australian, so there’s no shortage of people to help.
A rising tide of innovation across the sector will lift all ships, and hopefully our retirement balances along with it.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by Lightspring, Shutterstock.com