MySuper was intended to be a simple, low-cost default superannuation product that allowed for easy comparison between the returns of the various products available.
When the design for MySuper was first unveiled in 2011, the super industry raised concerns about the emphasis on costs.
This “cheap and cheerful omnibus” for the average Australian, as one industry participant called it, would not result in the best investment performance, fund managers feared, because it would simply mean a shift towards passive investments rather than alpha-generating strategies.
The emphasis on costs has reduced somewhat during the various incarnations of the legislation around MySuper, as the Australian Prudential Regulation Authority emphasised that ultimately performance would be compared net of fees.
But it never quite disappeared.
It was, therefore, interesting to gain a first look into the costs of these new default products.
SuperRatings’ analysis of 65 MySuper products laid bare some revealing trends in the industry.
The overall fees of these 65 products were 23 per cent lower than the average fee charged by the 148 trusts analysed in 2012.
But what was most striking was that the average fee reduction among retail master trusts plummeted from $974 a year to $490 a year.
Although these figures were partly skewed by the smaller number of funds that were included in the research, as far less retail funds have received or sought MySuper approval than the number of retail default products analysed last year, the analysis still indicated a move towards increasing price competition.
Retail funds are now only $25 a year more expensive than their not-for-profit super fund competitors.
Although a higher allocation to passive investments could partly explain this cost reduction, SuperRatings argued retail funds had also taken a significant hit on their margins by lowering administration fees.
From this perspective, MySuper could be called a success, as it has resulted in lower costs for members.
Whether this will prove to be beneficial to members remains to be seen.
Many super funds in both the retail and not-for-profit sector have embraced the philosophy of the life cycle; the idea that members at different stages of their lives and with different account balances should also have different allocations.
Although this argument is intellectually appealing, there is still little evidence the strategy actually works.
In the United States, these types of strategies have been in existence for longer, but they differ vastly in structure, which makes any generalisation of results difficult.
What did become clear though is that the rigid automation of rebalancing assets has led a number of pension funds that adopted these strategies to produce rather disastrous results for their members.
A number of product providers have tried to overcome this issue by including more personal details of account holders, but inevitably there will be a trade-off between customisation and costs.
It will be interesting to see if this next generation of life-cycle funds delivers good results for members, or whether they will disappoint and push more people into self-managed super funds.
Written by By Wouter Klijn for the Instoreport.