Inside Money: How default apathy keeps fees high

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Australia's A$1.7 trillion superannuation system has come in for another mauling, this time at the hands of "independent think tank" , the Grattan Institute.

The report, titled 'Super sting: how to stop Australians paying too much for superannuation', concludes a couple of reforms could easily knock off about A$10 billion annually in fees from the system.

"It is the largest single opportunity for micro-economic reform in the Australian economy," the Grattan Institute proclaims.

After detailing why the Australian super system has failed to lower fees despite a massive increase in scale, the Grattan report says a government-run default fund or a tender process for private providers would introduce the missing element of true cost-competitiveness.

About 70-80 per cent of Australians end up in default super funds, the report says.

Government-run default funds in the US, Sweden and the UK have lowered annual costs to 0.04 per cent, 0.22 per cent and 0.38 per cent respectively, the study says.

Meanwhile, according to the report, New Zealand's default process, for instance, has achieved average annual fees of about 0.55 per cent compared to about 0.9 per cent for Australian equivalents. However, the study is more enthusiastic about the Chilean model (where providers bid to run the default fund every two years compared to every seven years in NZ), which has seen default fees fall to 0.2 per cent.

The Grattan report's other major super reform aims to improve member engagement by making fund price/return comparison an explicit component of filing an Australian individual tax return - maybe even allowing members to switch funds on the spot. As most New Zealanders don't submit annual tax returns, this proposal wouldn't have much effect here.

But the Grattan study does have something to say about the New Zealand government's effort to improve KiwiSaver consumer activism via the recently-launched Sorted fund comparison tool.

The report says the Sorted effort, and similar comparison sites in other countries "are worthwhile".

"But there is extensive evidence that they do little to improve the choices investors make. Most people remain disengaged even when comparability is high," the Grattan study says.

Quoting an OECD (Organisation for Economic Cooperation and Development) comment, the report says comparative fund sites such as Sorted "especially in countries that target lower income employees" don't work due to "general apathy" about retirement savings.

The good news for providers of high cost super schemes is that there is "much greater response among individuals to providers' marketing strategies than to fee levels."