Merging more superannuation funds could boost retirement savings by $22,000 per member, if the resulting savings are passed on as fee reductions, the Productivity Commission has found.
The Productivity Commission has been releasing research as part of its inquiry into the efficiency and competitiveness of the superannuation system. The latest paper is on economies of scale.
The paper finds that “large cost savings can still be realised, especially from further consolidation”. It “conservatively” estimates that merging the 50 highest cost APRA-regulated super funds with the 10 lowest cost funds would save at least $1.8 billion a year.
“Even modest economies can materially reduce costs. A one basis point reduction in administration expense ratios for funds with more than $10 billion in assets would result in annual savings of around $130 million.”
Passing on the median cost savings, of around 10 basis points (0.1%), on to all members as lower fees and holding all other costs the same would leave the average super fund member about $22,000 better off at retirement.
The Commission found that there have been “significant scale benefits” realised over recent years, of $4.5 billion between 2004 and 2017. Though there is “little evidence” that these savings have been “systematically” passed on to members through lower fees
“Despite the realisation of economies of scale since 2004, the reduction in fees charged to members by the median fund did not fall. Though some funds have likely passed through at least some of the scale gains.”
The Commission says the savings may have been used to increase operational reserves, improving member services or spent on new compliance and regulatory requirements. But issues with data make it difficult to reach a conclusion.
Some super funds – in particularly not-for-profit funds – may have used the savings to increase investments in unlisted assets which boosted returns for members,.
“It is also possible that data limitations (including under-reporting of expenses and patchy fee data) are muddying the analysis.”
The Productivity Commission is due to give its final report on efficiency and competitiveness in the super system to the Government in late December 2018.