Australian super fees too expensive
04 May 2014
Superannuants should closely scrutinise what is happening to their savings. That is the lesson of the report last week about super fees. The AFR
"Roger Irwin, global head of investment content at investment consultancy Towers Watson and one of the most respected pension experts in Europe retirement schemes could do a whole lot better.
“The Australian system is expensive. Funds should work harder at managing the system better,” Irwin tells The Australian Financial Review.The Reserve Bank of Australia, it should be noted, recently made similar observations about the high costs of Australia’s $1.8 trillion retirement savings system, noting it was the third most expensive in the world to operate.
According to Grattan, Australians pay about $20 billion in fees a year, or 1.2 per cent of assets, down slightly from 1.4 per cent since 2002. By comparison, a new retirement savings regime to be introduced in the United Kingdom in October this year will require funds to charge well below 1 per cent in fees.
Under the UK system, known as auto-enrolment, companies will make a minimum contribution of 2 per cent of wages and salaries into a super fund on behalf of staff.
In contrast to Australia, staff will be able opt out if they so wish. Also in contrast to Australia, the maximum fee that can be charged on these retirement savings accounts will be 0.75 per cent, points out Irwin.
Reducing fees for members is challenge number one, Irwin might say. Challenge number two for Australian super funds is to create an appropriate suite of retirement products. As Irwin says, Australia’s pre-retirement super system is well developed, but the post-retirement regime is nothing short of “chaotic”.
For those who opt for self managed super, the need to be attentive is just as great:
"Prosperity Advisers director, business services and taxation, Stephen Cribb says new trustees must be mindful of filing their returns on time.
“For new funds that’s really the point of scrutiny” Cribb says. “If the fund can demonstrate that it’s going to play by the rules in the first year – and that includes lodging its tax returns pretty early (by October 31) – normally that then gets a green light from the ATO.”
Earlier this year, ATO assistant commissioner Matthew Bambrick said lodgment rates were improving but still a concern. Trustees with outstanding lodgments for more than two years have been removed from the government’s Super Fund Lookup site which lists the compliance status of SMSFs.
“APRA funds look at that when they do a rollover into an SMSF and some employers look at it before they make contributions,” he says. “By doing that we’ve given people an incentive to update their lodgments and we’ve had quite a few people respond to that and update their lodgments.”
Bambrick says other common contraventions reported by auditors include inappropriate loans and borrowings, improper dealings with related parties (and in-house assets that should not be in a fund), as well as incorrect use of limited recourse borrowing arrangements to buy property. Nonetheless, only about 2 per cent of SMSFs are reported by auditors to the ATO for contraventions each year.
For the first time, the ATO can take a more flexible approach for such contraventions. In the past it could only resort to heavy-handed actions such as disqualifying a trustee, applying an enforceable undertaking or making a SMSF non-complying (where it loses its concessional tax status).
It remains to be seen how the ATO will apply its new sanctions, but Morcom says trustees would be well placed to restructure their SMSFs because penalties are applied individually to trustees and cannot be claimed against the assets of the fund.
“There is now an incentive for people to put in place corporate trustees in their self-managed super funds – something we’ve been actively doing for a number of years,” he says.
It means penalties applied to a single corporate trustee are limited to $10,200 compared to a maximum $40,800 that can be applied to four individual SMSF directors."
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