Australia Looks to Cut Down Investment Fees After Scathing Report

Pension funds are becoming increasingly allergic to fees eating into their returns, as CalPERS demonstrated this week when it announced a decision to cut hedge fund investments by 40 percent. But the United States isn’t the only country where this concern is taking hold. From the Financial Times:

Australia’s highly regarded private pension system faces sweeping reform following a sharply critical report into the fees charged by superannuation funds, which manage $1.8tn ($1.7tn) of assets.

Although Australia has the fourth largest private pensions savings pool in the world, the operating costs of the country’s superannuation funds are among the highest in the OECD, leaving scope for significant improvements in retirement incomes.

Fees should be cut by an average of 40 per cent (or 38 basis points) across the entire superannuation sector, according to an interim report released last week by the Murray inquiry, chaired by David Murray, a former chief executive of the Commonwealth Bank of Australia. This would deliver savings of about $7bn ($6.6bn) a year from annual running costs of $20bn ($18.8bn), boosting the average retirement payout by $40,000 ($37,574).

“There is an opportunity for innovation to deliver better outcomes for retirees and to better meet the needs of an ageing population,” said Mr Murray.

The report called for a “fundamental change” in the way the country manages its assets. It urged Australia to look at other parts of the world for ideas. From FT:

The report suggested Australia’s government should consider following the example of Chile and auction the right to manage default funds for all new pension accounts to the lowest cost provider. Fees charged by successful bidders in Chile have fallen 65 per cent since this approach was introduced in 2008.

The report also urged the government to consider introducing some form of compulsory deferred annuitisation that would pay out after the age of 85 – just as the UK is abandoning near-compulsory annuitisation.

The report said Australia was “unusual” in not encouraging citizens to convert their retirement savings into an income stream with longevity protection.

A “fundamental change” in the approach to asset management is required by Australia’s pension system, which focuses on maximising wealth on retirement rather than ensuring a sustainable income flow for life, said Mr Murray.

The panel that produced the report, called the Murray Inquiry, will send its official policy recommendations to the Australian government in November.