Far from a revolution, some think the Cooper review of superannuation will entrench apathy and hurt returns.

“Super set for golden age” is how some media greeted the release of the review of the superannuation system by Jeremy Cooper on July 5^th.  “Consumers to benefit from radical overhaul,” it enthused.

Aside from quibbling with individual recommendations that might harm the particular interests of their members, groups representing funds, trustees and advisers were also enthusiastic about the final report of the year long inquiry.

“The majority of Cooper review recommendations, if implemented, will provide Australians now and in the future, with a secure, transparent and accountable retirement income industry,” said Paul Vamos, chief executive of the Association of Superannuation Funds of Australia, the self styled “voice of super”.

However, now upon further analysis quibbles are becoming gripes as the Cooper review turns out to herald an age pretty much like the old one.

Indeed, fears are growing that its recommendation could entrench apathy, lower investment returns, keep fees high, and surrender retirement savings to a handful of mega-funds.

Big reform issues like longevity risk and self managed super have been ignored.

Longevity risk (that is, the risk of investors outliving their savings) has been left to the same market which the review indicates has fundamentally failed investors.

Instead the Cooper review  wants to force the market to come up with low cost funds for the three in five members who put money into funds they did not choose to be in.

These default, so called “MySuper” funds would have to satisfy some 16 criteria, including performance based investment management fees but no entry fees or adviser commissions, as well as a “single, diversified investment strategy at an overall cost aimed at optimizing fund members’ financial best interests”.

While members would retain the option to choose a fund that does not meet these criteria, MySuper accepts that many people are too apathetic to seek out an investment strategy in their “financial best interests”, either on their own or with the help of an adviser. 

“Australians have contributions made to their super funds whether they like it or not,” the review notes. 

“Members should not have to be interested, financially literate, or investment experts to get the most out of their super. 

The key tenet of this approach is the concept of ‘libertarian paternalism’ – the idea that the outcomes experienced by inert or disengaged consumers should have inbuilt settings that most closely suit those consumers’ objective needs, as assessed by the expert providers of the product or service  in question,” the report says. 

However, right now people can access high quality, low cost superannuation options which are cheaper than those referred to by Cooper. 

If people were more engaged they would seek these out.  But due to the constant tinkering with the system, people switch off and remain blind to the opportunities.

We would like to see financial education, workplace training on retirement savings – those sorts of things to assist people to understand their superannuation, and perhaps assist them to understand whether MySuper is appropriate for their circumstances of whether they should go for another option which gives them more choice in their retirement saving.

Indeed, MySuper could ensure a repeat of the global financial crisis when a halving of the sharemarket decimated a typical member’s retirement savings.

The reason?  In Australia, a portfolio consisting of 30-40 per cent in cash and bonds and 60 to 70 per cent in stocks is considered “diversified”.

In the US and Europe, the proportions in a typical diversified portfolio are reversed.

By mandating a “single, diversified investment strategy” regardless of a fund member’s age and tolerance of uneven returns, MySuper makes it less likely those approaching retirement (and with less time to make up losses) will own a more appropriate mix of assets when the next crisis hits.

What about the fees?

Cooper estimates that MySuper and “SuperStream”, a combination of more technology, uniform data standards, and other “back office” improvements, will immediately save the industry $1.55 billion annually, rising eventually to $2.70 billion, and boost members’ final balances by about 7 per cent.

However, there is doubt on the savings claims.  Some experts estimate that costs and fees could fall by less than one fifth of what the Cooper review promises.  In addition, another potential danger is recommendations to allow the Australian Prudential and Regulatory Authority to pressure funds to merge with others in pursuit of “economies of scale”.

Does this mean that every corner shop is non-viable because they charge more than Coles and Woolworths?

Even if they provide a dearer service, albeit more personalised, is it the government’s job to decide on their business economics and put them out of business?

Not all cost reductions are necessarily beneficial for super fund members.

There is a potential danger that an excessive focus on costs will drive MySuper products to a race for low cost outcomes even if this does not maximise long term returns.

It would be appalling if products use cash as a default strategy in order to cut explicit fees.

These and other emerging doubts do not appear top have weakened the resolve of Superanuation Minister Chris Bowen to implement MySuper and SuperStream. 

Comment: Andrew Venning, Director, Advantage One