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Personal retail funds have cut fees significantly
from about 185 basis points to 100-110 basis
points, according to Chant West, after commissions
were banned (30 basis points), and boosting
passive management and lowering alternative
exposure (45 basis points), and margin squeeze.
A recent report by the Grattan Institute still
found Australian super fund fees were more
than three times as expensive as the best systems
overseas. However, Mercer’s Graeme Mather says
offshore pension schemes are often dominated by
defined benefit funds, and are also less diversified
and actively managed.
“If you’re going to have unlisted assets in there
and hedge funds and private equity – really good
asset classes that give you diversification and
protect your capital – I would argue it’s worth
paying for,” he says.
Industry funds have largely maintained their
pre-MySuper strategies, which typically included
substantial levels of alternative and actively-
managed assets, by rebadging their balanced
options as MySuper products. It has brought the
level of fees charged between the industry fund
and retail sectors closer together.
However, the majority of lifecycle funds don’t
reduce their fees, even as their asset mix is
shifted to lower-cost conservative assets. They are
permitted to charge up to four different investment
management price points under MySuper.
“If you’ve got a constant fee throughout then
there’s a bigger profit margin as people get older
because you’re investing less in growth assets,”
Chant says. “But, at this point, a lot of funds have
just done that for simplicity.”
A research report by the Centre for
International Finance Regulation and Chant West
estimates that lifecycle products will ultimately
strip about one per cent a year (after fees and
taxes) from investment returns. A key driver
behind that result is the impact of rising balances,
which peak at or near retirement – just when an
investor is least exposed to growth assets.
While a sample lifecycle investor will spend a
reasonable 44.9 per cent of time invested in a
high-growth investment option, only 8.4 per cent
of their balance is exposed to growth assets when
measured on an asset-weighted basis, according
to the analysis.
It is an outcome that is being challenged by
others in the industry. Deloitte’s Facer is currently
working on research that shows that an investor
would end up with a “broadly equivalent”
retirement balance compared to an investment in
a balanced 70:30 fund because they have accrued
higher returns earlier in life (when lifecycle funds
can have up to 90 per cent of the portfolio
allocated to growth assets), which offset lower
returns later in life.
The upside (which Chant agrees with) is that a
lifecycle investor would bear less risk as they near
retirement. He is critical of the impact of MySuper
on the industry but remains neutral about
“It’s still early days and we’re all having
these debates,” Chant says. “But let’s just say
we’re right: one per cent is a fairly big price to
pay for that comfort zone as you get towards
Unravelling the complexity of assessing the
end benefit of lifecycle products does not end
at retirement. While retirees are expected to live
for decades, most products take an investor ‘to’
retirement rather than ‘through’ retirement.
It potentially represents the next stage in
lifecycle investing as the needs of retirees, which
include income and tax-effective strategies, can
radically differ from a typical ‘conservative’ option
for an investor approaching retirement.
CFS’ Tully says its Lifestage product manages to
retirement because an investor’s interest begins to
peak and their individual needs differ once they
retire. “You tend to start thinking about your
personal experience,” he says.
Nonetheless, the challenge remains: how do
you best meet the needs of an investor base that
is compelled to use a product, super, which they
largely have little interest in?
“We’re going down a path which is better than
the balanced fund approach,” Tully says “and,
over time, we’ll see this evolve and the experience
of members should continue to improve.”
Brendan Swift is a freelance journalist.
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