Superannuation fund mergers are saving members thousands of dollars in fees, with the average member now $15,000 better off over their working life.
But the cost of insurance premiums within super accounts is likely to rise 30 per cent in the next five years, according to an industry specialist.
Research from Super Consumers Australia found that fund mergers were delivering significant benefits to members.
“MySuper fees charged to consumers decreased by an average of 13.4 per cent among merged funds, compared to just a 2.76 per cent decrease across funds that didn’t merge,” said Super Consumers Australia director Xavier O’Halloran.
Some of the mergers covered in the survey include the creation of Aware Super following the merger of First State Super, VicSuper and WA Super, the merger of Cbus and Media Super, Hostplus’s takeover of Club Super, and SunSuper’s merger with AustSafe Super.
Mr O’Halloran said many of the benefits came from economies of scale.
“It is clear that in superannuation size matters,” he said.
“Responsible super funds are looking to find merger partners so they can pass efficiency gains on to members in the form of lower fees.”
Across the board, direct costs charged to members by super funds have declined in most areas. Members were charged $8.48 billion in fees in the year to June 2020, compared to $8.85 billion back in 2015.
That is a decline of 4.6 per cent, during a period in which super funds’ assets under management rose 56 per cent to $1.93 trillion.
Costs per dollar invested therefore fell by far more than 4.6 per cent.
And in more good news for members, insurance premium costs also fell in 2020, after rising strongly over the preceding four years.
Between 2015 and 2019, premiums charged to super fund members rose 23.3 per cent to $9.87 billion.
Regulatory changes applying from April 2020 were the main reason why insurance costs fell last year.
“They included making insurance in super opt-in for members under 25 and those with less than $6000 in their accounts,” said David Knox, partner with super consultancy Mercer.
Another change gave the ATO the power to hoover up inactive super accounts into its own account, where the money would be held without insurance costs until they were claimed by members, or funds helped identify their owner.
All up, along with a government campaign to end multiple super accounts, the measures have reduced the number of accounts paying life and disability insurance premiums and the figure should decline again this year.
But while the number of people holding insurance in their super should continue to fall, those who retain it may find themselves paying higher premiums. This is because there is a squeeze on the insurance sector, largely caused by low interest rates.
Earlier this month, financial regulator APRA released figures showing that the net return of assets for life insurers had fallen below minus 5 per cent and the industry had collectively lost more than $1 billion last year.
Among the loss makers, as the chart below shows, were the group products that account for insurance in super funds.
“Group insurance is a very low margin business,” said Mark Kachor, CEO of research group DEXX&R.
“Premiums have already started to go up and over the next five years I can see them rising 30 per cent,” he said.
“Life insurance is a risk business and funds have to invest very conservatively.”
Mr Knox said this conservatism meant funds “have to hold a lot of fixed-interest investments to be sure they have the funds available to pay out when necessary. But because interest rates have fallen so far in recent years their income has been slashed and it can be a loss-making situation”.
Eva Scheerlinck, CEO of the Australian Institute of Superannuation Trustees, said lower fees on super accounts was a good thing.
“But it is also important to remember that fees and costs shouldn’t be considered in isolation. What matters most to members is their net return – that is what they receive in their super fund – minus all fees and costs,” Ms Scheerlinck said.
“While there is generally a strong correlation between super funds that charge low fees and those that outperform, there are instances where high fees are justifiable, such as when a fund invests in unlisted assets and infrastructure.”
Although such assets can be costly to invest in, their long-term performance is strong and suits the long-term investment horizons of not-for-profit super funds, she said.
“These assets play an important role by providing diversity in a balanced portfolio and minimising the impact of sharemarket downturns.”
The New Daily is owned by Industry Super Holdings