Australian Pension Study finds that high fees and costs of private sector pension plans seriously limit investment returns for pensioners

May 30, 2011 – A new study, called Redesigning Choice and Competition in Australian Superannuation, has found that the high fees and costs of private sector pension plans in Australia seriously limit investment returns for pensioners. All the more reason for a public option and real competition.

The Australian Superannuation model was founded on the assumption that market competition will deliver economic efficiency in a largely private, defined contribution system.

The report, commissioned by the government of Australia, shows that while total assets in the system have grown substantially through contributions, net earning from investments were relatively low.

The principle reason for the lower than anticipated earnings is that high costs and fees restrained the growth of the fund, despite the role that competition was expected to play in keeping costs minimal.

In fact, the report argues that competition does not produce lower costs when individual investors face complex choices, as they do retirement planning and investing. Simply, complex choices are not functionally choices at all, which means that the average investor pays the fees and costs set by the various funds.

Why it matters

The retirement system in Australia – called the Australian Superannuation program – is compulsory, meaning that employers are required by law to pay an additional amount based on a proportion of an employee’s salaries and wages (currently 9%) into a complying superannuation fund. These mandatory funds are defined contribution and privately run.

If this sounds familiar, it’s because it is. The current Canadian federal government proposal for Pooled Registered Pension Plans would run much like the plans in Australia.

The Canadian government is looking into compulsory contributions, but otherwise, PRPPs would be run by the private sector as defined contribution plans.

There’s no reason to beleive that PRPPs would perform better than the Australian model. High costs and fees would erode earnings much the same as they have in Australia.

The Solution

The Australian report argues that investors need clearer options, which in turn would produce real competition that would drive costs down.

In Canada, a practical solution is clear – allow people to buy into a separate fund run by the existing not-for-profit pension funds like the CPP, OMERS, provincial Teachers Funds and the like. With their size and experience, they can offer low-cost, reliable defined benefit pensions. They have the advantage of scale and operate on a not-for-profit model.

If real competition can drive down fees and costs, then it makes sense to let the public sector and the not-for-profit sector compete with private banks.

To read the full report, Posted in In The NewsTagged , , , ,