On 21 September 2011, the federal government released the Stronger Super Information Pack, which outlined the fees that can be charged in a MySuper product.
The allowable fee basis will be restricted to an administration fee, an investment fee, buy-sell spreads, an exit fee and investment switching fees.
There are also exceptions for member-specific fees initiated by the member, such as family law splitting fees.
The information pack states that "all fees charged for MySuper products must be able to be included under these standard descriptions".
"This will make it simpler for members to understand what they pay and to compare fees against other MySuper products," it says.
One of the problems of highly prescriptive legislation is that good intentions can wind up having unforseen consequences.
While the MySuper fee specification does not contain this level of detail (yet), there is potential for it to adversely restrict super fund trustees' ability to charge fees on an equitable basis.
For example, all public offer funds appoint an external insurer to provide life and disability insurance cover for members of the fund.
The premiums charged by the insurer are regularly deducted from each member's account balance.
For some of the largest funds, there have been significant recent changes in the way insurance administration is handled, and these changes affect the balance between insurance premiums and administration costs.
As funds get larger and they are able to negotiate better terms and conditions with the insurers, some of them have taken on many of the day-to-day insurance administration tasks, such as obtaining medical reports for members who are applying for additional insurance, or managing part of the claims process for members applying for a disability benefit.
These streamlined procedures are in the best interests of members because they speed up back-office processing and eliminate duplication of effort, resulting in better service and lower end-to-end costs.
As a result of the increasing delegation of tasks to the fund, insurers have been prepared to reduce their premium rates to reflect the administrative work that is now being done by fund staff rather than the insurer.
The end result is that the super fund now incurs increased administration costs, offset by lower insurance premiums.
The administration costs need to be recovered via the fund's fee structure.
At the moment, some trustees recover their additional costs via an additional 'insurance administration' fee calculated as a percentage of total insurance premiums.
It is possible a more prescriptive MySuper fee structure will eliminate this option.
What are the consequences?
- For these funds, the additional costs will have to be loaded into the general administration fee, payable by all members. This means members who opt out of insurance, or who are otherwise ineligible, will still be paying for part of the insurance costs. Furthermore, members who choose to have higher cover will not pay a higher share of the administration costs relating to their cover.
- It will be more difficult to compare insurance premiums between funds on a consistent basis.
As it stands, the MySuper specification does not say how the administration fee component must be calculated. Provided the method is left to the discretion of the fund trustee, there will be sufficient flexibility to handle the issue discussed above.
In the event the specification does become more prescriptive, we suggest trustees be given the discretion to use any or all of the following components:
- a fixed-dollar fee,
- a percentage of the member's account balance, and
- a percentage of insurance premiums.
Bill Butler is a principal with Rice Warner Actuaries.
