Rome wasn’t built in a day

To help consumers compare different superannuation plans and products requires some standardisation in the way that fees, charges and costs are disclosed in Product Disclosure Statements (or PDS’s) and in other communications.  In fact, the same can be said of any product with an investment component, such as a managed fund or a life office or friendly society investment-linked policy or bond.

In the late 1990’s the Institute decided to promote the idea that superannuation fund investment performance should be reported net of tax and investment fees and costs, rather than net of all fees and costs.  The main driver for this decision was that we could foresee a future situation where performance comparisons could be distorted by incorrect analysis, leading to poor decisions by superannuation fund members.

Although it was not explicitly stated, implementing this recommendation would include the need to separate investment fees and costs from non-investment (‘administration’) fees and costs.  Without this it is not possible to give members and prospective members a sound basis for comparing the costs of two or more superannuation funds.

In January 2019 ASIC released Consultation Paper 308 – Review of RG 97 Disclosing fees and costs in PDSs and periodic statements.  CP 308 included measures to separate and present administration and investment fees and costs as one-line items, consistent with the recommendations that the Institute had been making regularly since about 1998.  Even so, after many years of Institute endeavour, there were warning signals that the CP 308 proposals might not eventuate. 

In November 2019, ASIC issued the final version of RG 97.  The Institute was very pleased to note that key aspects of the CP 308 proposals remained unchanged.

It’s been a hard-won victory that has required persistence and patience from those involved.  The history of how this result was achieved makes interesting reading and may help guide future campaigns (an example of the latter could be the 180-degree 2016 change in focus which is summarised below).

1998

Over 21 years ago the Institute of Actuaries of Australia recommended the following (with some bolding added to aid the explanation):

1. Investment performance should be reported net of tax and investment transaction costs and net of all investment costs.
2. Key Features Statements should include a brief description of all fees and charges.
3. In addition, there should be some form of analysis of the impact of fees and charges which should focus on all non-investment fees and charges.
4. The impact of these fees and charges should be shown net of employer subsidies but should include any costs in excess of fees and charges.

2009

In their 18 November 2009 submission to the Review into the Operation and Efficiency of Australia’s Superannuation System (the Cooper Review) the Institute made four specific recommendations which they considered “would significantly improve the operation and efficiency of Australia’s superannuation system.”  The first recommendation was:

All superannuation fund expenses and superannuation fees and costs which impact on members’ benefits should be subdivided into an “investment” component and an “administration” component for all purposes.  All purposes would include plan and member reporting, PDS disclosure and APRA fund expense statistical reporting and the definition of the “investment” component would be consistent with Corporations Regulations 7.9.01 which refers to “… relating to the management of investment of fund assets”.

Appendix A to the submission explained the reasons supporting the first recommendation.  Appendix B explained some safeguards that should be considered to ensure that plan sponsors do not manipulate expense, fee and cost subdivisions to try and gain perceived competitive advantages.  The first (Appendix A) of these two appendices was headed:

REASONS FOR SEPARATING FEES AND COSTS INTO INVESTMENT AND NON-INVESTMENT COMPONENTS

[ Five fruit or two apples and three oranges ? ]

The appendix commenced:

“All superannuation fund expenses and superannuation fees and costs which impact on members’ benefits should be subdivided into an “investment” component and an “administration” component for all purposes.

Without this it is not possible to give members and prospective members a sound basis for comparing the costs of two or more superannuation funds. To do this effectively, members need to know and consider:

1. The fund administration fees and costs (and the services provided for those fees and costs), and
2. The investment fees and costs (and the expected net investment returns) in respect of all the various investment options.

The most relevant attributes of administration and investment fees, costs and services, making subdivision essential, were then explained in the rest of the three-page appendix.

2011

All the Institute’s efforts above (and many others that were made in the intervening years) seemed to “fall on deaf ears”.  Then in July 2011 the FSC and ASFA, at the request of APRA, published the Standard Risk Measure Guidance Paper for Trustees.  The methodology required:

“The Standard Risk Measure should be calculated gross of administration fees but net of investment management fees. For the sake of clarity, where a fund charges an all-inclusive fee with no specific administration fee then this will result in a need to write back the notional component of the fee that relates to administration for the purpose of the modeling.

Calculating the Standard Risk Measure net of administration fees would likely result in unintended differentiation of identical investment options, for example, where the same investment option is offered by different superannuation funds or even by the same superannuation fund at different administration fee levels.”

The Standard Risk Measure was not a tool to disclose and compare fees but this was the first time that the Australian superannuation and wealth-management industries had a requirement imposed on them to separate administration and investment fees.

2013

With effect from mid 2013 the Corporations Regulations defined “administration fees” and “investment fees” for MySuper products.  However, Choice products had no requirements to separate the disclosure of administration and investment fees.  All superannuation PDS’s and Product Dashboards emphasised the importance of total fees and costs for a “representative member” with a $50,000 account balance.

2016

The Institute’s Superannuation Projections and Disclosure (SPD) sub-committee and the Institute decided to tackle the matter of separating disclosure of investment fees and costs and administration fees and costs from a different angle.  Rather than focusing on:

• the separation of investment fees and costs from administration fees and costs,

they decided to focus on:

• combining indirect investment costs with investment fees, and
• combining indirect administration costs with administration fees.

On 1 March 2016 the Institute wrote to Treasury, ASIC and APRA and explained the reasons why   indirect costs should be:

1. split between investment and administration/advice,
2. combined with investment fees and administration/advice fees, and
3. referred to as “other costs” in headings (as has been the situation for some years).

The submission listed nine reasons for the recommendations.  Two of these were:

“The main problem with the past strong distinction between fees and costs, is that different funds treat fees and costs quite differently and the separation implies a false level of accuracy – very similar costs (and even very similar deduction of those costs from members’ accounts) are variously treated as fees and/or costs by different funds.

The main difference between a fee and cost is that the fee is known in advance whereas a cost is usually known after the period and is based on cost recovery – these subtleties are of little or no interest to members and should usually not enter into comparisons between funds, products or services.” 

On 1 June 2016 a further submission to APRA re-enforced the need for these changes and suggested that the changes were equally desirable for PDS’s, Periodic Statements and for Fund APRA Reporting.

2019

In January 2019 ASIC released Consultation Paper 308 – Review of RG 97 Disclosing fees and costs in PDSs and periodic statements.  Page 2 of the Institute’s response submission stated:

“The views in this submission draw on our 2018 Indirect Costs Survey, which was completed by 49 superannuation actuaries and members of ASFA and was emailed to yourself on 18 February 2019.  The survey focuses on superannuation products, but we believe most of the suggestions are also relevant for collective (“managed”) investment products.

B1Q1 – Changing the superannuation product ‘Fees and costs template’

We support proposal B1(a) on changing the superannuation product ‘Fees and costs template’, namely the intention to introduce requirements to:

1. present all administration fees and costs as one-line item, by merging administration fees and indirect costs that relate to administration or operation of the superannuation entity;
2. present all investment fees and costs as one-line item, by merging investment fees and indirect costs that relate to investment of the superannuation entity’s assets;
3. remove advice fees (intra-fund advice costs) as a line item, and include this cost in the disclosure of administration fees; …’.

These are proposals … that the Institute has been advocating for many years.”

But, there were warning signals that the CP 308 proposals might not eventuate.  Page 6 of the Institute’s submission explained:

            “C1Q1 – Consumer testing some proposed changes

We are concerned that the proposal C1(b) seems to suggest that administration fees and costs should be merged with investment fees and costs.  We believe that such “merging” would be a very backward step.  This is because in order to give members and prospective members a sound basis for comparing the costs of two or more superannuation funds, the members need to know and consider:

1. The fund administration fees and costs and the services provided for those fees and costs, and
2. The investment fees and costs and the expected net investment returns in respect of all the various investment options.

Administration fees and costs and investment fees and costs have different attributes which make it necessary to demonstrate their effect on members in different ways.  …

If this key aspect of the CP 308 proposals is to be decided primarily on the basis of consumer testing, then we suggest that participants in the program would need to be given very carefully prepared information about the respective attributes of investment and administration services, fees and costs.  Perhaps they should also be asked,

if purchasing two apples and three oranges, would they prefer to know merely the cost of five fruit, or would they prefer to know the separate costs of apples and oranges?”

In November 2019, ASIC issued the final version of RG 97.  The Institute was very pleased to note that key aspects of the CP 308 proposals remained unchanged. 

Ironically, ASIC’s consumer testing found that consumers rejected the “old” regime, primarily because they did not understand “indirect cost ratios”, and even though 12 out of 20 believed that investment and administration fees could be merged.  So we got the right outcome for the wrong reason!

Superannuation Projections and Disclosure Sub-committee

• Estelle Liu, Convenor 
• Jean Nette Koay
• Bill Buttler
• David Orford
• David Carruthers
• Richard Starkey
• Esther Conway
• Young Tan
• Colin Grenfell
• Rein Van Rooyen
• Ian Fryer
• Brnic Van Wyk

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