Raewyn Williams
The Productivity Commission’s final superannuation report missed an opportunity to show how the industry’s pre-tax investment focus is penalising members who retire on after-tax returns, says Raewyn Williams, Managing Director, Research (Australia), at the global implementation manager Parametric
Williams says the Commission’s report, Superannuation: Assessing Efficiency and Competitiveness, provided some thought-provoking insights into Australia’s $2.7 trillion superannuation industry, including the importance of managing taxes, but “it stopped short of calculating the impact of tax naivety on a member’s retirement outcomes”.
“The Commission was right to ask an important question about superannuation funds’ after-tax investing practices. But it lacked the data and insight to interrogate the matter and provide answers—and superannuation funds and their advisors, by and large, were unable to help.”
Williams’ comments are in Parametric’s latest research report, titled ‘After-Tax Returns: Filling in the Productivity Commission’s Report’. The report highlights the importance of after-tax investing to members’ retirement outcomes, using hypothetical modelling to demonstrate how members could benefit to the tune of 59 basis points a year for a balanced portfolio (post-all fees and costs) if the fund adopted more tax-effective strategies.
The research, using modelling assumptions similar to the Productivity Commission report, says this translates into members losing, on average, nearly $200,000 at retirement date based on the Productivity Commission’s average balanced account over 46 years.
Parametric’s conclusions extend its earlier research report on the issue, ‘Fool’s Gold? Linking a Tax-Efficient Super Fund Equity Portfolio to Retirement Savings for Members’ (January 2018), to fit the Productivity Commission’s modelling approach, and also draws on a collation of 19 bespoke research projects conducted with large superannuation funds between 2014-18.
Williams says two conclusions can be drawn from the research. “It’s valid to group tax efficiency with higher (pre-tax) investment returns and lower fees as levers superannuation funds can use to meaningfully improve a member’s retirement outcomes.
“The benefits we modelled seem reasonable in that they are broadly in line with conclusions from other research we have conducted and are consistent with live investment experience.”
Williams says the fact that superannuation funds pay tax on their investment earnings (in contrast with overseas superannuation regimes) should “logically” drive differences in their investment approach compared with their global peers.
“Yet in the superannuation landscape, it’s hard to see where the after-tax mission of APRA-regulated Australian funds is shaping their approach to investing. That after-tax investing is well accepted in principle but minimally used in practice gives a sense of the opportunity still unexploited for most funds.
“The Productivity Commission laid down some paths to better member outcomes, including higher returns and lower fees, which make sense in theory but are controversial in practice. Our message is that tax efficiency can be as effective, is less controversial and has hardly been exploited to date.
“This is despite the exhortations of the Productivity Commission and predecessor inquiries, including the 2010 Cooper Review and the 2014 Murray Inquiry, as well as apparent support for an after-tax investing philosophy from the peak superannuation industry bodies, ASFA and AIST.”
