The latest Productivity Commission draft report into superannuation has generated a lot of discussion and focus on default products. However among this commentary, there seems little recognition that there is, and likely to continue to be, a choice segment of superannuation.
While the default segment tends to raise more interest, particularly from those coming from an ideological starting point, the choice segment has generated more innovation and seen members join or switch to new start up products.
The default (or MySuper) segment now represents almost half of pre-retirement superannuation assets, excluding SMFs. For just 100 or so products this is a disproportionately large share of assets and even larger share of regular contributions. This concentration would increase if a top ten super default framework was established.
However there still remains more than $700 billion in assets for the other 200 or so superannuation accumulation products that are not MySuper default. These products offer a gateway into thousands of investment choices that can be made - ranging from pre-mixed diversified investment options, single manager options, to asset class specific options.
So let's do a quick review of how the choice segment stacks up against the default market.
Firstly, investment performance. Based on SelectingSuper data, default options outperform the average for diversified options for choice products. The average annual return for the former to April 2018 was 5.7% compared to 5.1% the latter. However this may be partly due to the greater presence of conservative options in choice products. If you look at balanced options only, choice balanced options slightly outperform balanced default options, but with a much larger range of returns.
Another common factor in comparing funds is fees. While net performance is the more critical factor, there is some correlation between higher fees and lower performance. This too was highlighted by the PC report.
Looking at the administration and member fees only, and excluding investment fees, the average default product fee is around 0.51% p.a. compared to 0.86% p.a. for choice products. Part of this variation is due to the greater number of choice products being offered by the retail segment which has a generally higher cost product. What is clear is that once stepping outside of the default structure the cost generally increases. Many choice products have more functionality, for example around direct investments. Paying more for more is a choice; however paying more for nothing extra is failure. The default segment often leverages large member bases, and offers competitive insurance. Rainmaker insurance research indicates that on average a 40-year-old will obtain around 20% more sum insured cover for the same dollar premium in a MySuper default group cover compared with "priced for risk" insurance in choice personal superannuation.
However default insurance offering does not suit all members. The latest industry angst on suitability and affordability of default insurance is a case in point, particularly for younger members.
A choice product can and often does outperform a default product on performance. Similarly a choice product can be competitive on fees. And finally for many risk-priced member choice insurance outside of default will be a better fit. However all of these factors require comparative information and risk-based decision making. It is an information game. The choice market is out there, but buyer beware.
Written by Stephen Fay, head of superannuation research, Rainmaker.