The cost of complexity: Australian superannuation

Abstract

This thesis considers the management and performance of Australian superannuation funds in the period since the introduction of compulsory superannuation contributions in 1991, and the institutional history of the decisions that led to the current position. It highlights principal-agent failures in the Australian superannuation system (contributing to rent extraction via excessive fees and charges) and asymmetric information (which has permitted conflicts of interest to be exploited and also facilitated rent extraction). Design of the system has led to the majority of members to be in defined contribution schemes, rather than defined benefit, which has transferred the risk of underperformance from fund sponsors to (less well informed) members. The thesis also explains how current structure and organisation of the industry resulted from the decision to introduce compulsory superannuation contributions (thus creating huge funds to be managed), acceptance by unions, trustees and government that the private sector should manage the majority of these funds, and extensive outsourcing and delegation of responsibility and authority. The resulting complexity, and in particular the multi-layered nature of the industry, has led to a degree of separation between the ultimate beneficiaries of superannuation funds and those who make decisions on their behalf. The costs and performance of the system are analysed using cost, performance and financial data at the fund level published by APRA, and an international database of US, Canadian and European funds. Simulation modelling suggests that fund assets might now be several hundred billion dollars greater if they had been invested passively in a single fund. International comparison shows higher costs and lower efficiency than oveseas funds, highlights the superior performance of passive management, and demonstrates the superior performance of passively managed funds. Suggestions for reform include enabling proper competitive pressures to emerge, full disclosure of all investment management costs and conflicts of interest, creation of a single regulatory agency with a clear remit to improve the efficiency of the industry and a primary duty to promote competition, stronger use of trust law to enforce the fiduciary duties of trustees, and creation of a publicly administered agency which offered a centrally-administered, passively managed, alternative fund.