Superannuation reform score: maths 1, good intentions 0

The Productivity Commission wants to help Australians get a better return from superannuation, but unfortunately good intentions can’t trump basic maths. In its draft report Superannuation: Assessing Efficiency and Competitiveness, the PC recommended:

• Members should select a default superannuation product once, upon entering the workforce.
• A ‘best in show’ shortlist should be developed to help members pick a good super product.

Having members choose their default fund once, thereby reducing the impact of administration costs on their investment returns is a very sensible reform measure.

In fact, any measure to reduce the impact of management fees is a good one because study after study of financial products has shown virtually no evidence that paying higher fees leads to higher returns.

The share and bond funds — in which superannuation funds largely invest members’ money — tend to charge higher fees if they have performed well in the past. Unfortunately, past performance is a terrible indicator for future performance, so paying higher fees tends only to reduce your future returns.

Based on these facts, the PC’s second recommendation of developing a best in show short list for superannuation funds is sheer folly. The chance of a government selected panel regularly picking winning funds is as likely as Donald Trump giving up Twitter. Cue the public indignation and cacophony of criticism, once the funds on this list inevitably underperform the market.

A vast phalanx of financial advisors are employed to try to beat the market and the majority of them fail to strike gold because of the tyranny of maths — half of all funds must be below the average. If highly paid, skilled financial advisors can’t beat the odds, do you think that a politically-selected panel of indifferent, risk-adverse ‘experts’ is going to accurately select the 10 best superannuation funds in Australia?

Of course member retirement savings would be higher if they were invested in above benchmark funds, but this is not Alice in Wonderland. The Red Queen may be able to think of six impossible things before breakfast but superannuation investors will just have to live with the impossibility of everyone beating the average.