How efficient are super funds?

The award of one of three national scholarships to South Australia’s Flinders Business School PhD student, Ms Yen Bui, will fund a study into the efficiency and performance of Australia’s superannuation funds.

Ms Bui will receive the $12,500 Brian Gray Scholarship, established by the Australian Prudential Regulation Authority (APRA) and the Reserve Bank.

APRA will also support the project by supplying financial data not normally accessible to external researchers.

“APRA is keen to develop a measure, or metric, to estimate and score the economic efficiency of the largest superannuation funds in Australia,” Ms Bui says.

The research covered some 65% of Australia’s superannuation assets, estimated to be worth nearly $1 trillion.

Efficiency, for the purpose of the research, is specifically economic, and Ms Bui will design a model into which economic input and output data can be fed to produce a rating.

“Costs tend to reduce the return of the funds significantly, and are a huge issue which has attracted recent attention from baby boomers, government and media. Given that the value of total superannuation assets approximates the Gross Domestic Product (GDP) of Australia, their concerns are justified,” Ms Bui says.

“The model will categorise cost elements in administration, investment and management, and of third party service providers, in particular related party agents.”

The output aspect of the model will include issues such as the volatility of returns and the liquidity of the funds.

“Volatility, the degree of variation in return, is another crucial factor, if members are to access their funds at the low point in the economic cycle, they will be negatively affected,” Ms Bui explains.

She claims funds that have made high levels of investment have less cash reserves, meaning members may not be able to move their money if they wish.

Once set up, the model will have the capacity to assess the relative efficiency of the funds at regular intervals into the future.

In a later stage of her PhD, Ms Bui aims to assess governance and disclosure practices among the funds to see how they correlate to economic performance.

Her supervisor, Associate Professor Sarath Delpachitra, says the research held major implications for underperforming superannuation funds.

Since the cost structure of the industry affects the future benefit payment for retirees, the research will add significant value to the Australian superannuation Industry.

“This is practical research that will highlight possible areas for reform of superannuation schemes,” Associate Professor Delpachitra says.