PC misses tax-retirement link

The Productivity Commission (PC) final superannuation report has missed an opportunity to focus on how the industry’s pre-tax investment focus might negatively impact members who retire on after-tax returns, according to Parametric’s managing director, Raewyn Williams.

According to the company, the report failed to calculate 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 said.

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Parametric’s “After-Tax Returns: Filling in the Productivity Commission’s Report” said that the report had used 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

Following this, the research which used similar modelling assumptions to PC’s report, found that it would translate into members losing nearly $200,000 at retirement date based on PC’s average balanced account over 46 years.

According to Paramteric, this would lead to two conclusions, with the first one being valid to group efficiency with higher (pre-tax) investment returns and lower fees as levers superannuation funds could use to improve a member’s retirement outcomes.

“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,” Williams said.

“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.

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Wouldn't the after tax position of a balanced fund be reflected in the unit price, which is what is used for the performance rankings?

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