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Fees and Costs explained under the new disclosure regulation

27 August 2018

Fee Disclosure on Statements

From 30 September 2017, a new regulation (RG97) came into effect where existing fees and costs that weren’t previously disclosed as they were included within the net investment returns, must now be disclosed in Product Disclosure Statements (PDSs) and periodic statements.

Local Government Super is disclosing these fees and costs as components of our investment fee and the indirect cost ratio for each of our investment options. 

This means that the investment fee and the indirect cost ratio shown on your annual member statement will be higher than your previous member statement.  This doesn’t mean you’re paying more in fees and costs than before the new disclosure regulation came into effect.  It just means that additional underlying fees and costs are now being disclosed to you.

What does the investment fee include?

Previously, the investment fee included the following:

  • external investment manager and performance-related fees
  • custodian fees
  • fees relating to the management of investments by Local Government Super.

The investment fee since the regulation came into effect now has the following fees included:

  • external investment manager and performance-related fees
  • direct costs associated with agent lending fees
  • custodian fees
  • consultancy fees
  • transactional and operational costs
  • fees relating to the management of investments by Local Government Super.

Please note that the investment fee is deducted from the Fund’s assets prior to unit prices being calculated and applied to your super account. The amount quoted in the PDS and in your statement is indicative only.

What additional fees and costs does the indirect cost ratio include?

The indirect cost ratio was previously the sum of all investment related fees and the Trustee costs (Management Expense Ratio (MER)).

Since the new regulation came into effect, the indirect cost ratio now discloses the Fees and Costs associated with our indirectly held (comingled trust) holdings.

This doesn’t mean you’re paying more in fees and costs than before the new disclosure regulation.  It just means that all these underlying fees and costs are now being disclosed to you.

Are these fees and costs being deducted from my super account? 

No.  Those fees and costs are deducted from the daily unit price of the investment option, not from your account.

Will these fees and costs affect the net investment returns of my super investments?

No.  These fees and costs have already been incurred.  Due to the regulation change, we are just providing a deeper level of disclosure of them to you.

For instance, asset managers we employ previously absorbed their cost of buying and selling assets into their management fees.  Now, they are disclosing all their fees and costs they incur in managing the assets and, in turn, we are disclosing these fees and costs in our investment fee for each of our investment options.

Will all super funds show an increase in their fees and costs due to the new disclosure regulation?

It depends on the how each super fund invests their members’ monies.  Below are two examples:

a)    Active or passive portfolio management

One factor is the type of investment strategy the super fund uses: active or passive portfolio management.

Active portfolio managers pick investments they believe will outperform the market compared to a specific benchmark.  Passive portfolio managers aim to mimic the investment holdings of a particular market index, e.g. S&P/ASX 200.

Active portfolio managers charge a higher fee, as they regularly research and monitor the performance of all their investments. Passive portfolio managers invest in a pool of shares without the regular research and monitoring the performance and credentials of each company in their portfolio. 

At LGS, we employ an active strategy as part of our investment philosophy as we believe paying a bit more in fees and costs will be offset with better long-term sustainable investment returns for our members.

This doesn’t mean you’re paying more in fees and costs than before the new disclosure regulation.  It just means that all the fees and costs associated with this type of investment strategy are now being disclosed to you.

b)   Alternative investments

Another factor is the type of investments the super fund invests in.

For instance, alternative investments, such as direct property, infrastructure or private equity, tend to have higher fees than traditional market investments of shares, fixed interest and cash. 

Most alternative investments are unavailable to the public and are less liquid than shares, fixed interest and cash. However, alternative investments usually offer higher and more stable investment returns over the long term and diversify the risk across an investment portfolio. So, their investment returns usually more than offset their extra investment fees over the long term.

Because Local Government Super invests in alternative investments, our fees may appear higher than a super fund that invests little or nothing in this investment sector.  

This doesn’t mean you’re paying more in fees and costs than before the new disclosure regulation.  It just means that all the fees and costs associated with this type of investment is now being disclosed to you.

Does the disclosure regulation have an impact on my investment returns or my super balance?

No, the regulation makes no impact on your investment returns or your super balance. The administration fee, investment fee, and indirect cost ratio, have always, and continue to be, deducted from the unit prices of your investment option(s) when calculating your investment returns.

Does the disclosure regulation have an impact on the fees that are directly taken out of my account?

No, the regulation doesn’t change which fees are directly taken out of your account. 

For LGS super accounts, the only fees that are directly taken out of your account are $71.24 p.a. administration fee and insurance premiums.  These fees are shown on your member statement.

Where can I compare Local Government Super with other super funds?

You can compare Local Government Super with other super funds via super comparison websites such as Canstar, Chant West, Selecting Super and Super Ratings.

There are a number of factors to consider when comparing super funds, you should look at investment related fees and costs, but it is the net investment returns over the long term that will have a significant influence on whether you will have enough money to live on when you retire. Also compare the administration fees that are deducted directly from your account, insurance, investment approach, investment options, and the types of services you want receive from your super fund.