Opinion piece from Industry Super Australia Chair Greg Combet
Despite all the fanfare the Your Future, Your Super package will not hold the worst underperforming super funds to account nor will it stop the disgraceful examples of misconduct unearthed during the banking royal commission. In fact, in a return to the prejudice of the past, the Morrison government reforms appear designed in part to disadvantage the best performing funds in the superannuation system, the profit-to-member industry super funds.
When the reform package was released on Budget night it sounded like the long overdue day of reckoning had arrived for retail and bank-owned super funds that for decades had made billions in profit from their members no matter how poor the investment returns.
Throughout months of testimony and the damning final report Justice Kenneth Hayne exposed countless examples of for-profit retail and bank-owned super fund misconduct that systematically gouged fees and commissions from fund members to boost dividends for shareholders and line the pockets of financial advisers who were not acting in their client’s best interest.
Even in death members could not escape the for-profit sector fees for no service, with examples of retail funds charging a deceased person’s family for financial advice.
Hayne’s savaging was followed by a scathing report from the Productivity Commission that concluded retail and bank-owned super funds dominated the ranks of poor performers and fee gougers.
Industry super funds would fully support the Your Future, Your Super package if it heralded a comprehensive clean-up of the system that drove out the dud funds, wherever they were found.
But unfortunately it appears that the government has been influenced by politically aligned financial sector interests.
Here’s how the financial sector lobbyists – inside and outside Parliament - designed the package to handcuff industry funds and allow the for-profit retail funds an easier run:
Firstly, almost 70% of retail fund products have been carved out from assessment against the crucial performance benchmarks.
Shielding the worst retail products means millions of Australians will likely never be told their fund is a dud. That could cost them as much as $500,000 at retirement – that is the difference between being in a good fund and a bad one.
Investment offerings and products from retail super fund giants BT, IOOF, MLC, ANZ, AMP, and Colonial First State will all be excused from the performance benchmarks. In fact retail products totalling approximately $420 billion are currently out of scope.
Secondly, administration fees are excluded from the key performance benchmark. Administration fees are far higher in the for-profit sector. If they were included the retail funds would have to tell up to 1 million more members about inferior performance.
Any organisation investing worker savings should not fear robust and universally applied performance benchmarks showing the net return to members - meaning investment returns minus all fees and charges. The carving out of profit generating administration fees reeks of a benchmark inappropriately influenced by vested interests.
And finally, retail funds are exempt from having to justify their up to $10 billion a year profit take under the revamped member best financial interest test.
Extracting unreasonable profits
A new financial best interest test that responds to Justice Hayne’s or the Productivity Commission’s findings should mark a death knell for those wanting to extract unreasonable profits from fund members.
But trustees of retail funds can rest easy, knowing that corporate-wide profits derived from deals with related party providers are safe no matter how bad the investment performance.
Instead, it is industry fund advocacy and advertising the government is going after. But there’s a problem, Justice Hayne found these things were all in the best financial interest of members.
So, in case the industry funds successfully jump through all the hoops, the government has designed a regulatory override button. The government will be able to ban expenses or investments it doesn’t like even if they are in the best financial interest of members.
We know the intention here because some ex-bank lobbyists, now government backbenchers, can’t stop bragging about it.
Bank-owned and retail super funds have been trying to stop industry funds promoting their outperformance for years. But now, with this government and their lobbyists sitting on its backbench, they sense victory in their quest to kill off the well-known Compare the Pair campaign, which has helped millions of Australian workers and their employers find a better fund.
Government giving itself the power to prohibit legitimate expenses and investments where they are in the best financial interest of members is conduct that shouldn’t be tolerated in our democracy. It is wide open to politically motivated abuse.
The industry super funds are a legitimate and significant part of our financial services industry. They are major participants in the super system and large investors in the economy. They came through the banking Royal Commission scrutiny with a clean bill of health, and have consistently delivered superior returns to members for many years. And yet they are targeted by the government reforms.
We will seek to ensure through dialogue with the Morrison government that the Your Future, Your Super reforms are better balanced, properly targeted to address misconduct identified by the Royal Commission, and achieve the desired improvement in outcomes for current and future super fund members. But we will vigorously oppose the stacking of the deck against us.
Ultimately, unless the government changes course or the Parliament forces it to, it will be the retirement savings of millions of Australians that will not be properly protected by the government’s current approach.
* As published in the Australian Financial Review on December 16, 2020