Published: 24 Apr 2018
A representative of Westpac subsidiary, BT Financial, published an opinion in the Australian Financial Review on 12 April 2018 concerning industry super funds. This statement corrects the record.
Industry super funds are not “union funds”.
Under “Equal Representation” governance, the directors of the trustee must include an equal number of directors nominated by employers or representatives of employers, and members of the fund or representatives of members including trade unions.[1] The participation of unions and employer associations in industry super funds is one reason why industry super funds delivered higher long term average net returns than retail funds owned by Westpac (BT Financial) and other bank-owned super funds.
Industry SuperFund advertising is appropriate. BT Financial has been penalised by the regulator for its advertising.
ASIC reviewed ISA’s “Compare the Pair” marketing campaign in 2014. ASIC found no legal violations and issued no penalties. ISA agreed in future advertising to (a) provide details about the samples used in the comparison of average Industry SuperFund and average retail super fund, and (b) include a voiceover stating that past performance is not a reliable indicator of future performance.[2]
ASIC also investigated BT Financial’s advertising in 2014. ASIC found that “misleading statements were contained in two separate online advertising campaigns” and issued two infringement notices with aggregate penalties of $20,400.”[3]
Consider the performance of BT Financial superannuation products.
BT Financial offers 60 superannuation investment options for which SuperRatings has 10-year net returns data. 57 of the 60 options offered by BT Financial have lower average annual performance than the median industry super fund option.[4]
The majority of super funds operated by BT Financial are in the bottom quartile of 10-year fund-level net returns published by APRA, and the average net return of BT Financial’s largest super fund was just 2.57% per annum.[5] This is lower than the average net returns of a rolling term deposit over that period.[6]
Even small industry super funds perform better than large retail funds.
Of the 31 superannuation funds in the bottom quartile of 10-year fund-level net returns published by APRA, 29 are retail funds, including the largest funds operated by the four major banks.[7]
The assertion that there are “33 sub-scale union super funds” is based on research undertaken for the Financial Services Council that has not been published and exposed to scrutiny. The 33 funds have not been identified. The definition of “sub scale” at $10 billion in assets appears to be unrelated to net performance for members. The official, audited, publicly available data published by APRA paints a different picture.
The “illiquidity premium” is accessible to all super funds.
If it is true that an “illiquidity premium” is the reason retail super funds underperform industry super funds, then industry super fund options that are invested in liquid assets, such as cash or Australian equities, would not outperform retail super fund investments in the same kind of assets. A comparison of all retail super fund and industry super fund investment options focused on liquid assets finds consistent outperformance by industry super fund investment options.[8]
A decision to not invest in unlisted assets is more likely to be a function of business model and investment philosophy. According to Wilson Sy, former Head of Research at APRA and Senior Advisor to the Super System Review:
Retail funds emphasize choice for members who are encouraged to be engaged in active switching between investment options, in dynamic asset allocation or short-term market timing. Such operational structures require liquid assets with high turnovers, favouring listed, rather than unlisted, asset classes. The short-term philosophy of Retail funds has trustees leaving asset allocation and portfolio construction in the hands of individual members.
On the other hand, Public sector and Industry funds recognize superannuation investing is for the long-term. They take greater fiduciary responsibility in asset allocation for their members by constructing limited numbers of optimized portfolios as investment options for their members with most in the default options. Because switching and trading are substantially reduced at the level of asset classes, the demand for liquid asset classes is significantly reduced. This operational structure allows Non-profit funds to make more direct, long-term and illiquid investments such as infrastructure projects.[9]
The Fair Work Commission process for determining eligible default superannuation funds in Modern Awards does not make decisions based on union affiliation.
The criteria to be considered by the Fair Work Commission are specified in the Fair Work Act.[10]
Industry super funds continue to support implementation of the Fair Work Commission process as proposed by the Productivity Commission and legislated in 2012[11], which is a merit-based system. This reform has stalled following Federal Court action by the Financial Services Council.
BT Financial has opposed the Fair Work Commission process, or “any Government body that would assess the quality of default funds and select a shortlist of funds that employers or employees can choose from.”[12]
Industry super funds have not “bitterly fought against recent reforms that would make the sector more transparent and accountable to regulators”.
Industry super funds support a ‘Member Outcomes’ Test and increased disclosure and enhanced trustee obligations, but these requirements must result in the same obligations and disclosure outcomes regardless of the type of investment option.
The current Government Superannuation Bills do not ensure consistent outcomes across MySuper options (in which the majority of assets of not-for-profit super funds are invested) and Choice options (in which the majority of assets in retail super funds are invested); nor do these bills fix gaping disclosure gaps which appear to be exploited by the retail super sector.
Industry Super Australia has publicly stated this position.[13]
ISA believes the Government’s Bills are significantly flawed. The Government has been unable to gain the support of the Senate and has been unwilling to ensure that the legislation extends to products that comprise 80% of retail super assets.
Among other important omissions, the legislation also fails to comprehensively address unpaid super.
BT Financial has opposed full transparency of payments to related parties, recently advising APRA that trustees should not be required to disclose payments made from “retained profits of the entity.”[14]
Industry Super Australia Pty Ltd ABN 72 158 563 270, Corporate Authorised Representative No. 426006 of Industry Fund Services Ltd ABN 54 007 016 195 AFSL 232514. Consider a fund’s Product Disclosure Statement (PDS) and your personal financial situation, needs or objectives, which are not accounted for in this information, before making an investment decision. Past performance is not a reliable indicator of future performance.
[1] See, Superannuation Industry (Supervision) Act 1993 (Cth) §§ 10 and 86 et seq.
[2] See, Australian Securities and Investments Commission media release, Industry Super Australia agrees to change comparative advertising, 24 June 2014.
[3] See, Australian Securities and Investments Commission media release, BT pays $20,400 penalty for misleading statements, 16 June 2015.
[4] ISA analysis of SuperRatings Fund Crediting Rate Survey, February 2018.
[5] ISA analysis of Australian Prudential Regulation Authority, Annual Fund-level Superannuation Statistics, June 2017.
[6] ISA analysis of RBA Statistical Table F4, Retail Deposit and Investment Rates (1 Year term deposit).
[7] ISA analysis of Australian Prudential Regulation Authority, Annual Fund-level Superannuation Statistics, June 2017.
[8] See, Gallagher and May (2018), ‘Are comparisons based on superannuation fund-level performance useful?’, at pages 14-18 (finding higher median performance for industry super fund options in “Cash”, “Australian Equities”, “International Equities” and “Diversified Fixed Interest”, as categorised by SuperRatings). The-usefulness-of-comparisons-based-on-fund-level-returns-Final.pdf
[9] Wilson Sy (2018), Impact of Asset Allocation and Operational Structure on the Investment Performance of Australian Superannuation at 14-15.
[10] See, Fair Work Act 2009 (Cth) § 156F.
[11] See, Fair Work Amendment Bill 2012.
[12] Letter from BT Financial Group to Productivity Commission dated 21 August 2017 regarding Productivity Commission Issues Paper “Superannuation: Assessing Competitiveness and Efficiency”, page 6, Recommendation 4.
[13] See, Industry Super Australia media release, Flawed super Bills must be even-handed, 5 December 2017.
[14] Letter from BT Financial Group to Australian Prudential Regulation Authority, dated 29 March 2018, page 4. (BT also recommended that “legacy products/funds be exempted from the proposed look-through expense reporting requirements where there is a Board approved migration/termination/merger strategy and where this is capable of execution in a realistic timeframe.” Id).
*The above material, whilst correct at the time of publication may include references or statements which are no longer current.