Retail super funds are resistant to reform, writes David Whiteley.
COMPULSORY superannuation is one of Australia's most significant postwar economic achievements, and the creation of industry super funds is central to this achievement, with employers and unions uniting to oversee retirement funds with a shared commitment to return all benefits to members.
One example of the success of industry super funds has been their investment performance. On average, industry super funds have out performed retail super funds largely owned by banks over one, three, five, seven and 10 years to July 31, according to the SuperRatings SR50 Balanced Index.
Industry super funds have also been vocal in the area of superannuation policy. In recent years there has been considerable debate about the need to ban sales commissions and other incentives paid by the largely bank-owned retail funds to sell their products.
Industry super funds have led this debate, which has resulted in the creation of commission-free super for all Australians. This could deliver, over a working life, an average of tens of thousands of dollars more to the super savings of millions of Australians, lift national savings and reduce the burden on future taxpayers. Retail super funds have tried to water down these reforms.
More recently there has been a public debate about the governance and disclosure requirements of super funds. But for a debate about transparency, the public discourse has been anything but clear.
There is no doubt that the level of transparency expected of all super funds should be one that meets the expectations of members, employers, regulators and the government. This is particularly the case given the compulsory nature of superannuation, the increase in the super guarantee and current returns environment.
The disclosure requirements should be also equal across the superannuation sector industry super funds, government funds and retail funds should all be covered by the same disclosure regime.
Currently four of the five largest retail funds do not make readily available to members or the public the names of board members, the fees they draw as board members nor the salaries they earn as executives (as many directors of retail funds are full-time executives of parent or related entities).
These retail funds do not disclose the arrangements struck between the fund and parent company, even though the regulator has observed that these payments are, on average, 2 times the market rates. An Australian Prudential Regulation Authority working paper has questioned whether these practices are consistent with their fiduciary obligations as trustees.
While much of the public debate in recent months has focused on industry super funds, some perspective is necessary. It is actually the retail super sector that has underperformed the industry super sector over the past 10 years.
Missing from the public debate has been one of the key problems in super the opaque governance structure that is typical of most major retail super funds and that diminishes the value of members' savings. Furthermore, many of the assertions advanced to suggest the need for greater transparency have little or no connection to industry super funds. Seemingly every public matter raised about a union, employer association or super fund is used to advocate the need for industry super funds to be more transparent and adopt a new governance model.
The debate about the integrity and governance of Australia's super funds is valid and important. There is no doubt in the minds of industry super fund trustees that disclosure to members should improve. Industry super funds support the APRA prudential standards introduced by the current government as a first step in this regard. But more should be done.
In coming months many industry super funds will introduce a transparency regime that will set a standard that retail funds will inevitably fail to meet. This is predictable because of a profound philosophical difference. Industry super funds are governed by trustee directors appointed by employer associations and unions, who are determined to deliver superior net returns to members.
And there is the rub. The opposition to industry super funds is driven by the competitive threat industry super funds present to the major banks. This opposition is driven by the determination of industry super funds to challenge the practices of the banks' retail funds, which often compromise member returns in order to generate the profits needed to pay dividends to shareholders.
Twenty years ago, industry super funds were opposed by elements of the establishment because of their governance structure. Nothing has changed. This is because at the heart of industry super success has been the co-operative approach between unions and employers.
Industry super's continued challenge to the big banks ruffles a few feathers at the top end of town. But returns are how members will judge them. Industry super's success is one that 5 million members can call their own.