Score one for retail super

While the government lies idle on super transparency, retail funds are ramping up the pressure on their industry equivalents, and it could threaten the financial muscle of this Labor establishment.

Even a casual observer of the superannuation sector would notice huge tension and jockeying for position between the industry and retail funds. That tension has now stepped up a very big notch.

Industry funds are primarily run by unions and hold around $240 billion of workers' money. They consistently claim they operate with lower fees, offering higher returns than the retail funds. The retail funds have about $350 billion under management.

With the claim and counter claim around comparative performance the issue that’s always struck me is the near zero transparency offered by the funds. I’ve been a consistent critic of both the government and the funds on this issue.

That criticism is heavily based on evidence from a 2010 Institute of Public Affairs report. It’s an eye opener and worth a read. For example, the alleged comparative performance of the funds is based on tables produced by the Australian Prudential Regulation Authority. But it transpires that APRA only reports what the funds report to APRA. No verification of performance claims is done by APRA.

The IPA report demonstrates that there’s near no capacity to investigate and verify performance because transparency and disclosure is so poor. The IPA rates transparency between funds, with industry funds performing much worse on average than retail funds.

The problem of performance truth is demonstrated in a simple example. A young fellow currently working overseas showed me his industry fund statement for the last six months. As he’s not having compulsory contributions to his account made, its true performance is apparent. With an opening balance of $2,775, he’s investment earned $22.53 but $81 in fees came out.

This 23-year-old says the negative trend has been consistent. It’s no wonder he thinks the entire superannuation scheme is a con. In some respects it could almost appear like a giant Ponzi scheme. It only looks financially viable while workers are forced to make contributions. But who knows the truth? The facts are hidden by limited disclosure!

The poor transparency was examined in Cooper Review into superannuation. The 2010 report recommended major disclosure requirements be imposed on the funds. This should have been easy to implement through legislative disclosure requirements.

But the Gillard government, under then Assistant Treasurer Bill Shorten, responded with "supports improved disclosure requirements but will consult with relevant stakeholders on design and implementation issues." Now approaching two years on, nothing has been done on the government's side but talk. Meanwhile transparency and disclosure remain appallingly low.

On this, the Gillard government is exposed to accusations that it’s compromised by its close association with unions that have vested interests in and control of industry funds. In many respects the broad Labor machine looks like it has become a powerful new establishment network in Australia. It’s an integrated grouping involving political, industrial (union), legal and now (most importantly) financial power through the industry funds.

This has been partly exposed in Senate hearings detailing (now withdrawn) court proceedings against ex-Electrical Trades Union boss, Bernie Riordon. According to the hearings Riordon, who’s recently been appointed as a Commissioner of Fair Work Australia, received in excess of $1 million from multiply directorships of superannuation and related funds.

This dovetails perhaps with the long-running concerns over the management and performance of MTAA Super, now chaired by ex-Victorian Labor Premier John Brumby. Brumby was brought in, it seems, to tighten up MTAA.

What’s observable is an intricate Labor web around industry superannuation funds. Refer again to the IPA report for more detail.

This is where the retail superannuation funds are in such an interesting spot. The retail funds threaten the financial muscle of this Labor establishment. If workers shift their money from industry funds to retail funds the Labor establishment's financial power diminishes. Hence industry funds need to maintain the impression that they offer lower fees and higher returns even if the experiences of our 23-year-old, for example, could call this into question.

But the retail funds have taken a sudden, unexpected and bold move. They’re not waiting for the Gillard government to require disclosure. Through their association, the Financial Services Council, they’ve announced that they will impose on themselves new high disclosure requirements approaching that required of publicly listed companies.

It’s welcome news. This includes disclosure of directors and senior management salaries, independent chairs and prevention of holding multiple directorships across different funds. It’s not clear if the retails funds are implementing all of the Cooper disclosure requirements but it’s a big step.

What the retail funds may perhaps now be able to argue is that they offer a ‘safer’ investment environment than industry funds. If the retail funds go as far as fully implementing Cooper's disclosure recommendations they’d be able to argue that their claims of returns on investment are fully open to public scrutiny. This is something the industry funds would have difficulty matching.

The retails funds initiative creates a dilemma for the Gillard government. If there was any thought of creating the appearance of superannuation disclosure, without substance, this is now difficult.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.

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