Union-backed funds claim rivals cost investors $75bn

THE weak performance of super funds owned by banks and wealth management companies has cost investors $75 billion in the past 15 years, says a report that ups the ante in union-linked funds' challenge to further deregulation of super.

By InvestSMART · 25 Jul 2012

By InvestSMART ·
25 Jul 2012

Comments

As banks eye the $1.4 trillion super pool as a key source of future profits, research by Industry Super Network says for-profit funds' returns lagged their peers by 2 per cent between 1996 and 2011.

The research, to be published today, also casts doubt on regulators' long-held view that historical performance cannot predict future returns.

If accepted by the government, this finding could frustrate retail funds' efforts to grab a bigger share of the lucrative market managing the billions in retirement savings of workers on industrial awards.

Using figures from the Australian Prudential Regulation Authority, the research found retail funds returned an average of 3.84 per cent a year between 1996 and 2011. This was more than the rate of inflation, but less than the 4.01 per cent available through term deposits.

Non-profit providers industry funds, public-sector funds and in-house corporate funds returned more than 5.5 per cent. Public-sector funds posted the best returns, of 6.47 per cent.

Had the retail sector matched returns of not-for-profit funds, the report said the nation's pool of retirement savings would be $75 billion larger.

"If we'd had that extra 2 per cent, we would be in a very different position as a country. That's just more capital being invested here and overseas for our benefit," ISN's chief economist, Sacha Vidler, said.

The Financial Services Council, which represents retail funds, has dismissed previous ISN analysis of APRA figures as "misleading" because it is based on the performance of funds as a whole rather than individual investment options, such as balanced, conservative or growth funds. Members of retail funds are also older and tend to be more conservative, the council says. The report comes as the government considers the Productivity Commission's call for more competition among funds that serve workers on industrial awards who do not explicitly choose a fund. Funds owned by big banks which face weak credit growth are also pushing for more competition in the default fund market.

The commission has raised concerns about relying on past performance when choosing default funds, but Dr Vidler said there was a "statistically significant" link between past and future performance.

Analysis of the 90 biggest funds showed strong performance in the period between 2004 and 2007 was likely to be followed by strong performance in 2008-11, he said.

"There's no indication that if you're got a poor performer it's going to bounce back in the next year. Some do, but the odds are against you."

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What did the Industry Super Network report say about super fund performance and the $75 billion figure?

The Industry Super Network (ISN) research, using APRA figures, concluded that weaker performance by bank- and wealth manager-owned (retail) super funds cost investors about $75 billion over the 15 years to 2011. ISN says retail funds lagged their not-for-profit peers by roughly 2 percentage points a year between 1996 and 2011, and if retail returns had matched not-for-profit returns the nation’s retirement pool would be about $75 billion larger.

How did average returns compare between retail super funds, not-for-profit funds and term deposits?

According to the APRA-based analysis cited by ISN, retail (for-profit) super funds returned an average of 3.84% per year between 1996 and 2011. Not-for-profit providers (industry funds, public-sector and in-house corporate funds) returned more than 5.5% on average, with public-sector funds averaging 6.47%. For context, term deposits averaged about 4.01% in the same period.

Who produced the research and what data source did they use to assess superannuation returns?

The research was produced by the Industry Super Network (ISN) and it used figures from the Australian Prudential Regulation Authority (APRA) to compare long-term returns across retail and not-for-profit super funds.

Does the report say past super fund performance predicts future returns?

The ISN analysis challenges the view that past performance can't predict future results: ISN’s chief economist and the report say there is a 'statistically significant' link between past and later performance, and that funds strong in 2004–07 were more likely to be strong in 2008–11. However, the Productivity Commission and some regulators warn against relying solely on past performance when choosing funds.

How did the Financial Services Council respond to the ISN report on retail fund performance?

The Financial Services Council (FSC), which represents retail funds, dismissed previous ISN analysis as 'misleading.' The FSC argued ISN compared funds as whole entities rather than individual investment options (balanced, conservative, growth) and noted that retail fund members tend to be older and more conservative, which can affect returns.

What are the policy and competition implications from the report for default super funds?

The report comes as the government considers the Productivity Commission’s recommendation for more competition among default funds that serve workers on industrial awards. Banks and retail funds—eyeing the roughly $1.4 trillion super pool—are pushing for more competition in the default fund market, while ISN’s findings could complicate moves toward further deregulation if the government accepts the report’s conclusions.

What did ISN’s Sacha Vidler say about the broader economic impact of the performance gap?

ISN chief economist Sacha Vidler said that an extra 2% annual return across the retail sector would have left Australia in a 'very different position,' because that additional capital would have been available to invest domestically and overseas for the country's benefit.

What should everyday investors take away about choosing a super fund from this debate?

The article highlights a clear performance gap between retail and not-for-profit funds over the 1996–2011 period and a debate over whether past returns predict future outcomes. Everyday investors may want to compare long-term returns reported by APRA, consider differences between fund types (retail vs not-for-profit), and be aware of ongoing policy discussions about competition in default funds—while remembering regulators caution against relying only on past performance.