Union-backed funds claim rivals cost investors $75bn

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."