Why Industry Superannuation Funds Are Not So Super

Union super and professional retail funds agree on one thing: legislation currently stifles competition in the default superannuation market.

It has been rare for union funds to acknowledge this fact, but credit must go to Australian Super at The Australian Financial Review Banking & Wealth Summit last week for owning up to the reality of this design flaw.

Not surprisingly, this admission has occurred on the eve of the Productivity Commission's impending report on the absence of competition in the default superannuation market.

Australian Super's argument, however, was that the lack of competition has been a good thing because millions of Australians have been defaulted into union funds rather than joining professional retail funds.

Ian Silk, CEO of Australian Super, which has been the largest beneficiary of the current system.Jessica Hromas

Given that Australian Super has been the largest beneficiary of the current system, perhaps this position isn't that surprising.

Union funds understand that they benefit from about $10 billion in guaranteed default contributions that flow through modern awards each year, along with enterprise agreements that earn them an "illiquidity premium" that other funds cannot access.

However, what union funds fail to disclose in their marketing and lobbying campaigns is that not all union funds perform equally despite their privileged position.

The credibility of the union superannuation sector is therefore damaged by sweeping claims that are clearly self-serving and not supported by data.

The simple fact is that the performance of union funds like Australian Super is built out of a government-guaranteed distribution model, administered by the Fair Work Commission, which allocates employees' retirement savings based on union affiliation, rather than competitive forces.

Analysis prepared for the Productivity Commission demonstrated as many as 1.7 million consumer accounts are stranded in 33 sub-scale union super funds.

Selective averages

The performance of a few large funds hides the chronic underperformance of a multitude of sub-scale union funds –which explains why every "compare the pair" union fund campaign uses selective averages which may not compare apples with apples.

Analysis prepared for the Productivity Commission demonstrated as many as 1.7 million consumer accounts are stranded in 33 sub-scale union super funds.

These funds collectively manage $94 billion in retirement savings which run the risk of sub-optimal consumer outcomes in terms of performance and cost.

The prudential regulator, APRA, has made it clear that sub-scale funds should merge with large funds or close down.Louie Douvis

Defaulting consumers into sub-scale funds could leave an average consumer as much as $170,000 poorer by the time they retire – an unacceptable result considering these 33 sub-scale funds are collectively listed 153 times in modern awards (almost a third of all award listings).

The prudential regulator, APRA, has made it clear that sub-scale funds should merge with large funds or close down. The default system, however, continues to keep sub-scale funds on life support as disengaged consumers are unwittingly funnelled into these union funds.

This is why the government is right to intervene with legislation to reform the default superannuation arrangements in enterprise agreements and modern awards.

I acknowledge that not all professional retail funds are strong performers, but to suggest that no reforms are needed within union super funds defies recent evidence to the contrary.

Kelly O'Dwyer has sought to legislate stronger consumer protections in superannuation.David Rowe The Australian Financial Review has reported numerous examples of governance failures and conflicts of interest within union funds.

These include officials preventing the mergers of sub-scale funds to defend their own board seats, a fund leaking confidential consumer information to its sponsoring union, and unions seeking to influence funds' investment strategies so they align with the goals of the sponsoring union.

It is simply wrong to suggest that union funds are beyond conflicts that require independent regulatory oversight.

For example, Australian Electoral Commission data shows that union funds have collectively paid $53 million directly out of members' retirement savings to their sponsoring unions in the past decade.

Significant costs

It is therefore hardly surprising that trade unions and the superannuation funds they control have bitterly fought against recent reforms that would make the sector more transparent and accountable to regulators and consumers.

Minister Kelly O'Dwyer is right to challenge the assumption that members of union funds must "stand by and watch as their retirement savings are spent on straight-out political advertising, or dubious sponsorships of union congresses, or on superannuation liaison officers who are in fact union officials being paid out of super funds".

Ms O'Dwyer has sought to legislate stronger consumer protections in superannuation, including regulatory oversight of related-party transactions and a requirement for all trustee boards to appoint independent directors. Given the issues identified above, these reforms are necessary and timely.

The government's reforms will also impose significant costs on professional retail funds.Nevertheless, our sector has broadly supported the reforms simply because they are the right thing to do for superannuation consumers.

The objective of the superannuation industry should be to help Australians achieve a dignified life in retirement and the sooner the public interest is put before sectional interests the better all Australians will be.

By Melinda Howes

Financial Review

11 April 2018

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