Bringing real choice to super
With a total value breaking through the $2 trillion mark in March this year, the efficiency and effectiveness of the Australian superannuation system is something the government keeps a close eye on, and new legislation is never far away.
One recent piece of legislation brought before parliament by Assistant Treasurer Josh Frydenburg would mandate a minimum one-third representation of independent directors on super fund boards – a move aimed at improving governance standards across the super industry. The legislation has prompted strong opposition from industry funds and unions as the fees directors earn on industry funds often flow back to the union and employers.
Default fund nomination
One area where unions and industry funds continue to maintain control is the nomination of the default funds. However, it's a situation also in the Government's sights with Mr Frydenburg suggesting the current system is 'highly inequitable'.1
According to figures released by Financial Services Council (FSC), 83 per cent of APRA approved retail funds with 'MySuper' status have been blocked by the current modern award system from receiving default super funds.
Sally Loane, CEO of the FSC says this protected position ensures industry funds receive the 'lion's share' of $9 billion in annual default contributions.2
'The concentration of industry funds in the modern award system, where retail funds are prevented from competing by law, means that more than two million consumers don't get the benefit of full competition,' Ms Loane commented.
Low fees not always the best
Industry funds defend the status quo, citing lower fees as justifying the exclusion of retail funds from the majority of modern awards.
This argument is challenged however by independent super body, SuperRatings which has recently published a report finding low fees have little correlation with higher overall returns. Studying 162 funds over a 10 year period, SuperRatings found the fund with the lowest fees ranked 96th in earnings for a 'net benefit ranking' – that is overall returns to members inclusive of fees and investment earnings – of 41st.3
SuperRatings also highlighted the tendency for lower fee super funds to have passively managed funds - a situation which produces positive results in favourable market conditions, however leaves little flexibility in market downturns.
Industry funds and unions
Workplace Super Specialists Alliance (WSSA) CEO Douglas Latto is not surprised at assertions in the ongoing Royal Commission into Trade Union Governance and Corruption, that industry funds pay substantial sums to the unions with which they are associated.4
Mr Latto said any conflict of interest, perceived or otherwise, in the areas of enterprise bargaining and the selection of default funds should be examined and removed.
'The industry funds movement has been very vocal about removing conflicts of interest from the financial planning industry. It is now time to apply the same standards within,' Mr Latto said.
Mr Latto also said that if the legislated changes to the modern awards were implemented, the Fair Work Commission would be allowed to select a limited number of default funds. This would lead to hundreds of thousands of employers being forced to change the default funds they have chosen for their staff – limiting competition, duplicating accounts and ultimately leading to higher fees.
'Forcing employees into an inferior fund just because it is nominated in an award does not make sense,' Mr Latto said.
The 2010 Cooper Review into Superannuation also questioned the protection for industry funds in modern awards. 'Naming a particular fund in an award when there has been no transparent, formal selection process would appear to inhibit competition and delivers a significant advantage to the fund named,' the report found.
IOOF Head of Employer Super, Steve Black, also supports the WSSA and FSC calls for decoupling of the default superannuation funds from the industrial relations system.
'Employers should have maximum choice and flexibility in selecting a fund which best meets their employees' workplace requirements,' Mr Black said.
'If we maintain a competitive industry where funds will have to differentiate themselves through superior performance, features, service and price, this can only result in a better outcome for all super members in the long term.'
1 AFR: Frydenburg plans to clip union wings on super funds – January 2015
2 FSC Media Release: New analysis shows need for competition in super to protect consumers – January 2015
3 SuperRatings Media Release: Low super fees far from best – April 2015
4 WSSA Media Release: Remove vested interests from MySuper – May 2015