Finance Your Super Changes to fund governance could let ‘retail fox’ into ‘super henhouse’: ISA

Changes to fund governance could let ‘retail fox’ into ‘super henhouse’: ISA

Fox in henhouse.
Don't let the for-profit fox into the super hen house, says ISA. Photo: Getty
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Industry Super Australia has launched a new advertising campaign warning against changes to superannuation governance rules and portraying the for-profit sector as the ‘fox in the hen house’ that threatens the super savings of ordinary Australians.

The campaign includes research which shows that keeping investment options simple delivers better returns for superannuation investors.

The research, highlights the fact that industry and public sector funds with less investment choice options performed better than retail funds with more choices.

As the following table shows, the number of different investment choices across the privately owned and bank sectors is larger by a factor of 31 compared to the total number of options offered in the not-for-profit funds of the industry, corporate and public sectors.

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But having all those options does not seem to be resulting in a stronger performance. The following chart demonstrates that the retail sector is performing well below the not-for-profit sector, earning average annual returns of 4.5 per cent over 20 years compared to 6.3 per cent for the industry funds over the same period.

In fact, the funds with the least options made up the top quartile of performers with the upper middle quartile having slightly more choice than the top. The lower two quartiles were made up by funds having and average of 191 and 540 choices for members respectively.

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Chief executive David Whiteley said ISA’s advertising campaign is aimed at alerting “over five million industry super members and the public that the major banks are lobbying to redesign superannuation to suit their business models based on building profits to shareholders rather than directing all returns to members”.

“The banks want to replace the cost-efficient and high performing not-for-profit model with cross-selling to consumers and by bundling business banking and super with employers,” Mr Whiteley said.

Given the underperformance of for-profit funds, a move away from the not-for-profit model would be bad for members, ISA said.

For example, a 2 per cent performance difference over an entire working life could reduce final retirement savings by $200,000 for an average earner, according to ISA.

Lower returns erode balances. Source : ISA
Lower returns erode balances. Source: ISA

“The carefully calculated changes lobbied for by the banks will have two clear effects,” Mr Whiteley said.

“First, they aim to increase opportunities for banks to boost their market share and profitability from compulsory super.

“Secondly, and more importantly, they could reduce members’ super nest eggs by disrupting and undermining the model used by top performing, not-for-profit super funds.

“Compulsory super is critically important to individuals and the economy. Why anyone would consider undermining the best-performing model of the system to aid the worst-performing simply defies logic.”

Marketing efforts in super

The privately owned funds are putting a greater marketing effort into convincing their banking customers to move their super accounts over to be managed by their credit providers and are apparently having some success.

ISA research shows a doubling in direct super sales advice from the major banks to their clients between 2011 and 2015. There was a corresponding 40 per cent increase in their market share in the switching market, seemingly as a result of their efforts.

This is despite the fact that retail funds have long under-performed their industry fund competitors.

The for-profit super funds sector is lobbying for changes to the board structure of industry funds. These would see equal board representation, usually between union and employer groups, changed to include one third independent directors and an independent chair.

The  TV ad campaign, which will hit screens on Monday, paints the banks as predatory foxes about to pounce on a young girl’s pet chickens, while the government is portrayed as a man who lets the fox into the coop.

* The New Daily is owned by a group of industry super funds

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