Forced closures or mergers of underperforming superannuation funds could significantly hurt members, and create a knock-on effect to the wider superannuation landscape.
The comments come from Martin Fahy, CEO of the Association of Superannuation Funds of Australia, in the wake of the Productivity Commission’s recommendation to adopt a top-10 list of default super funds for members to opt into.
“The reason they are underperforming is because they have made poor investment decisions. If you unwind them or force them to merge with other under-performers you would just aggravate the situation,” Dr Fahy said.
The top-10 model triggered criticism from many in the superannuation industry, including concerns it would leave out many high-performing funds. Currently, default funds are named by the Fair Work Commission in industrial awards.
Coalition figures, including former financial services minister Kelly O’Dwyer and fund chairman Peter Costello, pushed for the Future Fund to act as a default to replace underperforming funds.
Future Fund is a candidate
One industry insider told The New Daily the sudden emergence of the Commonwealth’s $148 billion Future Fund as a default option following criticism of the top-10 plan was “interesting”.
“They are quickly pivoting away from the top 10 and their attitude is to find anybody except industry funds to use for defaults,” the insider said.
Dr Fahy said the top-10 method would leave a significant number of well-performing funds out of the default system, essentially allowing them to wither away.
“There are about 200 funds in the [public offer] super system and the Productivity Commission said two-thirds of them perform adequately,” he said.
Former ACTU secretary and one of the fathers of compulsory super movement, Bill Kelty, joined the fray on Wednesday, calling for underperforming funds to be knocked out of the default system.
“It is people’s money. They should be accountable,” he said.
Dr Fahy agreed consistent underperformers should be removed but said the Productivity Commission target of undershooting an agreed benchmark by 50 basis points to identify bad performers was too low.
“I think 100 basis points would be more reasonable,” he said.
Bernie Dean, CEO of Industry Super Australia, also criticised the top-10 approach, saying: “It’s plainly evident that there are a great deal more than 10 good performers among super funds”.
He did not give a measure for unacceptable under-performance, but said it was a matter for the regulator that needed to be kept transparent and simple.
Don’t act in haste
Dr Fahy said once underperformers were identified, they could not just be wound up or merged with other funds.
“Closing underperforming funds is not the way to go. There would need to be an orderly unwinding of assets to prevent a fire sale that could lead to losses for members,” he said.
Regulators would need to set up an arrangement to hold some underperforming investments until maturity.
“Ireland’s debt was valued at 30 cents in the Euro after the GFC, but the government eventually paid out the full value,” Dr Fahy said.
Research by Chant West reported by the Australian Financial Review has cast doubt on the value of using the Future Fund for managing default accounts. Over three, five and seven years a number of industry funds outperformed the Future Fund, it found.
Chant West researcher Mano Mohankumar said the Future Fund’s structure meant it had lower costs than super funds – but that would change if it had to deal with individual members’ accounts and life cycles.
“The Future Fund has 15 per cent of its assets in private equity, but industry funds only have 3 per cent because of a need for liquidity,” Mr West said.
The Future Fund was established to support unfunded public service superannuation liabilities. It does not have to deal with individual members or pay tax on earnings and will not have to pay a return till 2027.
“If there is a problem with super returns, the Future Fund is not the answer,” Dr Fahy said.
The New Daily is owned by Industry Super Holdings