For-profit retail superannuation funds could earn $10 billion in annual fees regardless of how they perform under the government’s new reforms, Industry Super Australia says.

The Your Future, Your Super legislation, currently before Parliament, will introduce performance testing for super funds to be carried out by APRA progressively from July 2021.

However, the performance of up to $881 billion in superannuation savings – mainly in the retail and public sectors – will never be tested under the legislation because only default MySuper and trustee-driven choice funds will be covered by APRA’s new performance reviews.

Best interest is unclear

The legislation will also tighten rules around the member “best interests” test to restrict super funds spending on advertising and lobbying, which will be classified as ‘discretionary expenditure’ and closely scrutinised.

However, ‘core expenditure’ – items that the government classifies as integral to running the business – will not come under the microscope to anything like the same degree.

ISA’s draft submission says the legislation is “highly selective in the types of financial decisions made by trustees that will be subject to the heightened test”.

“In addition, it would appear the setting of fees is carved out of the framework along with resulting surpluses and dividend payments by for profit funds,” the draft submission reads.

“Accordingly, the measures are misdirected and do not focus on the financial arrangements which the Productivity Commission and Hayne royal commission identified as contrary to members’ interests.”

The Hayne commission came down heavily on the retail fund sector over illegal and unethical actions, including charging fees to dead members, lying to regulators, and misusing the funds entrusted to them.

The new legislation will judge fund performance by measuring investment fees against returns, but will leave out administration fees and the profit payments that retail funds make to their owners – the banks and big finance houses.

That means significant costs will be excluded from the performance reviews, critics say.

As the chart above shows, retail funds have significantly higher fees than the not-for-profit sector.

ISA puts the retail sector’s fees over and above the cost of running the business at $10 billion.

That figure came from the Productivity Commission’s 2018 report into superannuation, which found there was a figure of 1.7 per cent in unexplained underperformance in the retail sector, which ISA calculates at the equivalent of $10 billion.

Source: Productivity Commission

Because fees paid to retail funds’ owners will not be included in the underperformance measure to be run by APRA, or scrutinised as discretionary payments, members risk suffering low returns without knowing it.

Industry funds disadvantaged

Industry funds will be at a distinct disadvantage when it comes to advertising and marketing under the new regime, according to Ian Fryer, research director at Chant West.

“Retail funds have service provider companies that stand between them and their ultimate owners,” Mr Fryer said.

“Fees can be paid to them for services for a range of things which could be passed on to the owner.

“The owner could then pay for advertising and marketing, which wouldn’t be classed as a payment by the trustees of the retail super fund itself.

“For an industry fund, there is only one entity so all payments will be seen as coming from that.”

If all the costs charged by retail funds were included in their performance measures, it would make many more funds look bad.

“If the government moved to a more logical net-return measurement a further $39 billion in retail assets would move to the underperforming pile and up to one million of their members would be told their product was lousy,” ISA’s statement on the issue said.

“We thought the government had at last focused on reform that put members first, but instead they’re planning a feast for the banks and retail funds and they’ll be dining out on workers’ savings,” ISA CEO Bernie Dean said.

“The government is making countless dud retail super funds and investments immune from any meaningful performance tests, effectively giving some of the worst-performing financial outfits in Australia a licence to go on fee gouging.

“It’s as if the carnage we saw at the Royal Commission never happened, and instead we’ve got the government letting the foxes into the hen house.”

Assistant Minister for Superannuation, Financial Services and Financial Technology Senator Jane Hume was unavailable for this story.

The New Daily is owned by Industry Super Holdings