New legislation aimed at knocking underperforming superannuation funds out of the market could leave the most vulnerable Australians at the mercy of unscrupulous fund promoters, the Senate Economics Legislation Committee has heard.

Scott Donald, representing the Law Council of Australia’s superannuation committee, told the inquiry into the Your Future, Your Super legislation that the proposed laws were “ill suited to achieving their objective”.

Under the legislation before Parliament, members of funds deemed to have underperformed for two years in a row would be told about the underperformance and their fund would be barred from taking on new members until its performance improved.

“The concern I have is that the engaged members will take account of that and move to a new fund, but a larger group would simply file the note and not read it or be aware of it,” Mr Donald said.

Two things could then happen.

The members could remain in an underperforming fund or “something actually much scarier than that will happen”.

“Because the tests are public, [the underperforming funds] will be widely known and members of those funds will be targeted by predatory organisations seeking to switch them out into other things [badly performing funds],” Mr Donald said.

“There have been massive scandals that have required major remediation in the UK and the US.

“We’re actually setting up a perfect storm where the first thing people will hear from is a predator trying to get them to move who knows where.”

Ministerial overreach

Labor senator Tony Sheldon brought up the powers the new legislation would give the Treasurer to unilaterally block any spending by superannuation funds.

The proposed legislation in its current form would allow the Treasurer to block investment spending even if that spending was in members’ best financial interests.

“Could the legislation be used by the Treasurer to cancel any particular investment, say in a coal mine or wind farm?” Senator Sheldon asked.

Mr Donald said the legislation read that way, though he noted the exact detail would be included in the as-yet unreleased regulations accompanying the bill.

“That is the problem of not seeing the regulation,” Mr Donald said.

“I would encourage the Parliament to consider providing some guidance around the legislation so that you wouldn’t have a situation where the minister could do that.”

He said the financial regulator, APRA, already had the ability to force underperforming funds out of the market, without the new legislation, but noted they had been reluctant to use these powers.

“My judgment is that APRA has a wide range of powers that would allow it to do that, but they would have to develop the capability to do it,” said Mr Donald, adding that new laws wouldn’t necessarily change that.

“Changing legislation doesn’t change the appetite of a regulator to act. There are more sophisticated things going on there than simply saying ‘here are a new set of rules’.”

APRA chair Wayne Byres and deputy chair Helen Rowell have been reluctant actors. Photo: AAP

Weak performance test

The inquiry also reviewed the design of the performance tests included in the legislation.

David Bell, executive director of research group the Conexus Institute, told the committee the tests were set up so badly that they could work against members’ best interests.

“There is a 35 per cent likelihood that a fund which I would call a good performer will be classified as a poor performer under the test,” Dr Bell said.

The problem with the performance benchmarks is that they won’t take into account different levels of risk and different asset classes chosen by fund managers.

That could leave some funds being measured against funds that have different investment agendas, and therefore unfairly classified as relative underperformers.

“A fund that had 10 per cent more exposure to global equities than Australian equities over seven years [the period of measurement the legislation uses] would have added more than 43 basis points of performance per annum as a result,” Dr Bell said.

Under the new legislation, performance would be measured in general terms between funds of broadly similar classifications like growth or balanced.

“Asset allocation is also important and that’s ignored in this test,” Dr Bell said.

“As a result, members may be placed in poor-performing funds and not identify that they are.”

Senator Sheldon asked: “[Under the tests], can we see high-performing funds failing and low-performing funds passing?”

“Correct,” Dr Bell responded.

Although the performance tests would put pressure on funds to merge, Dr Bell said: “What incentive is there to merge with underperforming funds? You would inherit underperforming assets and it all takes a lot of management time to deal with.”

“We think there’s a risk of creating zombie funds that are unattractive to merge with,” he said.

Xavier O’Halloran, director with Super Consumers Australia, told the inquiry the performance measures were not broad enough, as they left out choice funds for the first year of coverage and excluded non-trustee-directed funds completely.

“We think there’s no real reason why non-trustee directed products shouldn’t be included. They’re easier [to regulate] as they usually cover a single asset type,” he said.

“To have a double standard where consumers in some funds don’t find out they’re in an underperformer, but everyone else in the market does, could create some real consumer harm.”

The Senate inquiry will hand down its final report on the legislation on April 22.

The New Daily is owned by Industry Super Holdings