Aware Super members enjoyed big fee reductions that boosted returns after a merger with VicSuper last year, a parliamentary hearing has heard.
Aware CEO Deanne Stewart told a House Economics Committee inquiry on Monday that after the merger created a $125 billion behemoth, admin fees for VicSuper members fell by 20 per cent “immediately”.
“With the additional scale we were able to reduce retirement fees to all members by an average of 10 per cent,” Ms Stewart said.
Although a consolidating superannuation market will continue to create fewer, bigger funds, there will be more competition between them given moves by regulators to move against underperformers, Ms Stewart said.
Superannuation: Size isn’t everything
However, the CEO of the $6 billion super fund Prime Super, Lachlan Baird, said a spate of mergers across the industry was creating 10 giant funds that are “too big to fail”.
By that, he meant there is a risk of giant funds negatively affecting significant numbers of members.
“We cannot have any one of those 10 funds underperforming,” he said.
“What impacts that would have on markets and return expectations needs to be better understood.”
Mr Baird said he wasn’t advocating regulation to deal with the issue.
He said that would increase costs, reduce returns and limit growth.
“Competition is the key,” Mr Baird said.
Where is the Future Fund?
The current inquiry by the House Economics Committee is looking into the implications of common ownership and capital concentration.
Australia’s largest super fund, the $222.1 billion AustralianSuper, gave evidence on Monday, along with the $172 billion umbrella investment group IFM Investors.
The $70 billion fund Hostplus also gave evidence.
But the other behemoth in the super sector, the Commonwealth’s $245 billion Future Fund, has not been invited to speak to the committee.
Committee chair Liberal MP Tim Wilson responded to deputy chair Labor MP Andrew Leigh’s question about why the Future Fund hadn’t been invited to appear, saying he “wasn’t sure” whether it had been.
Asked about the issue by the The New Daily, the committee secretariat said “nothing is confirmed at this stage”.
IFM Investors CEO David Neal, a former Future Fund CEO, rejected the idea that common ownership by super funds or other investment groups in a range of competing companies would have a negative effect on consumers.
He told the committee that “the hypothesis … is well understood and has been investigated by regulators around the world”.
But they “had not found any evidence” it had caused “anti-competitive outcomes”.
And no regulators had moved “to make any changes to the law” in response, Mr Neal said.
The concern with common ownership is that a group of investors with similar interests like super funds could use their voting power across competitors in similar industries to turn a blind eye to non-competitive practices because they would benefit from them in higher returns.
Dr Leigh took issue with Mr Neal’s comments saying there was in fact evidence showing negative outcomes from collective ownership.
“We have a study of the American banking sector which finds adverse consumer outcomes,” Dr Leigh said.
Similar results had been found in studies of the airline, agricultural products where “seed prices went up some 15 per cent as a result of common ownership”. There were similar findings in pharmaceuticals.
Big investors burn
Responses to those findings by giant US investor Vanguard and others rejecting the findings could be characterised as “a scorched earth view” and IFM should admit there may be a problem, Dr Leigh said.
Dr Leigh also suggested that markets would be better informed if the current definition of a substantial shareholder was reduced from the current 5 per cent to 4 or 3 per cent.
That would mean groups with smaller shareholdings would have to report their trades in a company.
“There would be other impacts there on the effective functioning of the market and the costs on all the players within it,” Mr Neal replied.
AustralianSuper CEO Ian Silk supported Mr Neal’s view.
“The ACCC has advised this committee that it is aware of the contested literature on the topic,” he said.
“It has not observed any instances of a lessening of competition due to common ownership.”
Nor has the ACCC received any complaints on the issue, Mr Silk said.
AustralianSuper has moved recently to manage a significant portion of its assets in house rather than paying external fund managers to do it.
“The savings to members last year for having 45 per cent of the portfolio managed internally was over $200 million,” Mr Silk said.
Mr Wilson brought up the issue of member funds using IFM’s umbrella investment arrangements to hide beneficial ownership of assets.
Hostplus chief investment officer Sam Sicilia said his fund doesn’t do that.
“There are disclosure obligations that are about to be tightened further” that would prevent such arrangements, Mr Sicilia said.
The New Daily is owned by Industry Super Holdings