Why industry superannuation funds are not so super.

By Melinda Howes,
Updated Apr 11, 2018 — 3.20pm, first published at 3.00pm

Union super and professional retail funds agree on one thing: legislation currently stifles competition in the default superannuation market.

It has been rare for union funds to acknowledge this fact, but credit must go to Australian Super at The Australian Financial Review Banking & Wealth Summit last week for owning up to the reality of this design flaw.

Not surprisingly, this admission has occurred on the eve of the Productivity Commission’s impending report on the absence of competition in the default superannuation market.

Australian Super’s argument, however, was that the lack of competition has been a good thing because millions of Australians have been defaulted into union funds rather than joining professional retail funds.

Given that Australian Super has been the largest beneficiary of the current system, perhaps this position isn’t that surprising.

Union funds understand that they benefit from about $10 billion in guaranteed default contributions that flow through modern awards each year, along with enterprise agreements that earn them an “illiquidity premium” that other funds cannot access.

However, what union funds fail to disclose in their marketing and lobbying campaigns is that not all union funds perform equally despite their privileged position.

The credibility of the union superannuation sector is therefore damaged by sweeping claims that are clearly self-serving and not supported by data.

The simple fact is that the performance of union funds like Australian Super is built out of a government-guaranteed distribution model, administered by the Fair Work Commission, which allocates employees’ retirement savings based on union affiliation, rather than competitive forces.

The performance of a few large funds hides the chronic underperformance of a multitude of sub-scale union funds –which explains why every “compare the pair” union fund campaign uses selective averages which may not compare apples with apples.

Analysis prepared for the Productivity Commission demonstrated as many as 1.7 million consumer accounts are stranded in 33 sub-scale union super funds.

These funds collectively manage $94 billion in retirement savings which run the risk of sub-optimal consumer outcomes in terms of performance and cost.

Defaulting consumers into sub-scale funds could leave an average consumer as much as $170,000 poorer by the time they retire – an unacceptable result considering these 33 sub-scale funds are collectively listed 153 times in modern awards (almost a third of all award listings).

The prudential regulator, APRA, has made it clear that sub-scale funds should merge.

I acknowledge that not all professional retail funds are strong performers, but to suggest that no reforms are needed within union super funds defies recent evidence to the contrary.

The Australian Financial Review has reported numerous examples of governance failures and conflicts of interest within union funds.

It is simply wrong to suggest that union funds are beyond conflicts that require independent regulatory oversight.

For example, Australian Electoral Commission data shows that union funds have collectively paid $53 million directly out of members’ retirement savings to their sponsoring unions in the past decade.

Significant costs

It is therefore hardly surprising that trade unions and the superannuation funds they control have bitterly fought against recent reforms that would make the sector more transparent and accountable to regulators and consumers.

The governments reforms will also impose significant costs on professional retail funds.

Nevertheless, our sector has broadly supported the reforms simply because they are the right thing to do for superannuation consumers.

The objective of the superannuation industry should be to help Australians achieve a dignified life in retirement and the sooner the public interest is put before sectional interests the better all Australians will be.

Now might be a good time to review your super if you haven’t already done so. 

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Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

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