The Australian, December 22, 2017
One of the most important issues of 2018 is going to the management and behaviour of our non self-managed superannuation funds.
And there is no better time to get it right than when the share market is rising and there are good news stories to tell.
As things now stand what is happening is a national disgrace. So let’s put four items on the agenda for superannuation change in the year ahead.
* Total disclosure of all fees paid to employers and unions in the case of industry funds and all fees paid to banks, AMP and other retail fund owners, plus all other management fees paid.
* An end to the current racket that stops people choosing funds and being ripped off with multiple fees as a result.
* The unravelling of the “Great Investment Fee Mystery” where it looks like some of the wealthiest investment managers and advisers in Sydney are donating their services to superannuation for no charge. That can’t be right. This smells of yet another bank scandal for the banking royal commission to look at.
* At least make a start on getting investment managers to think about the long-term interests of members rather than short-term profit forecasts. I will elaborate on this theme during 2018 because it’s vital to members of non-self managed funds and the nation.
* An end to the racket where those who chose funds see their money held by the so-called “manager of choice” for one or two months and then passed onto the fund of choice. This certainly happens in the retail area and may happen in industry funds. The money should go straight from the employer to the fund of choice. It’s just another racket that reflects a sector that is lazy in protecting members’ interests.
During 2017 I wrote many commentaries demanding that industry superannuation funds disclose all direct and indirect payments to employer groups and unions. It’s important that fees disclosed cover situations where money is drafted into low cost so-called “my super” funds and where members make a choice of fund. If I make a choice I need to know the fees, including owner fees, being charged on my money. To me that’s elementary and I can’t believe we are debating this.
Somehow under the proposed and ill-fated legislation the government required fee disclosures on the so-called “my super” funds, but nowhere nearer the same level of disclosure in the “choice funds”. It made no sense.
Now it so happens that 80 per cent of industry funds were based on the “my super” schemes (where there must be backer disclosure) whereas in the retail area it was the reverse— roughly 80 per cent were “choice” funds (no disclosure) and 20 per cent “my super”.
The industry funds tell me that they are happy for full disclosure of all direct and indirect payments to their backer, but it must apply industry-wide to both the “my super” and “choice” sectors, not just the sector where they dominate. And they are absolutely right. The minister, APRA or the royal commission need to fix it. Frankly the retail funds and the industry funds should together volunteer full disclosure.
It so happens that overall costs of industry funds are much lower than in retail funds so full disclosure in the retail sector is very important.
But the industry sector has its own set of bad practices.
People, usually on low incomes, are forced or shepherded into different industry funds when they work for, say, a pub and a retailer. The low income earners with two or more funds are then slugged multiple fees. There must be an ability to chose your fund so that retail workers who have a fund from their work in the pub can easily stay with one fund. The industry funds are proposing a scheme that will help reduce this fee racket and that’s good but fund choice is vital.
Now to the “Great Investment Fee Mystery”.
What makes it such an enthralling saga is that by reputation the characters in our tale have magnificent houses and drive fast luxury cars. How do they get this money? Either the investment managers have family money, a generous banker lending them vast sums, or they are on a high income. Clearly I am jesting but it’s a joke with a serious twist.
In the superannuation figures required by APRA there is a column called “investment fees” and that’s where we should look for clues as to the source of this well-displayed wealth.
In the industry funds there are some very large disclosed sums. For example, Australian Super public offer funds paid $418 million in investment expenses but to be fair this represented only 0.4 per cent of their assets. The health employees paid $101 million in investment fees but the ratio was only 0.28 per cent. All the funds have disclosed a figure and while there are percentage charges above and below, most fall into those brackets.
The point is that there is disclosure.
Now we go to the public offer retail funds. It looks like there are roughly about 80 retail funds. But about half of them have what looks like the deal of a lifetime because they pay no or token investment fees. Among those who do not pay investment fees are the heavy hitters like AMP, Commonwealth Bank’s Colonial, and NAB’s MLC, while Macquarie’s costs are 0.03 per cent of assets.
And so where do those fast cars and luxury houses come from?
Clearly there are side deals and somehow, some way, in parts of the retail sector investment charges are contracted out to others and not disclosed. I am sure the industry funds contract out as well but at least on the surface it would seem they and many of the retail funds include those costs in investment fees. But let’s get it all out in the open.
Remember this is not employer body, union or bank money — we are looking at funds owned by ordinary Australians who are members of non self-managed funds. Self-managed funds know exactly what they pay and APRA should want the same privilege for non self-managed funds. APRA needs to stop turning a blind eye to those funds showing no or token investment fees.
The head of the bank industry body, Anna Bligh, proudly has set out new rules for bank conduct. That’s good.
But let’s start by disclosing what is really being paid in investment expenses.
When people say the cost is “nil” when it is clearly not “nil”, it usually means there is something to hide. Let’s get it out into the open.
Have a wonderful Christmas and see you in the New Year.