The owners of more than 1 million super accounts holding more than $30 billion in assets may never be told their fund is a dud unless a crucial government performance test includes all fees and charges.
The government’s Your Future, Your Super exposure draft legislation suggests it will stick with the inferior net-investment return benchmark – which excludes administration fees and other non-investment charges.
This distorts outcomes because it does not measure what a fund deposits into a member’s account and allows dud products to hide their lousy performance. Benchmarks must be based on net returns – investment returns minus all fee and charges.
There is also no plan to roll out benchmarks to most of the trouble-plagued ‘Choice’ sector – despite a government review finding that sector had the biggest fee gougers and worst performing products.
ISA analysis of APRA’s publicly available five-year MySuper returns shows that $145 billion in assets would not meet the more rigorous net-return benchmark – compared with $108 billion using the government’s model.
The Productivity Commission, ASIC, APRA, the Cooper Review, analyst firm SuperRatings, AIST and even Superannuation Minister Jane Hume have all said net returns after fees and taxes is the most relevant fund performance measurement for members. It must be the test.
Products are considered underperforming if they drop below 50 basis points of the benchmark.
Members are told that their fund has underperformed when they first miss the benchmarks, consecutive underperformance results in funds being barred from accepting new members. This does little to stop existing members from being fleeced, so the ultimate punishment for chronic underperformance should be removal from the system.
There is also no plan for the benchmarking regime to be applied to more than 80% of the near $1 trillion Choice sector – despite this sector being littered with dud products.
The difference between being in a good fund and a bad one can mean more than $500,000 less at retirement, these reforms must be strengthened so that fewer workers are in underperforming funds.
Before the government proceeds with its plan to “staple” workers to their first fund it must remove the duds from the system – benchmarks must be robust and applied to the entire system equally.
Industry Super Australia supports the government’s Your Future, Your Super package and its crucial performance benchmark tool, but is concerned unless important improvements are made, members could end up worse off. ISA supports sensible changes in members’ best interest including:
Ø Net-return as a performance benchmark rather than net-investment return
Ø Forced closures of chronically underperforming funds
Ø Expanded coverage to ensure all funds and products – including the Choice sector – must also pass the benchmark tests, with no carve outs
Ø Sequencing of reforms to ensure performance measures are implemented before stapling
ISA welcome all universally applied laws that would mandate spending by super funds should be solely for the financial benefit of members – not the parent company’s shareholders.
Advertising is a cost-effective way to attract and retain members passing on benefits of scale. It is also a useful financial literacy tool to help explain to members the impact on their savings of potential policy changes.
All ISA’s activities are in the best financial interests of members – this is a statement Banking Royal Commissioner Kenneth Hayne agreed with.
Media reports have suggested the proposed changes to the sole purpose test are deliberately designed to disadvantage industry funds. ISA will carefully examine if the effect or intent of the legislation is to damage industry funds competitive position in the marketplace.