It’s a well known fact – at least among independent commentators and ratings agencies in the super industry – that the not-for-profit super funds are winning the race in terms of delivering superior retirement outcomes for members.

Even before the release last year of landmark Australian Prudential Regulation Authority research showing that the not-for-profit sector had out-performed the retail sector by a staggering 2-3 per cent every year for the past 10 years, it was obvious to most that the competitive fee structure of the not-for-profit funds was hard to beat. But what of the role played by the representative trustee system – the unique system of governance employed by the not-for-profit sector?

To what extent do the differences in governance between the retail and not-for-profit super sectors impact on differences in long-term performance?

A new report from APRA released this month provides plenty of food for thought on this largely unexplored issue. For the first time, and due in no small part to the fact that participation in the survey was compulsory, we now have quantitative governance data on virtually every large Australian super fund. The results of this landmark survey, released at the recent AIST/Melbourne Centre for Financial Studies fund governance conference, left many not-for-profit trustee directors feeling as though they had just been handed a straight A report card.

By contrast, the retail fund trustees scored a C plus average at best. While noting that all superannuation sectors seemed successful in selecting experienced and qualified trustee directors, the APRA report revealed statistically significant differences between the way retail and not-for-profit boards operate.

Of particular concern were the different sources of input for board decisions on important issues such as fund objectives, risk tolerance and strategic asset allocation. Whereas the trend in the not-for-profit sector is for trustees to either make decisions themselves and/or source input from outside expertise (such as asset consultants) nearly all key decisions made by retail directors are made by the fund’s executive.

It is almost beyond belief that a board could abdicate responsibility for the setting of the funds objectives and risk tolerance to its management team. The report also showed that 60 per cent of retail fund directors had one or more associations with a fund service provider, more than double the rate recorded for the not-for-profit sector and that one in three retail directors were employed by a service provider.

The potential for conflict is enormous. Other remarkable differences included the time directors spend on fund matters (an average of 550 hours per year for retail fund directors compared to 1350 hours for industry fund directors and 1150 hours for those in public sector funds) and remuneration (the average retail director fee of $70,000 is about double that of directors in other fund types). And while between 62 per cent and 73 per cent of not-for-profit directors invest in their own fund, nearly 80 per cent of retail fund directors invest elsewhere.

Talk about not putting your money where your mouth is! While fund governance has long been an issue of importance in the corporate sector, this recognition has been a long-time coming within the superannuation industry. Clearly, more research needs to be done to explore linkages between governance and performance. AIST is currently in the final stages of a research study with Sydney University to further examine this issue, the results of which are expected to be released early in the new financial year. Meanwhile, it seems reasonable to speculate that the differences in the governance outlined by APRA at least play a part in the underperformance of retail funds.

This then raises the question as to whether the profit motive of the retail funds may diminish investment returns. The APRA report should be compulsory reading for critics of the representative trustee system who judge it to be second-rate or obsolete. It should put an end to calls for the need for so-called “professional” trustees on the boards of the not-for-profit funds while members of the funds themselves can rest assured that their money is in good hands.

Unfortunately, the same cannot be said about retail super fund investors. Given the compulsory nature of super, investors are entitled to demand a straight A performance from their fund – on all fronts. As the APRA report tellingly reveals, the vast majority of retail fund directors are well aware that better value can be found elsewhere – indeed, some have privately confided that the not-for-profit funds offer excellent value.

They know that a C plus average isn’t good enough. It is now up to the government, as well as the regulators, to ensure that more retail fund investors and their financial planners reach the same conclusion.

For my part, I certainly know that if the person sitting next to me got paid significantly more than me, put in less hours, abdicated most of their decisions to others, and, to top it off, underperformed – I would be asking some hard questions.

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