The Australian Industrial Relations Commission (AIRC) has faced criticism for an apparent lack of rigour and transparency while determining a range of default superannuation funds for employers covered by modern awards.
Submissions to the AIRC’s award modernisation project show the commission was reluctant to analyse the investment performance of the chosen default funds, even after the federal minister responsible for superannuation, Nick Sherry, made it clear such assessments would be prudent.
The minister suggested that the AIRC and parties to it “form a panel of experts to compile a set of principles to underpin criteria for a list of well-performing funds that can be chosen as the default funds for awards”.
Sherry’s submission said when industry funds became default superannuation providers to award employees in 1987, few or none had performance records. Since then, the performance of these funds had not been reviewed, even though they cover approximately 20 per cent of the workforce.
“It is of significant concern, in light of their default fund status, that some industry funds have been consistent underperformers.
Aggregated unpublished APRA data shows that there are 24 industry funds – potential default funds in awards – that have underperformed over the long term … [by] as [much] as 1.6 per cent per annum, and these funds have a membership of around three million accounts,” Sherry wrote.
However most of the 16 funds chosen by the AIRC – of which only one is a for-profit master trust – have received platinum or gold ratings from SuperRatings.
In his submission, Sherry suggested the AIRC and any associated expert panel “access fund return data to aid in the research, analysis, and development of principles” and compile a list of default funds that employers could use.
But in a statement issued on September 12, 2008, which published the draft modern awards, the AIRC said that it would not analyse the performance of super funds before compiling a list of default providers.
“Performance will vary from time to time, and even long-term historical averages may not be a reliable indicator of future performance,” the AIRC wrote.
“We are prepared to accept a fund or funds agreed by the parties, provided [the funds] meet the relevant legislative requirements.”
Brendan Hower, of the AIRC modern awards project team, said the industry funds dominated the default list because they held these roles previously under federal awards.
However, in the absence of an independent analysis of fund performances, the AIRC would have served award workers well by running a competitive tender among candidate default funds, according to Nicolette Rubinsztein, general manager of strategy with Colonial First State (CFS).
Rubinsztein said the commission was not in the “best position” to determine which funds should become default providers, since comparing funds is a “sophisticated process”, and that “if it was put to competitive tender the members would be in better positions”.
“If investment performance wasn’t considered, then features such as services, insurance and capital backing probably weren’t considered,” she said.
“It has been somewhat of a black box; it’s not clear how they chose the funds and it’s not clear how they will benefit the members.”
Although the AIRC is required to review the content of modern awards every four years, no assessment of the performance of the default funds is compulsory or scheduled, Hower said.
While an employer covered by a modern award has the power to change their assigned default fund through a collective enterprise agreement, this would be an impractical task, requiring support from at least 50 per cent of employees and considerable legal work, Rubinsztein said. “It is like needing a sledgehammer to crack a walnut.”
She said the changes were already impacting the corporate super business of CFS. Some employers who were ready to choose CFS as a default fund had now selected a fund mandated by the AIRC because they employ award workers.
“Over time, it could have a huge effect on our funds under management in the corporate super sector, as employers covered by the awards will be reluctant to have one default fund for workers under the award and another default fund for workers that aren’t.”
However Damian Hill, the chief executive of the REST Superannuation, the default fund for all employees under modern retail industry awards, said the AIRC decision would not dramatically alter the super industry.
“The world has not changed for retail funds. We still have choice and the grandfather provisions,” Hill said, referring to the AIRC ruling allowing employers to maintain contributions to employee accounts that were active before September 12, 2008, irrespective of the list of new default funds.
Hill expected the changes to cause a “relatively small increase” in membership over time.
The deputy executive director at MTAA Super, Leanne Turner, has decried as “nonsense” suggestions that funds with large holdings in alternatives are overvalued.
Listed markets continued their dismal performance up to December 31, with Australian shares down 38.9 per cent and Australian listed property down 55.3 per cent, while unlisted property lost just 0.3 per cent for the year. Asset allocation was more important than ever before in 2008; super funds heavily weighted to listed markets underperformed funds with big unlisted books by nearly 15 per cent.
MTAA Super’s Growth option lost 11 per cent in 2008, way ahead of the median high-growth fund (defined as one with 81-100 per cent growth assets) which lost 26.5 per cent.
Much of this outperformance has been attributed to MTAA Super’s high allocation to alternative, unlisted assets. Under the guidance of its asset consultant, Access Capital Advisors, MTAA Super has split its fund into two distinct pools: the enhanced index, ‘market-linked’ portfolio; and the ‘target return’ portfolio.
The target return portfolio, which accounts for 48 per cent of the fund, invests in airports, tollways, ports, power stations, timber, power generators, private equity and property. MTAA Super said the valuation frequency of this portfolio was a trade off between ensuring member equity, without placing undue costs on members.
Assets such as high yield debt were valued most frequently (about 12 times per year), while natural resources and property were valued only about twice a year. The frequency also depended on the size of the asset, for example if an asset with a market value of $100 million was revalued four times a year, an asset with a market value of $10 million would be revalued only twice a year. The average weighted frequency of revaluation.
across the entire portfolio is about 3.3 times