AIST CEO Eva Scheerlinck (Photo: Supplied)
AIST CEO Eva Scheerlinck

At this point, dismissing profit-to-member funds’ outperformance is like denying climate change –but the new evidence is hard for anyone to ignore.

Rising sea levels, melting glaciers and record temperatures for the planet. Despite the plethora of scientific evidence telling us that climate change is happening, there’s still no convincing some.

There are parallels between climate change deniers and those who routinely dismiss  the outperformance by profit-to-member super funds.

Despite more than two decades of reports and independent surveys showing profit-to-member funds at the top, there is still an army of supporters of retail funds (those run by banks and other financial institutions) who continue to express doubts about the veracity of this evidence.

This makes the latest report on superannuation from the Productivity Commission essential reading, especially for financial advisers in the retail sector who, as the report notes, receive the lion’s share of advice fee revenue.

The report was released in November as a supplementary paper to the commission’s May draft report into the efficiency and competitiveness of superannuation. It goes further than previous studies in examining the factors that drive outperformance.

No more excuses

Notably, it puts to bed the argument that the outperformance of profit-to-member funds can be explained simply by differences in asset allocation. In the words of one journalist from The Australian, the report has “obliterated the last excuse put forward by retail funds for their systemic underperformance”.

For many years, detractors of profit-to-member funds have claimed that comparing the performance of retail funds with profit-to-member funds is akin to comparing apples to oranges. The argument goes that liquidity constraints and an older, more risk-adverse membership force retail funds to invest in more conservative assets. This, in turn, is said to result in lower net returns.

Drawing on new and existing data from regulators and research firms, the commission put this claim to the test by comparing like with like.  Adjusting for asset allocation and other key factors, it found there was still a 190-basis-point edge in relative performance for profit-to-member funds.

The report suggests that asset selection (that is, smarter investment decisions within asset classes) is the main reason for this performance gap. It also points to a correlation between good governance and outperformance.


While the commission did not specifically explore funds’ overall governance, the report states that “governance efficacy” – as an indicator of key intangibles such as the calibre of the trustee and investment team, the investment process, and management of conflicts and related parties – plays a role in outperformance by the profit-to-member sector.

Winning on fees

The report also examined fees and costs, finding that retail funds paid higher investment costs than profit-to-member funds across all asset classes. Almost all of the high-fee products, containing at least 3 million member accounts and $200 billion in assets, were retail funds, half of which were legacy (closed) products. The largest fee difference was in cash, where retail funds paid 44 basis points, on average, compared with 5 basis points for profit-to-member funds.

Noting that the use of related parties was more prevalent in the retail sector, the Productivity Commission suggested that using them might reflect poor governance when it was associated with higher indirect investment expenses.

Granular in its analysis and independent, this report must not be ignored.

While the sustained (on average) outperformance of profit-to-member funds may be an ‘inconvenient truth’ for the advisers associated with retail funds,

there is nothing inconvenient about it for those Australians languishing in underperforming super. As is the case with climate change, the evidence is overwhelming and the time to act is now.

A good starting point would be for the government to set up an independent online portal so workers can compare the long-term net returns of every product. Retail fund members could use this to understand how much better off they could be.

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