Hostplus chief executive David Elia has passionately defended the organisation’s marketing and entertainment budget, saying the fund would be “10 times the size of AMP” if the market were rational and judged funds purely on performance.

Entertainment expenses, including annual trips to the Australian Open tennis tournament, were critical to maintaining employer relationships that feed the membership base and, in turn, give its funds critical scale, he told the Hayne royal commission on Tuesday.

Counsel assisting Eloise Dias asked about the fund’s marketing budget, particularly its entertainment expenses, which involved inviting about 120 employers to attend the Australian Open at a cost of about $260,000.

Elia defended this. He argued that these employers accounted for about $4 billion of Hostplus’s funds under management and that entertainment was key to establishing and maintaining relationships, which in turn attracted and retained members.

Said Dias: “The fund – you acknowledge at the start of your testimony – does very well in terms of its returns. Why do you think employers need to be entertained in this way to [get them to] choose, or to retain their choice of, Hostplus as the default status?”

Elia said it concerned him that Hostplus needed to spend money retaining employer relationships but said also that was the reality of the industry. He lamented Hostplus losing about $500 million in funds under management per year to roll-overs to “underperforming, high-cost funds”.

“If it were a rational market, I think Hostplus…[would] be 10 times the size of AMP – should be 10 times the size of any of our competitor funds,” he said. “It’s just illogical to think how underperforming funds, high-cost funds, continue to grow at the expense of high-performing funds.”

Hostplus has about $34.5 billion in funds under management and just over 1.1 million members. It attracts a young demographic of hospitality and tourism workers, often in their first jobs or in the early stages of their working lives, Elia said. Its average member balance is about $30,000, less than half the industry median of around $66,000, and many join the fund because their employment contract or award has it as the default fund.

Hostplus had 469,659 member accounts with balances of $6000 or less at June 30, 2017, which represented just under half of its total accounts at that time. It also had 296,898 accounts defined as inactive, which meant they hadn’t received a contribution in 12 months or more.

Despite its relatively small average balance size and large inactive membership, Hostplus produced the best return of all “MySuper” balanced investment options for 2017-18, bringing in 12.5 per cent,  SuperRatings data shows. It was also first when measured over three, five, seven and 15 years.

Elia said brands were “incredibly important”, particularly to Hostplus’ younger membership.

“Our young membership is attracted to brands,” he said. “My kids are attracted to brands. Brands play such an integral part in the decision-making processes.”

He said other expenses such as taking key staff to restaurants such as Melbourne’s prestigious Flower Drum were also important aspects of retaining staff that could “make a hell of a lot more money” in other jobs.

It emerged that the Australian Prudential Regulation Authority had expressed concern to Hostplus about Elia’s personal expenditure, due to an anonymous whistleblower complaint. Elia had taken his family to the tennis along with clients and that was “certainly not unusual”, he said.

“It’s a sunk cost,” he said. “They’re not individual tickets. So you buy a package for the entirety of the two weeks of the tennis.” His children were able to come due to last-minute cancellations, he said.

Dias pointed out insurance premiums, and the tax benefits they offered, were an important source of revenue for the fund. She displayed company statistics that showed 158 insurance claims had been processed for the 55,000 members with balances under $1000 in the 12 months to June 30, 2018.

She then asked Elia: “What you’ve set out here shows that Hostplus is reliant on these cohorts on the low balances who are young and not likely to need the cover. They are essentially propping up the fund with their insurance premiums, is that correct?”

Elia disagreed, arguing Hostplus members were entering the workforce and generally needed insurance. Members were easily able to opt out of insurance, he said, and in March this year the fund made insurance an opt-in feature for members aged under 19.

Dias asked whether Hostplus had considered a merger to achieve scale.

“Hostplus has looked at many merger opportunities,” he said. “They fail for various reasons.”

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