The chief executive of the Australian Institute of Superannuation Trustees, Eva Scheerlinck, says the group will recommend to the Hayne royal commission, regulators and Parliament that retail banks be stripped of their ability to offer a MySuper product.
In an opening address at the AIST’s annual Super Investment Conference (ASI 2018), Scheerlinck said the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry had shown retail trustees “were unable to protect members from fee gouging and other misconduct” because they have a responsibility to return profits to shareholders, not just members.
“You cannot serve two masters and look after members’ interests at the same time…The regulators have proved themselves unable to stop bad behaviour,” she said at the conference, held in Cairns on Wednesday.
“Therefore, AIST believes there is no place for retail funds in MySuper, where members in a compulsory super system have the right to expect the highest level of protection. We will be advocating this position to the commission, to the regulators and to Parliament.
Since July 1, 2017, all member accounts in default investment options have been required to be invested in simple, low-fee MySuper products. There are now 100 MySuper products. Retail funds have $103 billion in MySuper products, while not-for-profit funds hold $491 billion.
The fifth round of the Hayne royal commission, in early September, laid bare failings in the retail, or bank-owned, super sector.
In a 223-page closing submission, counsel assisting Michael Hodge said the inquiry was open to findings that eight retail funds and related parties may have engaged in more than 150 separate instances of misconduct.
Retail funds operated by NAB, Commonwealth Bank, AMP, IOOF, Suncorp and ANZ Bank were included in the list of institutions that could be found to have contravened corporation and superannuation laws.
The potential instances of misconduct ranged from charging fees for no financial advice, slow transfers of members to low-fee MySuper products, and cross-selling members into high-fee products.
“The report noted that the Australian Securities and Investments Commission [ASIC] expects that compensation due to members will top $1 billion for problems relating to fees-for-no-service alone,” Scheerlinck told the conference.
By comparison, industry- or profit-to-member funds were left largely untouched by the royal commission.
The closing submission found no breaches of the law by industry super funds, but stated that hospitality-industry fund Hostplus might have fallen below community standards with its retention strategies, which sought to keep low-balance and inactive accounts in the fund, boosting revenue from insurance premiums.
The submission also criticised Catholic Super for failing to prevent the emergence of conflicts of interest and poor monitoring of corporate credit-card use.
Scheerlink said the industry-fund sector had been forced to defend itself against “attacks” relating to the 25-year compulsory super framework, a government plan to mandate board composition, and performance. But that recently changed.
“This year – in fact, the past four months – has brought a significant shift in the discourse,” Scheerlinck said. “The Productivity Commission affirmed the profit-to-member sector’s consistent outperformance and, for once, the message got through. The message was freely accepted as fact. [We’ve had] decades of being on the defensive yet continuously delivering results for our members.”
The landmark draft Productivity Commission report into the $2.7 trillion super sector, which revealed that between 2005 and 2016 retail funds returned 4.9 per cent, net of fees and taxes. For the same time period, not-for-profit industry funds returned 6.8 per cent.
On Monday, new Industry Super Australia chief executive Bernie Dean told the ISA Stakeholder Forum that industry funds had “been given a clean bill of health by the royal commission”.
“The outrage at the banks is real,” Dean said. “They are in a tight and very dark spot; people’s confidence in super is resilient. They’re actually looking at their super accounts and taking matters into their own hands. On our rough estimate, 1 in 5 retail fund members are looking to switch to an industry super fund.”
Despite this, Scheerlinck said, AIST was not “naïve enough to think that plenty of challenges do not lie ahead”.
“As everyone here would be well aware, bull markets don’t last forever,” she said. “While investment returns for members of profit-to-member funds have far exceeded expectations over the last year or two, this, paradoxically, raises the likelihood of a market downturn in the not-too-distant future.”
The royal commission has signalled it will consider recommending a range of superannuation reforms in its final report, due next February. The recent closing submission questioned whether there were structures in the retail sector that raised inherent roadblocks to trustees being able to meet their fiduciary duties.
“AIST’s answer to this is a resounding, yes. Being a super trustee is a special and privileged job,” Scheerlinck said. “Trustees are the stewards of other people’s money. A trustee director cannot be focused on returning profits to members when he or she is also having to return profits to shareholders or prop up related parties.”
