AIST CEO Eva Scheerlinck (Pic: Supplied)
Eva Scheerlinck.

The chief executive of the Australian Institute of Superannuation Trustees, Eva Scheerlinck has urged the government and regulators to act on underperforming default superannuation funds, after new Productivity Commission research dealt yet another blow to the credibility of the for-profit sector.

The Productivity Commission paper released on Friday found retail superannuation funds appear to be making poorer investment decisions on average when compared with industry funds.

There was a 200 basis point gap in the relative outperformance of the not-for-profit and retail segments of the superannuation industry, and a large part of this was probably due to “the relative merit of individual investment decisions”, according to a supplementary paper which is part of the commission’s ongoing inquiry into the efficiency and competitiveness of the super system.

However the report was limited in the conclusions it could make by a lack of data, which was partially due to gaps in the data collected by the Australian Prudential Regulation Authority, and partially due to large retail funds flatly refusing to provide information for a survey the commission conducted, despite multiple requests.

No place for underperforming super funds

Eva Scheerlinck on Monday pushed for regulators and the government to act on these “underperforming funds, particularly those in the default sector”.

“The findings of the report point to almost every dollar in retail super being better off in a high performing, low cost not-for-profit super fund. There is no place for under-performing super funds in our default super system. We need the government and the regulators to act on this,” she told Investment Magazine

The report found a 200 basis point gap in the relative outperformance of the not-for-profit and retail segments, and 10 basis points of this could be explained by indirect investment expenses.

The commission adjusted for asset allocation, tax and reported administration and investment expenses, but even after this there was an “unexplained component” or “residual” of about 90 basis points.

Asset allocation debate

While asset allocation is the largest determinant of net returns, the report said, most variation across individual funds and MySuper products was in this “residual” and so was not attributable to asset allocation.

“The remainder is likely to be differences in asset selection (within asset classes)–the relative merit of individual investment decisions–or measurement error,” the report said.

Ms Scheerlinck said the commission’s analysis “puts to bed” the argument that the industry fund outperformance can be explained simply by differences in asset allocation.

“It suggests that not-for-profit funds are making smarter choices of assets within asset classes and that there is a correlation between outperformance and good governance,” she said.

The report found there was some evidence “fund governance efficacy” in some funds contributed to the residual, and this was measured by fund readiness to introduce a MySuper product, how fast the fund transferred default members to the MySuper product and fund use of related parties.

This suggested avenues for further investigation by regulators and researchers, the report said, as the results only indicated correlation, not causation

Related parties

Ms Scheerlink also urged the Australian Prudential Regulation Authority (APRA) to investigate related party arrangements and trailing commissions in the retail sector.

Looking at the available data, the report found high fee products–defined by fees surpassing 1.5 per cent of assets–had at least three million member accounts and $200 billion in assets. Almost all of these were retail funds, and about half of them were legacy (closed) products.

Ten retail funds accounted for over 90 per cent of advice fee revenue reported to APRA, it found. This averaged $341 per member for 2017.

The report also found trailing commissions were likely to be a factor behind these high advice fees.

Higher administration and investment expenses were also associated with use of related parties–something retail funds in the funds survey were much more likely to do than not-for-profit funds.

“Retail funds in the funds survey are much more likely to use related parties for investment than not-for-profit funds, but too few large retail funds provided these data to draw firm conclusions,” the report found.”

Colonial First State, BT, MLC, IOOF and AMP were some of the funds which reported the highest levels of advice fees and commissions.

There were also “major gaps and quality problems with related-party expenses data collected by APRA”, it found, forcing the Commission to rely on survey data.

Draft recommendations

The report made draft recommendations calling for the Australian government to extend MySuper regulations which limit exit and switching fees to cost-recovery levels so that they cover all new members of all retirement products.

The government should also require superannuation funds to annually inform all members who are paying trailing financial adviser commissions, it said.

The commission will make recommendations about new government policy by the end of the year.

Last week Labor leader Bill Shorten suggested retail banks should be stripped of their right to manage super products.

“Banks are no longer just banks, they’re cross-selling their products in wealth management and other areas,” Shorten said at an event for bank victims on Friday.

“I do think that the banks need to consider, and they shouldn’t wait till we’re told by a royal commission, that what they need to do is put the administration, or the trusteeship of superannuation, out of the hands of the bank and have independent organisations act as trustees,” he said.

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