Profit-to-member super funds are actively “scenario planning” a royal commission into the powerful $1.4 trillion sector as regulatory and parliamentary scrutiny intensifies.
Investment Magazine understands that spin doctors and politicos advising multiple funds are preparing for the increasing likelihood of a major judicial inquiry into their own operations, especially if the Coalition manages to win the election in early 2025.
The war-gaming comes amid escalating alarm from regulators about governance and member service failures in the sector, with serious issues identified including the competency and independence (or lack thereof) of trustee directors; commercial and interpersonal links between funds and the trade union movement; valuation and transparency of unlisted asset valuations; “greenwashing” in ESG options; and delays and deficiencies in insurance claims handling, account consolidation and retirement income advice and guidance.
To this editor’s knowledge, no elected official within the federal Coalition has yet uttered those words in relation to profit-to-member super, not even the system’s chief critic, NSW Senator Andrew Bragg, who seems content for now with his wide-ranging parliamentary inquiry into the retirement system.
But given their increasingly strident rhetoric on compulsory super and union links – including Shadow Treasurer Angus Taylor’s invocation of the 401K retirement model in the United States – it seems entirely plausible it is not far off.
The Murdoch press, whose pages are often a breeding ground for Coalition policy, has begun agitating for a more meaningful inquiry. And none are more meaningful than a royal commission.
Power to probe
While Parliaments have the power to probe, and compel industry leaders to give evidence – as we saw quite spectacularly in the showdown between Bragg and Wayne Swan – only a royal commission has real prosecutorial power and judicial authority.
Some well-informed observers may argue we have already had a royal commission – two, in fact – with the power to investigate the governance and operations of profit-to-member funds.
The Hayne royal commission had an explicit mandate to assess misconduct in superannuation, and did briefly put the advertising and marketing activity of the sector under the microscope.
But Commissioner Kenneth Hayne was seemingly convinced that advertising campaigns by the funds were in members’ best interests, thanks largely to the deft handling of his questions by industry scion and then-AustralianSuper boss Ian Silk.
Hayne then went back to his primary targets of AMP and the big four bank-owned wealth managers, which unquestionably warranted his attention, given the widespread findings of criminal wrongdoing.
Before that, the Royal Commission into Trade Union Governance and Corruption, instigated by Tony Abbott’s government and led by former High Court Judge Dyson Heydon, touched on the links between funds and unions.
Indeed, it specifically raised concerns with the Cbus-CFMEU relationship, which a decade later has once again exploded into the public domain following a series of revelations aired by the Nine’s Building Bad investigation, indicating the fund and union clearly had not heeded Heydon’s conclusions.
However, neither of these probes had the business model of profit-to-member and union-linked superannuation, or the broader super system, as their raison d’etre. And given regulators (and the International Monetary Fund) are now warning there could be some systemic risks in Australian super, calls for a standalone royal commission are surely not far off.
Feverish warnings
To be clear, Investment Magazine and its publisher Conexus Financial, are not necessarily endorsing the idea. We would hope the increasingly feverish warnings will be sufficient for the sector to make some changes to operations and governance, and certainly we are committed through our events and media to being helpful to that end.
But equally, we would argue the industry – and perhaps more pertinently, the Labor government – may be better off embracing such a prosecutorial probe, rather than repeat the mistakes made by the Coalition and the banks in trying to stave off a royal commission.
The Coalition famously voted against the banking royal commission 26 times – a record that aged poorly, given the evidence the inquiry eventually uncovered.
Moreover, in attempting to appease calls for a royal commission, the previous government also rushed through arguably flawed legislation, such as the financial adviser ethics and education standards – the implementation and design of which the Coalition subsequently admitted was botched – and the Life Insurance Framework, which many experts credit with a plunge in retail life sales and heavily depleted pool of policyholders.
The policy intent of these reforms, to lift education standards in financial advice and trim commissions paid to advisers on insurance products, may well have merit. But whenever legislation has an ulterior motive to what it says on the tin, it so often ends up being compromised.
And many insiders believe a primary motive for these reforms and more in those chaotic years under Tony Abbott and then Malcolm Turnbull’s leadership was primarily to attempt to appease consumer and media calls, while letting the banks off the hook.
Given the super sector is already subject to reams of legislation that many would argue is questionable, it would be ill-advised to risk more of it, and pushing back against a royal commission could create an environment in which a Labor government (assuming it wins a second term) would be tempted.
Ideologically motivated
Some within the sector will argue no doubt that these calls from conservative politicians and press are ideologically motivated. Swan himself has made this argument many times, including at the Investment Magazine Chair Forum earlier this year.
And, of course, given the perennially contentious nature of super, there is plenty of truth to this rebuke. There is no doubt it is politically advantageous for the Coalition to promote the idea of corruption in the union movement or dent public trust in compulsory superannuation – a landmark Labor achievement.
But that does not render their criticism baseless. There is ample evidence to suggest the member experience in some large profit-to-member funds could be vastly improved, including our own surveys of member sentiment conducted in partnership with CoreData. Both ASIC and APRA have made crystal clear they agree.
Even the Albanese Labor government has been a critic of claims handling and retirement preparedness failures – so much so that Minister for Financial Services Stephen Jones has found himself a target of some super-aligned Labor luminaries, according to well-placed Canberra sources.
Transparency is a rightful expectation of the community, especially in a default system. If the criticisms are ideological and overblown, then the full glare of a royal commission may well prove that to be the case.
But if they are not, the experience of the Hayne inquiry would suggest the public interest, and the industry itself, would be well served by hearing the truth.
