As Australia awaits the next federal election, the past three years have been a rocky road for industry super funds.

While they have continued to grow in size and dominate the superannuation sector, any suggestion they might get an easy run under a Labor Government has not materialised.

With assets of $1.4 trillion, the industry fund sector, particularly the big funds, have become the super fund ‘establishment’.

With large member numbers, including millions moving towards retirement, they are under increasing pressure to step up their member services – from answering queries to the processing of death and insurance benefits – as well as deliver competitive returns in an environment of increasing disclosure requirements.

Twin regulators, APRA and ASIC, are constantly in the media declaring “crackdowns” on issues such as greenwashing, member services and valuations of unlisted assets.

AustralianSuper dominates the superannuation sector with assets of more than $355 billion.

However, in recent months the fund has found itself battling criticism over its handling of member complaints, including insurance payouts along with negative media coverage of some of its investment losses.

This has seen chief investment officer Mark Delaney, who has held the role since it was founded in 2006, admit the fund’s $1.1 billion loss on a private equity investment in US education software start-up Pluralsight “still burns”.

Troubled industry fund Cbus has been the subject of legal action over delays in insurance payments with APRA also moving in August 2024 to impose new conditions on its license. This includes conducting an independent review into the fund’s appointment of directors and payments to the CFMEU.

Cbus chair Wayne Swan, who is also Federal Labor Party president, has been hauled before a Senate committee of inquiry about the fund’s shortcomings in making insurance payouts. Swan has faced criticism for appearing to try to shift the blame onto the fund’s third-party administrator and has had to make embarrassing “mea culpas” on the fund’s problems.

Queensland-based industry super fund BUSSQ failed in its attempt in Federal Court to fend off APRA’s decision in August 2024 to impose additional license conditions which included engaging an independent expert to review its processes for assessing the fitness of its “responsible” executives and making sure its spending meets the best financial interests of members’ test.

Outgoing Minister for Financial Services, Stephen Jones, has been cracking the whip at super funds to lift their game on member services and step up their attention to the Retirement Income Covenant’s requirements to put more focus on delivering retirement income products.

It will be interesting to see who Jones’ successor will be if Labor wins the next election or is part of a minority government, and if the selected candidate would take a different approach to the super sector.

At the same time, outspoken Coalition Senator Andrew Bragg has been a high-profile critic of industry funds.

If the Opposition were to win the upcoming election or put together a minority government, Bragg might be expected to play a more powerful role, potentially more critical of industry funds payments to unions.

From a business point of view, the industry funds have thrived under the Labor Government – continuing to increase their market share and coverage.

The latest annual super industry report from APRA shows the assets of the profit-to-member fund sector have gone up from $914 billion as of June 2021 to $1.37 trillion as of June 2024.

This compares to the retail fund sector which has seen its assets increase much more modestly, from $690 billion as of June 2021 to $756 billion as of June 2024.

The profit-to-member sector has also grown by membership, from 11.36 million as of June 2021 to more than 14 million as of June 2024, while retail super fund membership continues to fall from just under seven million at June 2021 to only six million as of June 2024.

Their higher funds and membership levels mean the profit-to-member funds are now increasing their total level of benefit payouts – from $857 billion in the year to June 2021 to $1.3 trillion in the year to June 2024.

Retail fund benefit payments have risen from $678 billion in the year to June 2021 to $746 billion in the last financial year.

While profit-to-member funds now have more than double the number of members than retail funds, their average member balance is lower – at $92,000 compared with $124,000 for retail fund members.

The cream of the crop in the super sector are the self-managed super funds which now have average member benefits of $830,000, some of which leaks out of the profit-to-member fund sector by members with larger balances who want more control over their savings.

The rub for the profit-to-member fund sector is it now services a staggering 14 million Australians with lower balances as more move into the retirement phase, with more pressure to focus on the higher touch retirement phase.

This requires a significant increase in investment in member services, such as taking more administration in-house and stepping up investment in IT systems and back offices, at a time when fees are under scrutiny.

One could argue the sector had a very easy run in its early days and now the true cost of servicing the billions of dollars flowing into compulsory super each year and increasing ranks of members is coming home to roost.

The sheer size of super funds in the economy, the number of Australians affected and issues of liquidity and consumer servicing does warrant much more oversight from a regulatory point of view.

The sector is now facing demands for more professional management and particularly at a board level which is putting pressure on its traditional approach of having directors from unions and industry bodies who may be well meaning but are lacking financial industry background or experience.

While retail funds have long had professional directors, the grass roots board level representation has – until now – been seen as one of the successes of Australia’s unique profit-to-member fund model.

Financial Services Council chief executive Blake Briggs addressed this issue in a recent speech at the annual PritchittBland Communications new year gathering last Thursday night.

Blake Briggs

“The modern reality of the superannuation industry is that the days of a hundred small funds being run like a cottage industry are far from over,” he said.

“Most funds are modern, complex financial services companies with sophisticated fund management, financial advice and governance arrangements in place.”

Briggs, whose organisation has long been seen as the industry body of the retail super funds – and is the former employer of Senator Bragg – suggested it was time for profit-to-member and retail funds to work more closely together to lobby on issues affecting the sector.

“You could argue that the flare up of ‘superannuation wars’ and resulting regulatory interventions, is at least in part the result of layers of industry representation working at cross purposes,” he said.

“Would we have had the same political intervention we saw in group life insurance and death benefit service standards if the industry had been more aligned in addressing these issues?”

While profit-to-member funds are now run by a more professional class on a day-to-day level, there are big differences in skills at the board level.

Blake pointed the finger at what he saw were “tribal leaders [who] continue to pull the industry into rival camps.”

“The superannuation and financial services sector is one of the largest in the Australian economy,” he said.

“We have the capacity to be a leading voice in economic policy debates.”

“Ongoing division prevents us from realising this opportunity.”

Whoever wins the election this year will continue to put the superannuation sector under tight scrutiny and, if anything, increasing regulation.

The profit-to-member fund model has been successful to date, but it is under pressure to become more professional and hence less “political.”

The old days of Labor mates in the sector have not gone, but the ties are becoming less relevant to its future, as the challenger brand becomes mainstream and it pays the financial and public relations price of being much more heavily scrutinised.

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