The Your Future, Your Super law package could have been a ground-breaking super reform that finally ridded the system of underperforming funds and ensured the disgraceful misconduct by super trustees revealed at the Banking Royal Commission could not happen again.
But instead, it will be the Federal Government’s greatest gift to the Big Banks and the for-profit super sector, allowing them to skim up to $10 billion a year in profit1 no matter how bad the investment returns.
Industry Super Australia submission in response to the proposed reform will detail how the package favours the for-profit sector by:
Ø Never making retail funds prove how taking billions a year in profit through inflated related party payments is in the best financial interest of members,
Ø Excluding the for-profit sector’s most excessive fees from performance benchmarks,
Ø Shield most sub-par for-profit products from performance tests,
Ø Tying the not-for-profit sector down in costly red tape,
Ø Prohibiting industry funds from using advertising to promote their comparative outperformance or warn members about changes that could erode their savings.
Under the proposed laws fees and profits are excluded from the revamped member’s best financial interest test, which reverses the onus of proof if fund expenditure or investments are challenged by regulators. The billions in mark-ups that for-profit and bank-run funds pay to other parts of the businesses for services are excluded, this fee gorge on members’ savings generates up to $10 billion a year in profit.
The government instead wants to install a regulatory kill switch, which would allow it to prohibit any super fund investment or expenditure they do not approve of, even if in the best financial interest of members.
Industry funds successful advertising and advocacy programs are a reported target of the proposed laws. Despite the Banking Royal Commission finding these programs were in the best financial interest of members, as they warned workers about potential adverse government policy and helped connect Australians with a super fund that delivered better returns.
Retail funds can also effectively bypass much of the requirements of the new laws test by filtering expenditure through the parent company or other arms of the business.
Almost 70% of the retail sector – or 6.7 million-member accounts holding $427 billion in assets – will likely be forever shielded from the crucial government performance benchmarks, which forces funds to tell members they were inferior.
Just 20% of the “Choice” sector will have to pass performance benchmarks, this is despite the Productivity Commission finding the sector was littered with dud for-profit products.
Among those currently out of the test are notorious cash-only investment products whose poor performance and fee gouging Banking Royal Commissioner Kenneth Hayne savaged in his final report.
The tests themselves have also been tilted in the for-profit sector favour by excluding administration fees.
These fees generate the most profit for the retail sector. If the government moved to a more logical net-return measurement a further $39 billion in retail assets would move to the underperforming pile and up to 1 million of their members would be told their product was lousy.
Industry Super Australia supports the policy intent of the government’s Your Future, Your Super but is concerned unless important improvements are made dud retail funds will be given a free ride and protection from competition, leaving members far worse off.
ISA supports sensible changes in members’ best interests including:
Ø Net return as a performance benchmark rather than net investment return
Ø Forced closures of chronically underperforming funds
Ø Making sure trustees justify all fees being in members best financial interests, especially those charged by related parties above a cost recovery basis and used to generate profits paid to shareholders
Ø Expanded coverage to mandate that all funds and products – including the Choice sector – must also pass the benchmark tests, with no carve outs
Ø Sequencing of reforms to ensure performance measures are implemented before stapling Australians to one fund for life.