Industry super funds: a call for greater accountability and transparency

By September 18, 2017Financial Planning

Industry super funds

 

Many people invest their super with industry super funds because they feel its the best (low cost, good returns) and simplest option. I agree that industry funds are almost always a better option than retail (bank owned such as Colonial, BT, AMP, MLC, OnePath, etc.) funds and often better than SMSF’s too. However, I have some concerns with industry super funds that warrant your consideration. In fact, I think these concerns make industry funds a lot less attractive than what they might first appear – particularly if you have a high balance (i.e. more than $100k to $200k).

Using AustralianSuper’s ‘balanced’ option as an example

AustralianSuper is the largest industry super fund in Australia managing nearly $120 billion on behalf of its 2.2 million members (UniSuper is a distant second managing $60 billion). I have selected its ‘balanced’ investment option for the purposes of this blog.

AustralianSuper benchmarks its ‘balanced’ option investment returns against the “SR50 Balanced (60-70) Index” which is provided by SuperRatings, an independent research firm. This benchmark provides the median (mid-point) return from the largest 50 super funds under review by SuperRatings that have between 60% and 70% of its assets invested in growth-style investments. In my opinion, this is a weak benchmark and is chosen more for marketing purposes rather than creating financial accountability.

AustralianSuper (and other industry super funds) has invested a reasonable amount of members’ monies (circa 15% in the balanced option) in various unlisted private equity and infrastructure investments (which are important asset classes to have some exposure to in a well-diversified portfolio). Unlisted investments lack a great deal of transparency and their investment performance almost entirely depends on astute asset selection (i.e. ‘picking’ the right investment). The rumour in financial circles is that some of these investments have done poorly. Given this, it’s even more important to have a higher level of accountability through having tighter and more meaningful benchmarks. That is, benchmarks which better reflect the types of assets they are investing in (including their risks and volatility).

It’s a peer-to-peer benchmark

The aforementioned benchmark provided by SuperRatings is more of a peer-to-peer benchmark rather than an investment performance benchmark. It allows you to compare AustralianSuper’s performance to other super funds. However, what it doesn’t reflect is AustralianSuper’s performance compared to the market. What if all industry funds are doing poorly compared to the market? After all, as a super investor, you are paying AustralianSuper to invest your money to achieve a better return than you could achieve on your own. The ‘market’ return is available to anyone and everyone (via low cost index funds). AustralianSuper charges its members 0.57% p.a. in investment fees – which is twice as much than a well-diversified index portfolio would cost. So, it makes sense to ensure you are getting something for paying double the fees, right? If you are paying higher fees then it is reasonable for you to expect higher returns.

Opaque and little accountability

Sometime ago I asked myself the question “how do the industry super funds’ investment performance compare to the index?” (and maybe more people should be asking these questions). I set about trying to undertake this comparison and it was a difficult task to complete because of the lack of publicly available information and very limited information available from the research houses.

AustralianSuper doesn’t publish its historic asset allocations (i.e. where and how they have invested). The only publicly available historical information is the asset allocation contained in its annual report. But it only began publishing that in the financial year ended June 2013. Therefore, it is impossible to benchmark returns before this date.

Here’s what I have found

The table below sets out AustralianSuper’s balanced option returns compared to the benchmark indices that I have selected (click here for a listing of the indexes I have used).

Financial years

Last 1 year

Last 3 years

Last 5 years

AustralianSuper

12.44%

9.23%

11.41%

Index benchmarks

10.60%

8.65%

12.87%

Difference

1.84%

0.58%

(1.46%)

You will note that AustralianSuper has done better in the shorter term but failed to beat the index over the longer term. That said, even 5 years is a too short time frame. I would prefer to rely on data from a longer time period i.e. 10 to 20 years. This performance is consistent with what the studies show us (see here). That is, that some active fund managers can beat the market one or maybe two years in a row but typically fail to do so consistently over the long run. My guess is that AustralianSuper’s performance over a longer period is just as bad or worse than over 5 years.

A 1.46% p.a. differential in investment returns might not seem like a lot. However, if the differential persists, it will mount up. For example, the difference between a return of 7.50% p.a. and 8.96% p.a. (being 1.46% p.a. higher) on a super balance of $150,000 is projected to be just short of $200,000 or 31% after 20 years (i.e. projected balance of $637,000 versus $835,000 in 20 years).

Whilst my assessment is ‘high level’, the underlying thesis is likely to be correct

I acknowledge that there are a couple of inherent weaknesses with my analysis above. Firstly, as I have already noted, the time period is short. Secondly, the indexes chosen are the “best fit” but may not be perfect. If I had more information about the underlying assets, I may have been able to choose more appropriate indexes. Thirdly, the asset allocation would have changed throughout the year and this would have an impact on the numbers. However, I have done the best with the limited amount of information available to AustralianSuper’s 2.2 million members.

Whilst these inherent weaknesses might change the benchmark returns, I doubt any difference would be material. I would certainly encourage AustralianSuper to publish a comparison to the market (indexes) and I’d be happy to stand corrected.

Pick up your game industry funds

No doubt you have seen the industry super funds advertising on T.V. which use the tag line “banks aren’t super” (see http://www.banksarentsuper.com/). The message behind the adverting is that bank-owned retail super funds are expensive (over-priced) – which is correct – I have no argument there. However, industry super funds are far from perfect themselves! In my opinion, they need to improve in 3 ways:

  • Transparency – it’s our money and we deserve to know where it’s being invested. If a bad investment is made, we deserve to hear about it. Because if you keep making poor investments, we have the right to take our business elsewhere. I referred to rumours above but, as an independent advisor, I can’t draw conclusions from rumours. I would prefer the industry funds to work closely with independent advisors to provide regular briefings.
  • Accountability – industry super funds (in fact, all super funds) should have to compare their returns to a relevant (composite) market indices. If a super fund is going to charge higher fees (compared to an index fund) then someone needs to hold them accountable for achieving higher investment returns (net of fees). At the moment, it’s impossible to tell.
  • Investment cost & fees – industry super funds are cheap compared to retail super funds, many self-managed super funds and other options. However, are they as “cheap” as they can be? Just because a business is not-for-profit does not mean they are efficient. Given the scale of many industry super funds (AustralianSuper in particular), surely, they should be able to deliver their service for a significantly lower cost? Industry funds seem to rest on the fact that they are lower cost (and better returns) alternatives than retail funds and SMSF – which they are – but are they doing their best to be the absolute lowest cost?

An industry with so much scale should be able to do much better!

Very few businesses and industries openly welcome increased accountability and transparency and I suspect the industry super funds will be no different. And it is hard to see how increased accountability and transparency will be forced upon industry super funds. The government could do something although that’s unlikely (as they are having enough trouble trying to pull the banks into line). Retail super funds could create some price competition which is happening a bit but it’s unlikely to result in massive change. Or it could be a member-lead change i.e. if super members read blogs like this and demand improvement – although that is unlikely too as most super investors are quite apathetic about super.

For the reasons discussed above, I have some concerns with industry super funds. If in the future, accountability and transparency improves – meaning they benchmark their returns to market and the demonstrate that they do not under-perform the market over long periods of time, I think they could be a good solution for my clients.

Until that time, I will continue to direct my clients’ super into alternative solutions that are low-cost, very transparent with full accountability i.e. benchmarking of returns. It’s your retirement savings and you deserve it to work as hard for you as you did for it.  Unlike with many things, when it comes to superannuation, paying more does not get you more – it gets you less, often a lot less (see here for the impact fees have).

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Disclosure: ProSolution is a pure fee-for-service financial advisory practice. We do not have any vested interest in where our clients’ super is invested (i.e. we do not accept any investment commissions, fees, etc. from any super platforms, investment mangers or providers). We also do not charge percentage-based fees. We charge a fixed (flat) fee for our advisory service which preserves our independence.