Closing the superannuation gap

RETAIL superannuation funds look like closing the performance gap on their not-for-profit rivals, an industry expert says.

Piggy bank

Closing the superannuation gap

RETAIL superannuation funds look like closing the performance gap on their not-for-profit rivals.

The not-for-profits have consistently performed better, by as much as two or three percentage points a year, according to the latest research from industry regulator the Australian Prudential Regulatory Authority.

Over a working life, that margin could add tens of thousands of dollars to an individual's final payout or pension.

Warren Chant from research firm Chant West said there were two main reasons for the better performance of not-for-profits.

"In the last five to seven years, the not-for-profits were not heavily into international shares but did invest in Australian property," Mr Chant said.

"International shares did poorly and Australian property did very well so that was a good call.

"Second, over a longer period the not-for-profits have been more willing to invest in alternative assets such as infrastructure and hedge funds and those products have performed very well for them."

Those two factors were changing, he said.

International shares are performing more in line with other investment markets and the retail sector has become more inclined to invest in alternatives.

"The performance gap is narrowing," Mr Chant said.

"Retail funds, which traditionally have been focused on liquid assets like shares, are moving into some of these other investment classes."

Those who run the not-for-profit funds disagree with the analysis. They say there are structural reasons they have performed better and argue that the "profit motive" of retail funds is hampering their performance.

"The representative trustee system – with its emphasis on independence, diversity of trustee directors and their mission to deliver all profits back to members – is paying off," said Fiona Reynolds, chief executive of the Australian Institute of Superannuation Trustees.

Backing Mr Chant's prediction is Michael Rice of Rice Warner Actuaries, who says it is a very big call to claim that there are structural reasons for the gap and he expects it to narrow.

Not-for-profit funds are generally run by a board of representatives of employees and employers.

The not-for-profit sector includes the 73 industry funds worth $204 billion, 40 public-sector super funds worth $181 billion and 258 corporate (one company) funds worth $69 billion.

Last week APRA released research backing the claims of not-for-profits.

"APRA data collection since 1996 suggests systemic differences in investment returns," APRA deputy chair Ross Jones told an industry forum in Melbourne.

Most controversially, Mr Jones suggested that "the profit motive may diminish the alignment of interests between a fund and its beneficiaries".

That means people running the commercial super funds are placing the shareholders' interests above those of the members of the fund.

Certainly, the board members of retail funds are far less likely to invest their own money in the fund they are running than are the board members of the not-for-profit funds.

The not-for-profits compete with 70 retail master trust super funds, which are owned by the banks and other financial institutions and are run to make profits for shareholders.

At present, the retail sector has about $377 billion in funds under management.

The other big segment in the super industry is self-managed super, which is growing rapidly and has about $300 billion in 372,000 funds.