'They should be accountable': Labor legend tells Shorten to face up to Industry Super

One of the architects of compulsory superannuation and a former secretary of the Australian Council of Trade Unions has told Labor leader Bill Shorten to stand up to Industry Super funds, warning the alternative prime minister he had a duty to protect workers' savings over the vested interests of "loud underperformers".

Bill Kelty, the author of the accord between trade unions and the Hawke-Keating Labor governments, said it was time for Mr Shorten to approach the $2.8 trillion sector's powerful Industry lobby honestly.

"If it offends a few people that is fine," he said. "I don't think loudness is a substitute for reason. It is people's money, they should be accountable."

Bill Kelty and Paul Keating in 1996.Credit:

In comments that will rattle union and business board appointees of underperforming funds, Mr Kelty's intervention was backed by Industry Super chair and former Labor government minister Greg Combet.

"I might not be using Bill's language but what we are saying is the same," he said. "It cannot be justified that you put people into chronically underperforming funds, industry or retail, we have to start to weed them out."

Mr Combet said the Australian Prudential Regulation Authority should crack down on underperformers, forcing them to merge or transfer their members, while the Fair Work Commission should be bolstered with a quality filter to stop poor performing funds from becoming defaults.

Industry Super Australia chairman Greg Combet. Credit: Louie Douvis

Mr Combet's nod paves the way for Mr Shorten and shadow treasurer Chris Bowen to aggressively target the sector after years of Coalition allegations that they have been protecting Labor's union roots. Many former Labor MPs including Mr Combet and former Victorian Labor premiers Steve Bracks and John Brumby have gone on to lucrative roles in the industry.

"It doesn't matter how loud you are, if you tell people that they are in a super fund that is 2 per cent behind every year, that is 20 per cent over a decade," said Mr Kelty.

"If you continuously underperform, you should not have a licence and you really should ask yourself why you continue to exist."

Union-backed Industry Super funds outperform their retail counterparts overall, but some smaller funds continue to generate lower returns, costing a new worker up to $500,000 by the time they retire in a worst case scenario modelled by the Productivity Commission.

Despite the disparity, the Productivity Commission's key recommendation from its three-year review, a "best in show" top 10 list of superannuation funds, was thrashed by both Mr Combet and Mr Kelty.

"It is a high-school project result," said Mr Kelty, a former Reserve Bank board member. "It would be more suitable for cats and dogs competing at the royal agricultural show."

He said the real issues in the sector would not be addressed by deciding a top 10, but by eliminating the bottom 10, which he accused of fleecing members through fees and insurance.

"If you are investing in bonds and the stockmarket and charging 1.5 per cent for doing a task which should cost f--- all - then you are getting too much," he said.

Selecting the top 10, a move which has been warmed to by the Coalition but faces resistance under Labor, would jeopardise high-performing funds that fall just outside it and create a herd investment mentality, Mr Kelty said.

"It's like saying only take the 10 fastest runners for the 100 metres," he said. "The only people that can compete are the top 10 runners and Usain Bolt comes along and he's not in the top 10, but you've missed him for that year or four years."

Asked about the option of a top 10 list of superannuation funds, Mr Combet said those who miss out would be "just left to die on the vine."

"Everyone will be geared to doing whatever they have to do to be in the top 10, whether that is an absurd amount of marketing or investing in a loss leading product," he said.

Darren Stevens, Mercer's head of corporate superannuation, warned a top 10 list would create a copy-cat investment situation, where funds mimic the assets of the leading funds, overexposing millions of Australians to particular investment classes such as shares or property.

"That will expose large portions of our members and industry to the same investment cycles. You might end up with a [global financial crisis] that you can't predict or a 'black swan event' that could adversely affect a large number of Australians," he said.

Provided figures show billions of dollars in members' assets would have been wiped off if all funds had followed the lead of MTAA Super, which raced up the SuperRatings tables at 15 per cent per annum in the five years leading up to the global financial crisis before tanking.

The fund and its 280,000 members invested heavily in infrastructure and commercial property which took a battering after the GFC. According to the SuperRatings data it has since climbed back to the top 10 in the last five years, with an 8.1 per cent annual return.

Mr Stevens, a former finance executive at ING bank, denied the industry was rife with wrongdoing.

"It's bit like the royal commission. When you look into misconduct. What do you find? Misconduct," he said.

It is understood the Morrison government is also canvassing whether to empower the government-run Future Fund to run a default superannuation scheme that would compete with  industry and retail players.

The move, first flagged by former treasurer Peter Costello, has the backing of Mr Kelty, but was not examined by the Productivity Commission in its final report.

"The Future Fund is a better solution, I don't know why they ruled it out," he said.