Fees, costs and conflicts of interest: super funds compelled to reveal all

The financial services royal commission has compelled super­annuation funds to reveal their entire fee and cost structures.

Ian Silk, the head of the $140 billion AustralianSuper fund, will be the most senior chief executive witness in the two-week hearing into misconduct and poor governance in the retail and not-for-profit super sectors. Picture: Stuart McEvoy

The financial services royal commission has compelled super­annuation funds to reveal their entire fee and cost structures for the first time, as well as detailing the appointment criteria for ­directors, ahead of an expected bruising two-week examination of the sector.

A “witness outline’’ obtained by The Australian, ahead of hearings on the super sector beginning today, shows major funds have been delivered a seven-page list of questions that will force them to divulge conflicts of interest, internal ownership structures, commissions and what steps under­performing funds have taken to lift their returns over the past five years.

The demand for five years worth of fees and ­expenses, ­reasons for any changes in ­charging levels, and what ­services fund members receive in return, will give the royal commission ­access to the most comprehensive data on the $2.6 trillion industry ever compiled and comes as bank-­controlled retail funds face ­criticism for charging high fees and delivering low ­returns.

The inquiry questions also show the commission is probing the role of directors at a time when links between industry funds and union and employer groups have drawn criticism that some ­directors lack independence.

The ­inquiry has sought information on commissions between the funds and any financial planning or wealth management entities, including percentages paid and which person incurs the cost of the payment. It also seeks ­details on trailing commissions “and the ­circum­stances in which those commissions are charged’’.

It demanded details of the number of fund members paying fees to financial advisers employed by, or who are authorised representatives of, the fund’s registered licensee.

It seeks all contractual ­arrange­ments between the registered ­licensee, the fund or employer sponsor and any financial ­planning or wealth management businesses or other third party, the percentage paid and who ulti­mately foots the bill.

The commission’s powers to compel the production of ­information means that it will ­likely hold more comprehensive data on the financial performance of funds and their fee structures than the regulator, the Australian ­Prudential Regulation Authority and the Productivity Commission.

Releasing a highly critical ­interim report into the super ­industry in May, the Productivity Commission cited gaps in the APRA data and complained that only half of super funds chose to participate in surveys gathering data for its inquiry.

Last week, commissioner Kenneth Hayne criticised wealth ­manager IOOF over an “ill-based’’ attempt to not hand over board packs and other documents of ­subsidiary Questor Financial ­Services. Mr Hayne rejected the claim and warned the super funds to comply with directions from the royal commission.

“Prompt and proper compliance with notices to produce is required by law and is essential to the proper execution of the commission’s work,” he said. “Delays of the kind that have occurred in this case impede the proper work of the commission.”

An investigation by The Australian hasrevealed widespread gouging by the big four banks, such as paying fund members returns on cash investments as low as one-quarter of market rates.

Audited performance data provided to the APRA by Westpac, NAB, CBA, ANZ, AMP and IOOF shows that the biggest super funds operated by each of those institutions — comprising five million member accounts — delivered average annual returns to members of between 2.1 per cent and 3.1 per cent over the ­decade to June 30 last year. Those returns were roughly half the market rate for the types of investments those funds had actually made, roughly half the returns achieved by the major so-called “industry” funds such as AustralianSuper, and roughly half the returns of the super funds ANZ, CBA and NAB run for their own staff.

Ahead of today’s hearings, 26 groups have been granted leave to appear before the royal commission, including AMP, ANZ Bank, APRA, ASIC, AustralianSuper, the Commonwealth Bank, NAB, Westpac, IOOF and consumer group Choice.

Ian Silk, the head of the $140 billion AustralianSuper fund, will be the most senior chief executive witness in the two-week hearing into misconduct and poor governance in the retail and not-for-profit super sectors.

The practices of seven retail funds and the same number of industry funds will be probed in the commission’s fifth round of hearings. Funds have received demands to reveal all fees they have charged members over the past five years, including indirect costs and what services its fund members received in return.

These include details of five years of fees covering administration, investment, advice, insurance, switching, activity, exit, contribution and any other fees charged to a member’s account.

The commission has asked for five years of indirect costs which were not charged against a member’s account but “which were known or ought reasonably to have been known to have reduced a member’s return’’, including amounts paid or retained by investment or fund managers.

Funds have been asked to summarise what types of services were provided in respect of each of the identified fees or costs. They have also been required to detail five years of profits, expenses and rates of return for one-year, five-year and 10-year periods for their six largest investment options as well as the default MySuper options. Funds face a grilling on sensitive issues such as how directors are appointed, their qualifications and any external or internal assessments of their performance.

The commission has sought internal and external assessments of board performance and that of individual directors.

Directors’ cash salary, fees, profit-sharing arrangements and non-monetary benefits will also be disclosed.

The commission has sought information on any other positions that are held by directors, including with related parties and any shareholdings held by directors in wealth management and financial planning entities. It has called for details of conflicts of interests of directors and documentary evidence of how these are managed.

The commission has sought detailed information on fund administration expenses, including marketing expenses such as meals, entertainment, brand development, sponsorship, advertising, consultancies, motor vehicles and training seminars and conferences. It seeks a full breakdown of marketing expenses, how marketing expenses are approved and who has authority to approve these expenses. It also seeks an explanation as to how these expenses are in the best interests of fund members.