Default super: industry and retail funds’ battle hots up

The dispute between union-dominated industry super funds and the banks-backed retail funds is hotting up.

Industry funds got more than $30 billion in default flows last year, 50pc more than retail funds.

The highly charged dispute between union-dominated industry superannuation funds and the bank-backed retail funds is hotting up as the Productivity Commission looks at cracking open default super options to increased competition from retail funds.

Documents circulating between senior levels of the industry fund network, obtained by The Australian, reveal the tactics of a public relations battle being waged for billions of dollars in future super contributions.

The “cheat sheet” detailing more than 100 compliance problems at the big four banks and Macquarie Group over the past six years is helping to provide a quick reference guide for those in industry funds arguing against handing default super over to retail funds.

Similar documents are reportedly circulating between Labor MPs ahead of this week’s parliamentary inquiry into banking.

This comes after former banker and financial system inquiry head David Murray recently argued that the Labor Party was agitating for a banking royal commission to promote the interests of industry super funds over the retail wealth management industry.

At stake are the rivers of gold flowing into default industry and retail super funds, worth more than $70 billion a year and growing fast, through a system known as MySuper.

Data from the prudential regulator shows industry funds receive the lion’s share of employer contributions — a proxy for the amount of default super flows. But a Productivity Commission review is looking at the possibility of breaking open the existing default super rules, which currently benefits industry funds.

Around 80 per cent of workers accept their employer’s preferred fund, which are often brokered through enterprise bargaining agreements. Industry funds received more than $30bn in default flows last financial year — 50 per cent more than retail funds, which garnered $21bn.

When workers contribute of their own accord, retail funds receive much more than industry funds — $12.4bn last year compared with $5.3bn for industry funds. However, retail fund members are, on average, wealthier than their industry counterparts.

The Productivity Commission’s discussion paper for the review into a tender system for default superannuation funds, released last month, has reignited the public rivalry between industry and retail funds.

It has also brought into focus the Fair Work Commission’s expert panel that was tasked with allocating default super flows. The panel has idling since the Financial Services Council won a 2014 court case to dismiss the Bill Shorten-appointed group of experts on the basis it was not independent.

Michaelia Cash. Picture: AAP

Minister for Employment Michaelia Cash has the power to appoint new panel members. Industry and not-for-profit funds have called for the default selection process to be restarted, but the government has declined to move.

The Financial Services Council, which represents the retail funds, has campaigned strongly against the default fund process and wants to open up consumer choice for default super.

“The Fair Work Commission process has for decades prevented half the superannuation funds in the country from competing for $9bn of consumers’ retirement savings every year,” FSC chief executive Sally Loan told The Australian.

“The Fair Work Commission is an industrial tribunal and has no place choosing financial products for consumers,” she added.

But senior industry fund executives believe the banks are worried they will not benefit from a “quality filter” applied by the Fair Work Commission, as retail funds generally underperform their industry fund rivals. Over the past 10 years, industry funds have delivered an extra 2.2 per cent in annual returns each year compared to retail funds over the last decade.

Retail funds argue that administration fees charged by industry funds are far higher — at an average of 31 basis points above the average of 1.1 per cent.

Former ACTU assistant secretary and Host-Plus director Tim Lyons said these figures weren’t comparing apples with apples. Low fees in retail funds were achieved by creating low-maintenance indexed funds under the MySuper regime that were largely passive and continually underperforming, he said.

“Their performance is shithouse,” Mr Lyons said.

“What they’ve done is dumbed it down: instead of paying for active management where you can get an advantage in unlisted assets — where you pay for actual expertise in infrastructure and direct property — they’ve indexed the bloody lot to reduce the fees.”

Mr Lyons said fees in industry-run active management funds were historically lower than similar run actively managed retail-owned funds. He added that retail funds would often “run their own money” within their vertically integrated organisations, meaning there was little incentive to reduce the fees from the trustee.

The vertical integration model has been a key plank of Opposition Leader Bill Shorten’s attacks on the financial services sector.

Senior industry fund sources say related party transactions within the retail sector lead to above-market charges on super fund purchases such as insurance.

“The reality is that the unions it employs as trustees drives the governance and the culture of these institutions, which is driving better returns. Over in the banks, the governance and the culture of their institutions are driving scandal after scandal on a daily basis,” a senior industry fund source said.