Super switch will shrink number of funds in play

The compulsory switch of inactive super funds to the Tax Office will consolidate funds as the worst performers drop out.

AustralianSuper’s Ian Silk. Illustration: Johannes Leak

The compulsory switch of inactive super funds to the Australian Taxation Office due to take place from October should fast forward the consolidation of funds as the worst performers drop out, according to AustralianSuper boss Ian Silk.

Silk says there is more merger talk in the industry today than he can remember but just how much translates into action remains to be seen. Some would say he will be the net beneficiary being the ­industry’s biggest, with $154 billion under management, with a net $1.7bn in February alone.

But he plays down that talk.

A more pressing question for AustralianSuper may be succession planning given that Silk has run the fund for 13 years with Mark Delaney as chief investment officer. Both have clearly been top performers and neither has any plans to leave soon.

With 280 investment professions under Delaney, and 33 per cent of funds now managed internally, they argue when the time comes the replacement will be found in-house.

The same goes for Silk.

AustralianSuper is close to converting a 5 per cent stake in publicly listed Navitas to a 10 per cent stake in a BGH-led privatised ­vehicle.

Silk says the fund would prefer to work with management just as it works with the banks in its increasing debt arm, lending money to the likes of Dexus, Visy, Ramsay and AGL.

But, high valuations aside, with private equity approaching ideal conditions for public to private takeover deals, AustralianSuper is poised to make more direct investments.

Rainmaker figures show that around $135bn flows into the ­industry with the big funds having enjoyed the spoils with the top 20’s share increasing from 75 to 78 per cent over the past five years and the top five’s share constant at 33 per cent.

In a $2.7 trillion industry it takes a lot to shift the dial.

Still this year’s figures should show a dramatic change in the members of this group with AMP set to drop out, and, if there is truly competition in the market, then Hostplus with around $45bn under management should be the star mover given it has topped the performance rankings over the last year, three years and five years.

The Productivity Commission questioned the level of competition in part because the industry funds have a distribution system based on union awards and the retail funds historically have enjoyed fund flows as bank customers.

The royal commission turned the latter factor on its ear because the wealth sector was seen as host of many bank rorts and funds have flowed out of the sector into industry funds.

Silk maintains this is due in large part to superior performance and runs counter to any consumer fears of misclaimed political action from the industry funds.

AustralianSuper has increased funds under management from $21bn when it was created in 2006 to $154bn today, a 7.3-fold increase.

The PC wants to remove the nexus between the union awards and the funds in terms of default funds being nominated in awards, which makes sense — it’s just how this is achieved.

It wants a government panel to nominate the top 10 funds but arguably the market is already showcasing the best in show.

Silk wants account numbers to be cut by transferring default funds with you as you change jobs, whereas the PC wants your first default to stay with you for life.

AustralianSuper could lose as much as 10 per cent of its 2.3 million accounts under the ATO swap but if it was this large this would only affect funds under management by 1 per cent.

There are now 38 super funds and if all goes to plan and the trustees start doing their jobs by ­closing or transferring underperformers this will fall to around 30 over the next two years.

Political corrections

There is nothing like a visit to Canberra to help the big banks get their house in order.

Yesterday it was NAB banning its controversial introducer payments to encourage new mortgage loans, and last week it was ANZ formally ending commission payments for branch staff. Both practices attracted the ire of Hayne’s royal commission, and with ANZ and NAB scheduled to appear before the House Economics Committee tomorrow, what better time to make some politically correct changes.

Both practices fell under the problem of the bank potentially encouraging customers to take products they weren’t suited to which may get them into trouble.

Far better to have bank tellers on higher base pay than variable pay based on sales.

NAB would hope everyone who has dealt with it would recommend its services but that being the case there was no need to give these people a payment to thank them for the referral.

Royal commissioner Ken Hayne suggested the questions the banks should ask, including who are we paying, why, and in whose interest.

The loan referrers were a broad group including real estate agents and financial planners, neither of which satisfied the Hayne hurdles.

Both ANZ’s Shayne Elliott and NAB’s Phil Chronican may say their policy changes were going to happen and the parliamentary hearings were coincidental.

But for whatever reasons it’s good the banks are coming to their senses.

NAB is committed to 72 of the Hayne recommendations with mortgage broker commissions the main exclusion at this stage. The bank of course owns mortgage brokers so has a vested interest in the issue, and the more Chronican looks at the issue, the more he agrees with the government’s backflip on the issue of trailing commissions.

Trail commissions were the clever idea of the big banks to tie the lender to the originating bank.

Treasurer Josh Frydenberg showed his colours last week by rejecting recommendations to stop self-managed super funds borrowing for property.

Frydenberg doesn’t want to upset the retiree sector heading into an election so, once again, rational policy has taken a backward step in the chase for votes.

Loan conversion woes

Reality dawned on the bourse yesterday with the 1.2 per cent fall in prices reflecting a market which had run too hard.

The S&P 200 index rallied 15.9 per cent from its December lows to a high last week of 6270 points and has fallen some 2 per cent since, with more to come.

The market is now up 8.4 per cent year to date which compares with the US S&P 500 up some 11.7 per cent heading into last night’s trade.

This mirrors offshore trading where prices had rallied some 18 per cent on average and 21 per cent in the US.

In short it’s not time to get worried yet, but if you are looking for something to worry about then as banks move more people across from principal-only loans to principal and interest their cost of debt increases on average by about $6000.

Figures from John Mott at UBS show the switch from 2015 to 2021 will mean an extra $120bn a year will be spent on mortgages.

That is only a fraction of total consumer spending but it is a fair chunk of discretionary spending going from air travel and restaurants to banks.

The loans converting are now dating from 2015 which was closer to the peak in the housing market, which means the wealth effect kicks in even harder