Super reforms ‘a licence to go on fee gouging’, says ISA boss Bernie Dean

The $700bn industry fund sector has sharpened its attack on the Morrison government’s proposed superannuation legislation.

Industry Super Australia chief executive Bernie Dean: ‘It’s as if the carnage we saw at the royal commission never happened, and instead we’ve got the government letting the foxes into the henhouse.’ Picture: Kym Smith

The $700bn industry fund sector has sharpened its attack on the Morrison government’s proposed superannuation legislation, saying the changes would help its rivals in the retail sector skim up to $10bn a year in returns from fund members regardless of investment performance.

Industry Super Australia chief executive Bernie Dean said that instead of putting members’ interests first, the government was planning a feast for the banks and retail funds, enabling them to “dine out on workers’ savings”.

“The government is making countless dud retail super funds and investments immune from any meaningful performance tests, effectively giving some of the worst performing financial outfits in Australia a licence to go on fee gouging,” Mr Dean said.

“It’s as if the carnage we saw at the royal commission never happened, and instead we’ve got the government letting the foxes into the henhouse.

“No matter how lousy they are, these dud funds will be able to go on creaming $10bn in profit each year from members, without having to answer how it is in the members’ best financial interests.”

The $10bn figure comes from a 2019 Productivity Commission report on the efficiency and competitiveness of the super system, which found that there was 1.7 per cent unexplained underperformance in the retail sector each year, equal to $10bn.

Earlier this month, the government released draft legislation and explanatory material for its super reforms, with submissions due before December 24. The purpose of the reforms is to maximise the nation’s pool of $3 trillion in retirement savings by preventing the unintended creation of multiple accounts; making it easier to choose superior products; holding funds to account for underperformance and encouraging them to lower costs and fees; and improving transparency and accountability over the use of member funds.

Estimated savings over 10 years amount to $17.9bn.

ISA’s initial response to the draft legislation was relatively accommodating.

Since then, however, its attacks have strengthened, targeting key aspects of the package such as the requirement for fund expenditure to be in the “best financial interests” of members — a more stringent standard than the current “best interests” test.

As revealed in The Australian, ISA has also asserted that about half the system could be exempt from testing against key performance benchmarks.

The purpose of the tests is to expose funds which are serial underperformers, and prevent them from accepting new members if there’s a second consecutive strike. The problem, according to ISA, is that an estimated $881bn in retirement savings belonging to 8.4 million member accounts, or about 47 per cent of the APRA-regulated system, could be exempt from the performance benchmarks because of the way they’re structured.

The lobby group said on the weekend that its submission in response to the proposed laws would detail how the package favoured the for-profit sector.

Retail funds, it said, would not have to prove how billions of dollars in profit from related party payments was in the best financial interests of members. Performance benchmarks also excluded the for-profit sector’s “most excessive fees”, and its sub-par products were shielded from performance tests.

Finally, the industry funds would be tied down in costly red tape, and prohibited from using advertising to promote their “comparative outperformance” or warn members about changes which could erode their savings.

“Fees and profits are excluded from the revamped member best financial interest test, the fee gouging for unreasonable profit will continue unabated,” ISA said.

“The government instead wants to install a regulatory kill switch, which would allow it to prohibit any super fund investment or expenditure they do not approve of, even if in the best financial interest of members.

“Industry funds’ successful advertising and advocacy programs are a reported target of the proposed laws, despite the banking royal commission finding these programs were in the best financial interest of members as they warned workers about potential adverse government policy and helped connect Australians with a super fund that delivered better returns.”