Is the super funds’ customer ‘reward’ ethically fair?

Federal Assistant Treasurer Stephen Jones has put the superannuation industry on notice. Picture: Blair Jackson

Big super funds are suddenly under the gun as it becomes clear that they are wielding enormous power:

We are told that the funds are “on notice” from government over how they manage themselves. Well, someone should take a look at what are called “balance boosters” where funds reward some people, some of the time, with the equivalent of a cash prize.

Here’s how it generally works:

If you are in a fund and you get to the point of retirement then you are about to move into a tax-free phase. In that phase most people don’t have to pay tax, including capital gains tax. But some funds have a booster or bonus, where the fund has – on your behalf – “saved” up a nest egg for you, if you leave the fund and get hit with CGT.

However, if you stay and retire with the same fund that nest egg needs not be paid over to the tax office, so instead you get “rewarded” with a bonus payment.

It sounds great. The everyday investor is told there are a few thousand dollars waiting for them as a bonus.

But here’s the catch; if you leave the fund (let’s say to start a self managed super fund) you don’t get it!

It is reasonable to expect that (a) Most savers are delighted to hear they have a few thousand dollars waiting for them if they stay with the fund, and (b) Most savers would consider it daft to exit a fund and leave a few thousand dollars on the table.

It’s all very clever and perhaps too clever by half – and the practice raises a lot of questions. Is this a way to retain members by stealth? Is this in the best interest of all members?

What if the investor preferred to maximise their final return, couldn’t the nest egg money be used earlier? These booster arrangements were invented by fund managers and it is not a legal requirement.

And how about this? You only have to be in a fund for a very short time to qualify for the bonus payment. As a top financial adviser says: “A millionaire could put $1.9m into a fund and 12 months later receive a substantial bonus payment thanks to the collective largesse of the super fund.”

So a member who has been there for 30 years and the opportunist who has been with the fund for a year could both get a “bonus”. Is that in the best interests of all members?

Since industry funds now dominate the super sector, this is very much an issue for them – although some retail funds apparently have their version of the scheme as well.

The big money is in the big funds such as Australian Super and ART, which both promote a bonus payment product. In fact at ART we know it has paid out $65m.

If the funds want to know what people think about these schemes, we got an insight into the wider response at the Money Puzzle podcast where listeners wrote in a range of questions.

Here’s a sample and these queries are republished verbatim:

Luke:“So this product feature of super funds holding on to 0.5 per cent per annum up to a total of like $9000, or whatever, mentioned in your previous show sounds crooked.”

Philip: “I was a bit confused about the discussion on the ‘product feature’ of ART’s funds. Apparently holding over 0.5 per cent for CGT which is then paid back on retirement (unless you leave). I’m sure I misunderstood, but it sounded more like a hidden fee/a ransom.”

Christine:“Does this mean that if I am in a super product which has this feature, my fund is actually withholding some funds from my contributions? Is this something I should be able to request be stopped so that all of my super funds are invested now?”

David:“I personally would far rather have lower admin fees. Also, it does raise the question about why industry funds are effectively permitted to move funds between account holders.”

Clint:“Is the retirement ‘bonus’ just recognising that if you went to another fund they would have to pay CGT on the sale which they withhold from you when you leave, but as you didn’t you get to keep the tax they were accruing that didn’t need to be paid? However, they are all limiting the ‘bonus’ to under $10k. The fact they are doing that means others with smaller balances in the fund must be getting a benefit from others. The lack of transparency does make me want to go the SMSF route.”

As you can see, investors are baffled about how all this works. Some are concerned that small investors are getting the better of bigger investors in the funds. At the same time, financial advisers suggest wealthier investors could get the benefit of smaller investors with low balances.

One thing we know for sure is that these payments act as a lure to stay with the fund that is offering them.

Both AustralianSuper and ART have responded to these questions with reference to “what’s on the website” or routine descriptions of how the payments work.

Earlier this week, the Australian Securities and Investments Commission said that is was ready to launch “strong, targeted enforcement action to force better performance from funds on customer service”.

At the same time, federal Assistant Treasurer Stephen Jones said: “I spend the last year putting funds on notice; I won’t spend the next year doing exactly the same thing.”

The bonus payment game at the big super funds is a prime example of another unanswered question that arises from a lack of transparency.

At the very least there is widespread confusion. At worst there is a risk that all members inside funds are not being treated equally.

This has been a sleeper issue and the powers that be should have a look.