Are the scandals sweeping big super a signal to switch funds?

Big super has delivered some significant dirt of late but if you think leaping from one scandal-plagued fund to one untarnished so far will protect you, think again.

ASIC deputy chair Sarah Court. Picture: John Feder

Industry super funds are under the gun and it took a spectacular failing at Cbus with its death benefits fiasco to open the floodgates.

The question now for investors is how bad will it get?

The deputy chair of consumer regulator ASIC, Sarah Court, spelled it out this week. “We think this it is a broader issue; there will be more enforcement actions early in the new year,” she said.

Certainly, the Cbus scandal, of which the regulator has alleged the fund actively delayed at least $20m death benefits and disability payments, is unprecedented among the soc-called “big super”.

There is every reason to believe there are more horror stories to come.

For now, Cbus is just the most obvious cock-up so far. Don’t forget there was the outage at Unisuper whereby fund members could not even see their accounts for days.

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Then there was the incident at the second biggest super fund in Australia – ART – during which pensioners had payments delayed and the fund only publicly apologised after customers exposed it in the media.

Put together, these incidents spell a mounting crisis for industry funds. Chatrooms and investor forums such as our podcast at themoneypuzzle@the Australian.com.au are being peppered daily with complaints about funds behaving badly.

Investors protest on these channels because the existing system – for all its layers of regulation – is not serving them sufficiently. In fact, there is no single regulator in charge of super and that is now clearly emerging a key problem.

For investors the issue is cut and dried; If your fund is letting people down with delays or any other bureaucratic bungling then can you still have confidence the fund’s investment division will be unaffected?

And while we’re asking, if a fund has a woeful record when it comes to running its back office what will it be like when it expands the role into financial advice? (The government is supposedly moving to sign off a new deal on this before the end of the year.)

Unfortunately, it’s very difficult to assess the condition of any big industry fund, independent of the politics which surround them.

Many funds are tied to unions and the unions are tied to the government. At its worst, Wayne Swan is the chair of Cbus; Swan is also the national president of the ALP and the ALP is in power.

At Cbus there are also parallel investigations by the prudential regulator APRA into “questionable expenses” and links with the CFMEU.

The impossibility of assessing the industry funds without assessing the political backdrop is shown beyond doubt in the recent Morningstar ratings report on Cbus – which came out before ASIC launched its court case.

In downgrading its “parent view” of Cbus from average to below average, global ratings agency Morningstar did not beat around the bush. “Our concerns extend to the appropriateness of union affiliates sitting on Cbus investment committees. This outweighs positive steps Cbus had made to translate its growing scale into lower investment fees,” it said.

Cbus chairman and ALP national president Wayne Swan. Picture: Dan Peled

Put simply, the rating agency is making the point any rational investor would make here. The day has come to professionalise big super.

What’s more, these are enormous funds. Cbus is valued at $94bn, ART is $300bn and UniSuper is at $139bn. They can’t carry on as they did back in the day when super was a marginal activity for a small number of people.

Management quality, corporate governance and execution risk are all combining to strain the capacity of top funds.

Just recently the Australian Financial Complaints Authority (AFCA) released its report on super funds. In reporting on the nature of complaints across the sector, the latest report shows that “claims handling” is the biggest problem in the super by some distance. Cbus just happens to be the fund which stepped on a landmine.

Worse still, when Cbus chief executive Kristian Fok went to explain it all to a Senate committee this week, he poured blame on Link – the group the fund hired to outsource its operations – as if that in any way made anyone feel better.

Needless to say, Cbus features strongly in the complaints tables at AFCA. But so do other big names Australia Super, Aware Super, HESTA and ART alongside for-profit operators such as Mercer and AMP.

The point here is that unless you step out altogether and run your own self managed super fund, then switching super fund because your fund has let you down in the back office is most likely a loser’s game. Many big names are in trouble already and the list is yet to be completed by ASIC.

At the same time, when it comes to investment performance over the long term, the annualised 10-year figures from major funds regularly dovetail close to the 8 per cent mark. The discrepancy between the investment performance of the biggest funds over a 10-year period is not enough to trigger widespread switching.

But that may change.

If the next phase of the super scandal is anything like the bank scandals of a decade ago the most likely outcome is that they will be regulated more severely. More regulation will lead to higher fees and lower profits at all of the big industry funds.

The only thing we can say for sure is that this cluster of “big super” scandals means the salad days for this sector are over.

James Kirby hosts the twice-weekly Money Puzzle podcast

Originally published as Are the scandals sweeping big super a signal to switch funds?