New research shows member focused super funds the wrong target for governance reforms

Posted: Tuesday 01 December, 2015

New research estimating the cost of related party transactions in Australia's retail and bank owned super
sector suggests their members have been gouged by as much as $7.0 billion over the last decade in related party deals struck well above market rates.

“This research demonstrates governance legislation before the Senate is focused on the wrong target. The legislation targets the best performing, most trusted part of the finance sector and actually lowers the standards for the lesser performing and less trusted part of the sector,” said ISA Chief Executive David Whiteley.

Mr. Whiteley released ISA research which, building on APRA research from 2010 and 2012, estimates the
cost of retail and bank-owned super funds paying above market rates to their own in-house suppliers for
super fund services.

These payments are estimated by ISA to have cost members of bank-owned super funds $774 million a year since 2006 or $7.0 billion from 2006 to 2014.

“The APRA research suggests that banks are boosting other parts their business by paying above market
rates for superannuation services. This appears to be coming at the expense of the banks’ own super fund members,” said ISA Chief Executive David Whiteley.

“The extent of the related party deals exposes the key governance challenge within superannuation. There is an inherent conflict faced by the for-profit sector which must reconcile the competing interests of fund members and shareholders.

The persistent underperformance of these funds reveals it is members who are losing out.

Using APRA analysis published in 2010 which compared the prices paid to independent suppliers and related party (in-house) suppliers by for-profit retail funds and by not-for-profit super funds, Industry Super Australia has updated the ongoing costs through to 2014.

While all funds outsource administration, asset consulting and fund management services to both in-house and independent or external suppliers, APRA found that only the retail sector paid above market rates for inhouse services.

Where banks used independent suppliers, the APRA data found no statistically significant difference in the cost.

The ISA analysis takes into account the impact of foregone investment due to the leakage caused by overcharging relative to market rates.

“This latest analysis is more evidence of the conflicted nature of the bank-owned super funds and their vertically-integrated business model, which is eating into the retirement savings of millions of Australians,” said Mr Whiteley.

“This is the key issue which the Parliament should be debating. Instead, the Bill currently before the Parliament seeks to narrowly target the governance of industry super funds and their successful representative trustee boards that guard against many of the practices endemic in the finance sector.”

Further information please call Phil Davey 0414 867 188