Superannuation at the crossroads
Posted: Tuesday 17 January, 2017
25 years on from the introduction of the Super Guarantee Australia’s superannuation system is at a crossroads. It either matures into a world-leading retirement income system, or drifts further into the clutches of the banks.
The very best private superannuation systems in the world are in the Netherlands and Denmark. Their systems have two essential features. First they employ a mutual model where funds are run on a not-for-profit basis only of the benefit of members with the involvement of employers and unions. Second, funds are provided as a workplace entitlement offered at the industry or multi-industry level through wholesale rather than retail structures to minimise costs to actually leverage the scale a mandated savings system provides. The long-term average net performance of funds in these countries materially exceeds the OECD average.
Here in Australia, industry super funds share these characteristics. They are jointly governed by employers and unions, they operate on a not-for-profit basis, have low-cost workplace distribution and they have long-term average net performance that is substantially better than their finance sector competitors, and the OECD average.
Rather than use public policy levers to improve the super system, the banks and some policy makers for commercial reasons or ideological reasons (or both), want to see superannuation become just another financial product, and remove its links to employment and industrial relations and dismantle its governance. This is misguided and narrow-minded.
Superannuation is clearly a workplace entitlement, with the Superannuation Guarantee based on wages. However, when superannuation is treated just as a financial product, the conduct and motivations of the finance sector come to the fore. Instead of directing all profits to members, bank-owned super funds have a conflict of interest, between providing profits to shareholders and delivering profits to members, with these conflicts supposedly managed by so-called “independent directors” (who are generally drawn from the finance sector).
Industry super funds are deliberately different, and their members have benefited from this. Over the 10 years to 30 November 2016 (the latest published SuperRatings SR50 Balanced Index data), industry super funds have delivered to their members, on average, 2.33% more in net investment returns each year than bank-owned super funds with a similar risk profile.
At the heart of this outperformance has been the decisions by the boards of industry super funds to invest in unlisted infrastructure, property and private equity, and to run the fund in the best interests of members, not a financial institution and its shareholders. Their investment in infrastructure and other unlisted assets has not just been a driver of better member returns but diversified financial markets in Australia providing alternative sources of patient capital to the economy evidenced for instance with the recent purchase of Ausgrid. The OECD and overseas Governments have recognised this expertise and capability is world leading.
Industry super funds are deliberately different in their values and culture. 2016 gave the Australian public a taste of the governance, conduct, values and culture of the banks. An estimated $280m has been refunded and repaid to customers for alleged misconduct; $27m has been paid in penalties for alleged misconduct; over 2200 bank staff were investigated; and 159 dismissed by the banks. Industry super funds will never willingly emulate this governance.
Instead, industry super funds continually work to improve themselves and the super system. Industry super funds have campaigned to address unpaid superannuation, championed the banning of commissions and incentives paid to financial advisers, advocated for consumer protections for workers that do not choose their own super fund and lobbied for more equitable taxation arrangements.
It is the case that, as in many if not all walks of life, there are not sufficient women in senior positions within the super industry, whether at executive or board level. More can, and should, be done by super funds. That is why there are programs through Women in Super and the Australian Institute of Superannuation Trustees to develop, mentor and promote more women. Women within the industry super sector have inspired the funds to take a lead role in campaigning to improve the retirement income security of women, through advocating for government policies that recognise the urgent need to fix the gender gap in savings.
Over the past two decades, industry super funds have acted as custodians of the retirement savings of over five million people, and become the best performing, most trusted and scandal free part of the super sector. This is a track record to be emulated. Instead, it is one that confronts the banks, described as an ‘oligopoly’ in late 2016 by the Coalition dominated House of Representative’s Standing Committee on Economics. Could it be the banks just want to remove the competition in superannuation and obtain the same 80 percent market share they enjoy in banking?
Australia’s needs a world class retirement income system, one that places the interests of members first and carefully integrates fiscal, economic and social policy objectives. As the population ages, the very character of our nation will in part be determined by how we provide for and care for older Australians. Superannuation is central to the solution. Rather than focus on meddling with the best performing funds that place the interests of members first, perhaps it is time to consider the legitimacy of the scandal-prone banks’ participation in the nation’s retirement income system.