Are industry super funds being discriminated against?

Industry super funds Australia YourSuper MySuper

Could the Federal Government be “tilting the table” to make industry super funds look worse than they really are?

It seems like an unusual result but there is plenty of scuttlebutt around the industry claiming that the YourSuper online benchmarking tool to compare MySuper funds will be configured to flatter retail funds and to make industry funds look worse.

The reason is a distinction between measuring “net investment” performance and the actual number of dollars that are credited into member’s accounts.

Industry funds says benchmarking “deeply flawed’’

According to the Government the idea of the online benchmarking tool is to weed out underperforming funds and promote the good performers, although Industry Super Australia (ISA) – while supporting the concept of a comparison website – described the government scheme as “significantly flawed”.

Comparisons between basic MySuper accounts are meant to start appearing on the site from July 1 next year with some “choice” funds set to be added to the mix a year later.

Assistant minister for superannuation, Senator Jane Hume, has said that the benchmarking plan would help ensure “trustees of funds keep their eyes firmly on the financial returns of their members”.

Net investment returns differ from actual returns

The so-called flaw in the system is buried in the detail of the Budget documents which said the benchmarking would be done by the Australian Taxation Office (ATO) on the basis of “net investment” returns rather than actual net returns to members.

Some costs to members – most notably administration costs – would not be included even though they directly detract from overall returns for members.

Comparing different super funds is always notoriously difficult due to a range of variables and the different fund investment structures which include listed and unlisted investments and fund buy and sell “spreads” that can make it difficult not to compare apples with oranges.

However, actual net returns after all fees is the most meaningful test for comparison because this is the money that members will actually retire on.

Fees on Australia’s $3 trillion superannuation system add up to a hefty $30 billion a year.

Admin fees can seriously hurt performance

Administration fees do actually detract from overall returns so ignoring them does reduce the usefulness of the comparison, although it is possible that the ATO calculations could be done more quickly by ignoring administration fees.

Traditionally, industry super funds tend to have lower administration fees but higher investment fees, to accommodate a greater use of more expensive unlisted assets and the ability to spread administration fees across a larger number of members.

That means the methodology chosen will tend to put industry super funds in a bad light and could result in a fund with a lower actual result for members being ranked as better than another fund that happens to have lower administration fees.

Senator Hume has denied Labor claims that the benchmark system “doesn’t add up’’, saying that the reform was an important measure to increase the transparency and efficiency of the super system and that Labor should wait until it had seen legislation before complaining.

Stapled accounts and dud funds less controversial

Other changes in the Your Future, Your Super package have been less controversial, with the idea of “stapling” super accounts to a fund member from July 1 being applauded by many as an overdue reform that will reduce the plethora of multiple accounts and high fees.

The new stapled accounts mean that fund members can take their super fund with them when they change jobs rather than having to start a new fund if they do not choose their existing fund to receive the compulsory superannuation payments from their new employer.

The plan will also weed out dud funds, with those flagged as underperformers for two successive years — over eight years of data — not allowed to on take new members until their performance improves.

The YourSuper online search tool that will show fund rankings will be administered by the ATO using data collected and interpreted by the Australian Prudential Regulation Authority (APRA).

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