Government trying to handcuff industry super funds

Prime Minister Scott Morrison’s prejudice on superannuation is beginning to show.

It has long been assumed – and stated outright by several Liberal backbenchers – that industry super funds are something of a problem.

In the wake of the banking Royal Commission, industry funds emerged virtually unscathed while the big banks and for-profit superannuation providers such as AMP ended up smelling to high heaven.

So much so that the industry funds put out some advertising showing banks as foxes in the henhouse or dodgy bank executives, desperately trying to grab control of your superannuation so they could pocket some of the cash for the bank.

Banks outraged by being cast as foxes in the henhouse

In the formerly cosy world of financial products the advertising was seen as an outrage by the banks and retail funds, who thought it was like rubbing salt into their raw wounds.

However, the advertising – and the Royal Commission findings – worked a charm for the industry super funds, causing about $11 billion dollars to flow out of for-profit funds and into the large and successful industry fund heavyweights.

From here on in though, that sort of advertising campaign may not be possible, with the “your future, your super” changes announced by the Federal Government allowing a parliamentary committee to drag superannuation boards into a hearing to produce “robust quantitative and qualitative evidence” to support their actions.

Best financial interest change could greatly limit advertising and lobbying

At the moment default super fund trustees have a duty to act in the “best interest’’ of members, which is changing to “best financial interest”, which is a very significant change.

Advertising and lobbying would also face tight restrictions with boards not able to use members funds for either unless it also can be proved to be in the best financial interests of current members.

Straight advertising that enabled growth in the number of members and greater benefits of scale might pass the test but advertising such as the popular “compare the pair” attack on retail funds might not.

News services could be threatened

Similarly, industry fund activities such as the third party delivered New Daily online news service which is funded by Industry Super Holdings could well be problematic under the new rules, given the difficulties in proving that such news was producing a direct financial benefit to industry super fund members.

The members might enjoy reading the articles – which the government believes are often slanted towards Labor – but does it add or subtract from their super balances?

It would not be hard to argue that the New Daily actually reduces super balances, even if that reduction was so miniscule that it would barely show up.

Potentially, even lobbying against changes that would directly hurt member’s interest could be outlawed by the changes, given that it may be hard to argue that such activity adds to the financial interests of current members.

Ostensibly these new rules apply equally to all superannuation funds including retail funds but in practice they are clearly aimed at the industry funds, which have been spectacularly successful in building and maintaining a customer base through a combination of clever marketing, lower costs and, as a general rule, superior investment performance.

Industry funds highly successful

In a sense industry funds start ahead of the game because they don’t need to produce profits for owners, meaning their fees are automatically lower while their scale helps to reduce investment and administration fees which are shared across many more members and are now increasingly brought in house.

In fact, industry funds have been so successful that they are now the biggest players in superannuation, managing more than $760 billion of assets on behalf of members well ahead of the $597 billion managed by retail funds.

Under the changes anything the trustee spends money on – including advertising, marketing, lobbying and third-party payments to organisations such as New Daily – must be in the best financial interests of fund members.

Ginger group pushing for super changes

The ginger group of super activists within the Liberals which includes Andrew Bragg, Tim Wilson, Jason Falinski and Dave Sharma have been strongly agitating for more accountability and restrictions for the industry funds and it appears they have been successful with the “best financial interest’’ change and its associated documents outlining restrictions on marketing, advertising and lobbying.

Similarly, the successful campaign to release up to $20,000 of superannuation savings per person to cope with the COVID-19 pandemic set an interesting precedent for scaling back super balances through withdrawals and was particularly tough on industry funds which have large membership bases.

It was highly successful, although potentially very costly for many super fund members in the long term, with more than $60 billion withdrawn.

Withdrawing super to buy a house the next campaign

That precedent is sure to be tested again in the reaction to the government’s report on retirement savings, with the ability to withdraw super savings to pay for a house potentially the next way to divert super balances.

The argument being that the review showed the importance of owning your own home in retirement and that withdrawing super to buy a house would help young Australians make this choice.

Allied to this campaign are moves to stop the planned rises in super guarantee payments from the current 9.5% to 12% by 2025.

Activist investing, in which funds invest for objectives such as lower carbon emissions, ethical investing or more women in board roles might also need to be justified under the change to the rules.

Industry funds will probably still find a way

Despite these challenges, it would be a brave person who bet against the industry funds finding a way to continue to thrive under the rule changes.

Also, it is important to remember that super funds are not necessarily defined by their ownership structure.

They are many excellent retail funds and many underperforming industry funds, despite overall trends which might run in the opposite direction.

There have also been some very good points made by the ginger group of Liberals, including recent accusations of insider trading within industry funds that certainly bear close examination.

However, industry funds have now reached such a scale and on the whole have such efficient investment and administration processes that they should be able to weather the attempts to stymie their growth.

The most important long-term brake on their size and influence would be to hold the contribution rate at 9.5% so get ready for a massive battle over that issue.