Are some superannuation funds thieves?

What is the difference between an everyday thief and some superannuation funds?

The answer is that only one of them gets away with systematic stealing for years and is home free once some of the stolen money is returned to its owner.

That is the only conclusion that can be drawn after another shocking week of testimony at the Financial Services Royal Commission which once again heard how National Australia Bank (ASX: NAB) literally took money out of people’s super accounts for services that it had no intention of providing.

The feeble “dog ate my homework’’ excuse that they provided a website and a call centre was never going to fly, which led to one of the most illuminating exchanges when Royal Commissioner Kenneth Hayne asked if the bank thought taking fees for no service could be a “question of the criminal law”.

Super trustees feeling legal blowtorch

The answer was a resounding no but it is interesting that Commissioner Hayne’s line of attack was directed to question super trustees, given that they are notionally independent and literally “trusted’’ to look after the best interests of their members, not the fund manager.

These sums that have been literally stolen are not insignificant either – in the case of NAB the “refunds’’ paid out initially totalled $16.2 million but quickly ballooned to $34.7 million with another $87 million in refunds and compensation for lost returns to be paid.

In the end, NAB chief executive Andrew Thorburn decided to clear the air by claiming that: “I certainly do not believe our people are involved in any criminal acts.’’

He also made it clear that if any criminal charges were to come, they would be from a regulator such as ASIC rather than from police.

It is a distinction that may be lost on many people, particularly those who have had their super accounts fleeced for no reason other than to support corporate profits.

It was a similar situation over at AMP, which in its profit results this week set aside more than $300 million to compensate customers.

Fee refunds could reach $850 million

Across the financial services industry the fees for no service bill is predicted to reach at least $850 million and that could be a conservative figure.

So how have our superannuation funds managed to get away with the sort of behaviour which, if performed by conventional criminals and then discovered, would lead to a jail sentence?

Well the answer is complex but in broad terms this situation is a failure of regulation (in this case by ASIC which has been shown to be slow and dozy at best in this area) coupled with greed from some superannuation managers and a lot of disconnected customers who are not really aware of how much higher their superannuation balances could be if the fees were lower and were not charged for services which were not delivered.

If you think the “fees for no service’’ rort is the worst superannuation rort that will be uncovered by the Royal Commission you could be in for a shock.

Insurance and multiple accounts could be bigger problem

It has been widely acknowledged for many years by those in the know that the insurance within super and the issue of multiple accounts are without doubt the worst rip offs within super and it is one the Royal Commission has squarely in the headlights.

While it might be optimistic to expect any refunds for this behaviour – after all, the horse has effectively already bolted – insurance is one area where the Royal Commission could finally bring about lasting change.

So how do insurance and multiple accounts rip off so much money?

Well, the problems are related in that many people who move from job to job end up with a different superannuation account for each job.

In some cases, workers are actually prevented from bringing an existing account along to their new job, in others it is simply a question of them signing up to the “usual’’ industry or company fund and then forgetting about their previous fund or funds.

Insurance can be a good deal

Insurance within super is usually for death and total and permanent disability but can also include income protection insurance.

Sometimes super fund members have to opt in for the insurance but in other cases they are automatically enrolled unless they opt out.

In principle, the idea of buying this insurance through super is sound because the member might get lower insurance rates due to bulk discounts and the money used within the fund is usually taxed more concessionally than using after tax earnings.

The problem arises when there are multiple accounts because each account could well be charging for insurance as well as administration fees, meaning the member is paying much more than they would if the accounts were consolidated.

Small balance accounts can be wiped out by insurance and fees

In accounts with small balances – which is often the case for people who have only been in a job for a while – the cost of insurance and fees can be enough to send returns backwards, potentially even using up all of the money invested in the fund over time.

There have even been cases in which the same super fund has two accounts for the same member but has not offered to consolidate them.

On the insurance front, it can sometimes be the case that you can only successfully claim on one policy, meaning that the other insurance premiums have literally been paid for nothing.

Once again, this problem can be fixed if people are more aware of how their super works and act quickly to consolidate accounts and ensure that insurance and investment fees are minimised and investment returns at least meet the benchmark for similar funds.

If Commissioner Haynes can come up with recommendations that the Federal Government finds difficult to ignore that finally solve the problems of multiple super funds, true choice for insurance and no more fees for no service, he really will have achieved a significant breakthrough.