Back when it was forced to call a royal commission into the banks late last year, the government came up with a smart idea: if the banks were going to have to suffer, industry super funds would share the pain. It was “direct smack at Labor” a government source anonymously admitted. Peter Dutton was more blunt, saying it was good that the royal commission would “look at some aspects within the industry super funds which have union members and whatnot on the board”, because “people lose a lot of their super through fees and through donations and all sorts of support for unions”.
But like pretty much every smart idea this government comes up with, it turned out to be half-smart, as events of the last week demonstrated. The superannuation phase of the royal commission hearings has seen industry super funds sail through with minimal questioning. Rather than a parade of “venal union officials”, as Tony Abbott so falsely described the employer- and union-appointed directors of super funds, the hearings last week were dominated by executives of NAB and IOOF, and further revelations of account holders being charged for no service, dead people being charged and fund owners trying to evade the need to repay them.
Perhaps that’s what Peter Dutton meant by “whatnot”.
The commission also heard about the problem of related party transactions. Such transactions are a primary motivation for the vertical integration model: retail super funds contract out services to companies owned by their owners, and pay over the odds for the services they get. Account holders end up getting charged higher fees for poorer services.
Crikey has been a lone voice on the issue of dodgy related party deals since reporting on them back in 2012. Fortunately, other outlets have (“exclusively”) started sniffing around the issue as well recently. Almost certainly, this is one of the biggest scandals of the entire superannuation sector, and it’s been happening in plain sight for many years, with probably tens of billions of dollars flowing from ordinary Australians to the owners of the big retail funds in dodgy related party deals. Only now is the royal commission pulling at the threads that will bring the whole thing undone.
Which brings us to the other way the government tried to be cute about the royal commission, by limiting it to a year. That means Kenneth Hayne is preparing an interim report for September 30, with a final report due by February 1. Clearly there won’t be anywhere near enough time to explore the extent of related-party dealings in the super sector, let alone other outstanding matters. The point of the short timeframe was to try to minimise the damage that would be inflicted on the banks; it was the last remaining piece of political protection provided to the banks by the Liberals. It’s now the major impediment to properly cleaning up superannuation.
While misconduct by the banks revealed earlier in the year was appalling, the continuing underperformance, fee-gouging and related-party transactions of the retail super sector raise even more serious issues. Compulsory super requires that policymakers provide a super system that is trustworthy and dedicated to serving members’ interests. They have failed to do so, because of the political power wielded by the banking oligopoly and, to a lesser extent, by the Liberal-aligned financial planning sector. And the consequences will be long-term, in the significantly lower retirement savings of retail fund account holders, which will make it more likely they will have to use the aged pension.
Extending the royal commission might bring some more short-term pain for the government, but it will greatly benefit governments, Liberal, Labor or whoever, of the 2020s, 2030s and beyond.
What do you think? Send your comments and responses to boss@crikey.com.au.
It will get extended.
The RC is a massive sore point for the Turnbull government, one which for whatever reason Labor has held off on really pressing hard on up to this point. (which will change, I just figure they are trying to avoid wearing out the attack lines prior to the campaign proper).
If Hayne requests more time, then the government will grant it, refusing the request looks just terrible, far too terrible for them to take that bullet in the interests of protecting mates.
It’d be like Drumpfster firing Mueller were Talcum to refuse to extend the term – a confession of guilt.
“loan voice”. lol
I agree, Bernard. Forcing citizens to save sums they have no education or training to administer, then inflicting upon them an opaque, cynical and probably corrupt industry sector is tantamount to giving financial corporates license to farm citizen savings then compelling citizens to submit.
It might be smart to extend the RC, and its reporting date. There’s an election likely in the first half of 2019, and it might be wise to avoid having the report hanging around when it’s called. IF the report makes people angry, as well it might, they could take it out on the government, because they don’t get to vote for the banks.
Bernard’s comments are well made.
I was briefly one of a number of directors of the union/ industry super fund LUCRF in the earliest days of such funds;For years before that appointment I had been and continued to be union officer with in depth experience of the then Commonwealth public service super schemes; later, as a member of Commonwealth arbitration tribunals, I dealt with a fair cross section of matters and issues about award superannuation provisions and industrial dispute settlement issues concerning them.
After my first meeting I resigned as a director of LUCRF, my reason being, at that time, I did not have the time to adequately discharge the responsibilities of what I considered an important role .
In promoting candidates for what were then elected employee representative positions on the Board managing Commonwealth super schemes, the public sector unions invariably pushed successfully for individuals whose allegiance to union orthodoxy was vastly outweighed by their proven grasp of actuarial and investment niceties.
On the arbitration commissions, the worst excesses that came to my knowledge all concerned so called retail funds where employers were brought into dispute. Almost invariably, where fault was found, it concerned schemes where the employer appeared to be acting more out of self interest, often in an actual or putative relationship with a retail fund provider; in such cases, the interests of the employee/beneficiaries for whom, ostensibly, the scheme had been or was to be established, were betrayed. In my experience , most of the older occupational defined benefit super schemes run by big corporate employers, when tested, came through with clean sheets.
I know that a few of the current industry schemes can be faulted; mainly those faults relate to misconceived investment policies; too conservative prudent investment portfolios; too heavy a reliance on off-market project investments and the like. But mistakes of those kind, unrelated to any personal corruption, are an almost perennial feature of investment fund histories; the best advice, the most conventional wisdom, when applied goes oft awry.
One line of attack on industry funds seeks to replace them in roles of being default schemes for purposes of award mandated contributions; I was astonished to read that Commissioner Haynes seemed puzzled as to why Industry funds would deploy resources in defence of or promotion of membership. It is an elementary fact of investment stability that a generous cash flow from current year contributions is critical to maintaining optimal balance in fund investment stability; current cash flow can be deployed to pay out immediate liabilities to pay benefits to retiring members, preserving higher returning investments from the need for realisation. If Turnbull and his mates in the finance industry can shrink the flow of money into industry funds, they not only build the retail funds, they handicap the investment effectiveness of the industry funds.
I accept that there will be duds among the people placed by employers and by unions on industry fund boards; but the proof of whatever pudding is in question is in the proved better performance of the industry funds in admin costs and returns. I find no force at all in the case made that performance of industry schemes would be much improved by legislative insistence on management boards having higher proportion of so called independent directors; that is a recipe for placing rogues from the finance industry into roles where conflicts of interest would proliferate; the call for more “independent directors” ignores the extent to which most industry schemes already scour the available options for the best investment advisors; they don’t put them on the board, they put them into the investment kitchen; often they make them compete, and some funds bring their advisors in-house.
Finally, what has always stood out to me across the whole of my experience is that since the mid 1980s, the scrutiny and enforcement of the now massive super industry has been so peripheral and feeble. In my time, seeking information or advice I found nothing of worth available; very minimal approved scheme data only.
A strong case can be made to have, a well equipped inquiry take a close look, as Bernard suggests, at the relationships around retail funds; any such body should go further and examine what the regulatory agencies do and what might better be done by them, if resources were to be supplied. It would be desirable however to ensure the inquiry is staffed in a way that is equipped to understand the fundamentals of longer super scheme and sovereign capital fund investment experiences, and the practicalities of beneficiary expectations.
Great input Paul. May I suggest that your concerns about requirements for actuarial and investment niceties, while ahem, nice, isn’t really necessary at these Board levels.
In the same way that most non-Executive Directors wouldn’t have the slightest clue about how their company makes their widgets, markets them and other niceties, they can still add value by applying a fair modicum of common sense and applying a ‘sniff test’ to various ideas. The fact is that they often haven’t managed that, but still, high specialist expertise is no guarantee of future performance.
These boards in Industry Groups, and hopefully in Retail funds also, aren’t and shouldn’t be applying themselves to actuarial nuance and investment strategies. They SHOULD be applying themselves to getting the best advisors, setting up some internal competition, and applying the sniff test around possible corruption given the vast sums involved. The average tradie down the pub can add a lot of value with a bit of fair dinkum analysis along the lines of ‘your paying them that much – what bloody for?’
Sometimes it’s better to have non-specialists sniffing around.
I don’t disagree with your point about there being little need for actuarial skills on current super boards. My point was that in the 60s and 70s, the public sector unions selected horses for courses. Atthat time with defined benefit schemes, complex quinquennial reviews and arguments about indexing benefits for cost of living etc, representation of employee interests in confidential board settings was advanced by having someone who could understand, even develop themselves the analyses that were necessary and then translate the practicalities to stakeholders. These days of straight investment of accumulated funds do not make the same demands; a lot of common sense and a good eye for the main chance in investment options would seem to me to be a suitable skill set.