The banking royal commission has highlighted the relatively high costs allocated by industry super funds to a mysterious “other” category, as it prepares to question fund directors next month.
A fifth of expenses associated with industry funds, and 10 per cent of those for retail funds, are classified as “other”, these costs may relate to the higher cost of holding unlisted asses, such as infrastructure and direct investments in property.
The royal commission, led by commissioner Kenneth Hayne, is likely to examine how fees eat into retirement balances when it calls directors from 14 funds to give evidence starting August 6.
The royal commission has named an equal number of bank-owned retail and union-linked industry funds to appear.
Administration and investment manager costs make up a large proportion of expenses faced by both retail and industry funds, says a background paper released on Tuesday.
While regulators do not collect information on the “other” category, it accounts for about 20 per cent of expenses for industry funds and 10 per cent for retail funds.
Sources said “other” expenses includes those stemming from investments in unlisted assets such as infrastructure and directly held property, which are more expensive than liquid assets such as shares, as well as sponsorships and marketing activities. Industry funds have higher exposures to unlisted assets.
While unlisted assets tend to cost more, they have also delivered better returns.
Nearly 60 per cent of expenses reported by retail funds are linked to administration, while the figure is closer to 25 per cent for industry funds.
“A member’s return on their investment will depend on the return earned on the investment, less the fees charged to the member,” the paper says.
“Retail funds expend relatively more on financial advice paid for by members than other types of superannuation funds, while industry funds have a relatively high proportion of other expenses that are not further specified by the publicly available APRA data,” it says.
Release of the paper coincided with another key development in relation to super fund disclosure, with the Australian Securities and Investments Commission publishing an expert report on the highly vexed fee disclosure regime known as RG97.
Retail and industry funds have been at loggerheads for five years over how fees and costs should be disclosed, with each side claiming the other is getting off lightly.
Industry Super Australia claimed the previous guidance would result in direct investments in infrastructure and unlisted property “looking more expensive”.
At the same time, there were “inexplicable carve-outs” for costs associated with investment platforms used by the majority of retail funds, the group insisted.
While critics might argue net returns are the only thing that matters to super savers, ASIC is pushing ahead with RG97 and will consult further with industry before final guidance is issued.
The royal commission’s background paper notes that APRA does not currently publish data about spending on marketing and advertising.
Nor does it collect data on expenses relating to the management and operation of a fund on a “look through” basis. That is, there is no information about third-party expenses.
The Productivity Commission inquiry into the competitiveness and efficiency of the super system was similarly concerned about the drain on net returns posed by fees and unnecessary insurance premiums.
It identified “performance divide”, with industry funds delivering average returns of 6.8 per cent compared to 4.9 per cent for retail funds.
The royal commission’s paper notes that most people are disinclined to switch funds in search of a better deal. And when they do, they often end up being worse off.
Just over 70 per cent of switchers move to retail funds and members with balances of more than $100,000 are twice as likely to switch.
Work by Rice Warner, and cited by the royal commission, suggests that investment performance and fees are not the drivers of switching. Nearly half of switchers end up being charged higher fee after moving their money, and 56 per cent receive lower returns.
In fact, switching activity results in an overall increase in fees of $137 million per year and an aggregate decrease in returns of 0.46 per cent, or $284 million a year.
Fund executives say governance will be a major theme for the Hayne inquiry, specifically the legal obligation for directors to act solely in the best interests of members, not unions, employer groups or shareholders.
Super fund have been asked to provide the inquiry with the papers for meetings of the board and sub-committees dating back five years.
“Our fund alone has provided hundreds of thousands of pages of documents,” said the chief executive of one major fund, who spoke on the condition of anonymity.
Counsel assisting the royal commission is said to be drawing heavily on the Productivity Commission’s 570-page draft report on competition and efficiency in the super industry.