Here’s how compulsory super works for most Australians: it goes into the default super fund at our place of employment, and we pay minimal attention to it until we get into our fifties and start wondering about our retirement income.
At that point, or earlier if we have a decidedly unAustralian interest in wealth management, we’ll go to a financial planner for advice.
If we’re lucky, we’ll get one of the many planners in the industry who act with probity and professionalism and who don’t need a statutory requirement to put our own interests first in his or her advice. They’ll gives us advice appropriate for our circumstances, making sure we understand different levels of risk and return. They’ll earn the fees we end up paying them and make a real contribution to the quality of our retirement.
If we’re not so lucky, we’ll get one of the many planners in the industry who will simply direct us into a product that they’re paid to spruik to clients, and they’ll continue to charge us fees for advice year in and year out. According to one financial planner, the second variety are the rule, not the exception in the industry: “a majority of planners in the market that have hundreds if not thousands of people on their book that they haven’t provided a service to that validates them regularly receiving a fee/commission.”
The winners from the second approach aren’t just lazy financial planners unprepared to do the hard work that many of their professional colleagues do, but the owners of the retail products: the big banks and AMP, who dominate the retail super fund industry. Don’t be confused by the different names - the big banks and AMPare behind the bulk of the investment products in the retail super sector.
Unless you’re a public servant or work for a large company with its own fund, the main competition for retail super comes from industry super funds. Yesterday, Tony Abbott in the Coalition joint party room attacked industry super funds as “a gravytrain for union officials” and examples of their “venality”. The party of competition, it seems, isn’t too happy about the competition for the big banks and financial planners. Indeed, in 2004 the Howard Government had introduced superannuation choice arrangements designed to help retail funds at the expense of industry super funds.
The problem is that industry super funds are too competitive. On a long-term (1997-2010) basis, public sector and in-house corporate funds performed best, at 6.3% and 5.84% annual return respectively. Next was industry funds at 5.35%. Retail funds returned just 3.66% — that is, your money would have been better off in a term deposit account at the bank that sold you the investment product in the first place.
The most egregious example of the problems of retail funds was demonstrated in 2010 when APRA data showed that the big banks’ in-house super funds achieved five-year rates of return that were often double those of the retail products they offered ordinary punters.
The poor performance of retail funds begs the question of why even a gravytrain of venal union officials can out-manage our biggest banks and financial institutions in making money for their customers. The primary reason, of course, is that fees and commissions dramatically cut rates of return for retail funds. Money ends up in the pockets of financial planners and in the banks’ balance sheets, rather than in customers’ accounts.
The fight over superannuation is a subterranean one. Most voters have no interest in super; it doesn’t feature prominently in the media cycle; the issues are complex. Some of the biggest companies in the country have a vested interest in the status quo, as does an industry used to relying on customer indifference to generate income. But the stakes are high — not so much now, as in ten and twenty years, when people working now will approach retirement and start wondering about their incomes, and future Treasurers will wonder how to address the rising transfer payments associated with a rapidly-aging society.
The defeat of the FOFA reforms, or their hollowing out by vested interests and ideology, will be a low point in the cause of economic reform of recent years.