ANZ’s purchase of the remainder of ING, and new rumblings about ANZ or another major acquiring AMP, shine a rare light on one of the dirty secrets of the retail superannuation industry: the high level of vertical integration and control by the major banks.
Australia’s major banks control most of the biggest retail superannuation funds and they are not merely the biggest gougers of fees and commissions but they are shocking performers compared to industry and corporate funds.
The 10 biggest superannuation funds in Australia, according to APRA’s fund-level performance data released in August, are:
- AMP Superannuation Savings Trust (AMP)
- Universal Super (MLC/NAB)
- UniSuper (industry)
- ING Masterfund (ANZ)
- Telstra Super (corporate/public sector)
- Commonwealth Life Personal (Commonwealth)
- ASGARD Independence (Westpac)
- Colonial First State (Commonwealth)
- Colonial Super (Commonwealth)
- CSS (public sector)
Together they control more than $90 billion in retirement savings for Australians.
So how do these big funds perform? Courtesy of APRA’s data, we can look at their performance not just in the past 12 months, which has been a difficult period for everyone, but over a longer period. The best performers overall were Goldman Sachs JBWere’s corporate fund, at 14% over five years, and the industry fund MTAA Super, at 12.8% over five years. Australia Post’s super fund was third.
Of the big funds, the public servants did best: CSS performed strongly, with a five-year average annual rate of return of 11%, and a three year rate of 9.2%. That made it the 18th best-performed fund. UniSuper was right behind it, with a five-year average annual rate of return of 11%, and a three-year rate of 7.7%. Telstra’s fund didn’t go quite as well, with a return over five years of 9.1% and three years of 7.8%, but that still got it in the top 80.
The rest? Step up Colonial First State in the Commonwealth Bank stable, which managed 8.1% and 5.7% — 109th place. MLC’s Universal — 110th. Colonial Super Retirement: 116th. Commonwealth Life Personal — 122nd. AMP Super — the biggest of all — 137th.
And ING? 164 th place. 6.2% over the past five years and 3.6% in the past three, well under half the return of the best performers.
The best-performing fund controlled by a major bank is the Plum Superannuation Fund (NAB), which came 70th. The independent Perpetual Investor Choice retail fund was about the same. BT Classic Lifetime, owned by Westpac, came 74th. ING’s small Retirement Portfolio Service fund just scraped into the top 100.
So much for the benefits of vertical integration and economies of scale.
The relatively poor performance of bank-controlled funds wouldn’t be so bad except retail funds are, of course, exemplary chargers of commissions. Australians paid $1.4 billion in commissions to financial planners in 2008 (which was a bad year — they paid more than $2 billion in 2007). Fifty one per cent of financial planners in the 10 largest institutionally owned financial adviser groups work directly or indirectly for a major bank. The purchase of AMP would see that figure jump to two-thirds.
The major banks apply much the same strategy in superannuation as they do in mainstream banking: high fees and poor service. Fortunately, in superannuation there remains plenty of competition from independent retail funds and corporate and industry super, if you can access them and take advantage of their superior performance. Continued takeovers by major banks of retail funds, however, will curb that competition, exposing more and more Australians to the dubious benefits of vertically integrated “wealth management”.
And it’s not just those individual account holders who suffer. The poorer our superannuation fund performance, the greater the fiscal burden an ageing population will impose.
Overnight, the Investment and Financial Services Association released a study it commissioned by Deloitte, comparing fees charged by Australia’s largest funds with those charged overseas. It’s a difficult comparison given differing regulatory requirements and industry structures, but the study found that Australia’s big funds were “broadly competitive globally … allowing for a differentiated approach to investment management and … that Australia will always have some scale disadvantages.”
Broadly competitive meant that fees in Australia were higher than the Dutch, higher than or equal to the Brits and the Japanese but lower than the Americans.
“Scale is critical to achieving lower fees in any superannuation system,” the report concluded — an argument you can expect to see if the ACCC decides that there’s enough “scale” already in the sector when the next merger comes on the regulators’ radar. APRA’s performance data, however, suggests that scale is not exactly critical to generating good rates of return for members — if anything, the reverse.