The Australian superannuation and funds management industry is a rich ecosystem supporting a variety of parasites, leeches and other scavenging life forms.
Why can I say this? I’ve been a trustee of industry funds and employer funds, I’ve worked in funds management, in superannuation administration, superannuation consulting and for superannuation funds. So there is not much I haven’t seen in the past 20 years.
readers sent in various tips and comments last month (see them here
) raising concerns about how super works. They're right to be concerned.
What follows are three legal ways your super may be being raided -- and why I’ll see you at Bunnings still providing directions when you’re in your 70s if you don’t pay attention.
There are four types of superannuation funds: for-profit ones run by banks and AMP; not-for-profit funds or industry funds set up by unions and employer associations; government funds for public servants; and self-managed funds ostensibly for members but really for the benefit of accountants and financial planners.
Scam #1: insurance
Nearly all superannuation funds provide members with Life, Total and Permanent Disablement and Income Protection insurance. Life insurance is pretty obvious, you die and some lucky relatives have monetised you. Total and Permanent Disability cover provides you with a lump sum if some catastrophic event occurs. Income Protection provides you with weekly payments if some calamitous event or illness befalls you. Both can be pretty useful.
Upon joining a superannuation fund all of this insurance cover is provided to you whether you need it or not.
You can cancel this cover on joining or at any time you are a member. Most members pay no attention at all to their insurance. This means that their cost of cover (typically between $3 and $6 per week) is eating away their account balance, but if you need the insurance ... well, it is handy.
Many industry funds introduced opt-out insurance as traditional company-provided funds offered insurance basically to provide a "like with like" offering but, on the whole, at cheaper rates. Insurance inside super is much cheaper than buying it retail because of superannuation funds' purchasing power and insurance being purchased from pre-tax dollars.
There are arguments about whether funds should have opt-out insurance or opt-in insurance. Some funds need to offer life insurance to meet legislative requirements.
For a 25-year-old with no dependents, life insurance isn’t very useful. But I’ve seen a $95,000 payment to the mother of a 12-month-old who will never see her 19-year-old dad. Who knows what the right answer is?
When it comes to insurance not all funds are the same. Take one superannuation fund which I won't name, which is owned by a bank. If you are 30 and a professional and are in their fund for $1 per week, you get $71,000 worth of death and total and permanent disability cover. If you are in a run-of-the-mill industry fund with professional cover you’ll get over $100,000 cover for that same $1.
Where things went wrong was the regulator and government did not set limits on the commission or handling fees that funds and administrators charged on insurance. Some for-profit funds are making over 50% profit margin on insurance in super.
One South Australian-based industry fund is charging 20% profit margin on income protection insurance, nearly double what the next industry fund charges and significantly more than many others charge. This is wrong and is not what industry funds are about. The union representatives on the board of this fund should be embarrassed. You’ve got to ask why there is a need for this profit margin or handling fee given that the member administration fees are meant to cover all administration costs.
For the for-profit funds, it’s a chance to make greater profits. For some industry funds it’s a chance to cover up their higher than average administration costs.
"If you leave your employer and join a different fund with your new employer, your old fund will keep deducting the cost of insurance, often until there is not a cent left in your account."
Fee-driven financial planners just love insurance, as this is an area where they can make serious commissions.
In one case, an industry fund used its younger members to improve the benefits for older members. What the fund did was to get the insurer to increase the insurance benefit to older members by reducing the benefit to younger members. The insurance company was no worse off and went along with this scam which disadvantaged many members.
The thing you need to know is that if you leave your employer and join a different fund with your new employer, your old fund will keep deducting the cost of insurance, often until there is not a cent left in your account. The sting in this is that most insurers will not pay a benefit if another insurer pays out on the same event. In effect you are paying for additional insurance that you can never claim on.
The Cooper Review into superannuation was onto this dirty little secret but the government ducked the recommendation that there should be no commission on insurance so it’s likely that if you don’t pay attention to your insurance needs, you’ll continue to pay dearly.
Scam #2: trustees, governance and money
Industry funds and their lobby group, the Industry Superannuation Network, have done a pretty good job shaping public perception that they are the good guys when it comes to looking after your money. They are -- sort of -- relative to the for-profit sector at least. But they could do a lot better, particularly in the area of transparency and governance.
Some argue that industry funds have lost their bearings and have become like the for-profit funds when it comes to remuneration and related party transactions. HESTA, the health sector superannuation fund, paid its chief executive around $500,000 in 2011/2012. Australian Super paid its CEO a tick under $600,000.
There’s this organisation called the Australian Council of Superannuation Investors (ACSI) that over 35 industry funds are members of, including the biggest industry funds. ACSI’s mission is to achieve improvements in the environment, social and governance performance of companies.
It is only recently that industry funds began publishing details of directors' fees. Many still don’t disclose how much the directors are paid and even fewer funds disclose executive remuneration.
Some members would be surprised to know that many industry superannuation fund directors are paid. Some directors earn well over $50,000 a year in directors' fees that are paid from your superannuation contributions. On top of that many receive super on their directors' fee. The remuneration package for the chair of Australian Super was around $160,984 last year. Quite a bit more than the average blue-collar member earned.
Very few directors of industry funds are elected by either contributing employers or the members. They are appointed by employer associations and unions, often with no regard to skills or competence. Unions and employer associations have resisted direct election of trustees because it would hurt them financially. This is in contrast to many public service superannuation funds where member directors are elected by the members.
Unlike ACSI’s requirements of public companies, few industry funds have independent directors.
Many directors are in fact current or ex-employer association, union officials or employees. In some cases directors' fees are not paid to these directors but are paid to the union or employer association that employs them and nominates them. For example, HESTA lists director fee payments made to United Health Care, Australian Services Union, the ACTU and the Australian Nursing Federation.
What’s more, when industry funds merge they often retain more directors than they need. Why has one of the largest industry funds got 12 directors when Westpac has nine? This practice looks like a disguised dividend from funds that are not meant to pay dividends.
In addition to these payments, employer associations and unions also receive sponsorship payments or support from industry superannuation funds. There is no disclosure in industry fund annual reports of these related party transactions. Public companies have to disclose these but not industry funds. What would ACSI say about this?
One industry fund pays over $60,000 a year to the employer association that nominates directors and another $60,000 to the union organisation that nominates directors.
The other nice little lurk that industry fund directors have access to is being appointed directors of companies that funds have shareholdings in. Take HESTA; four directors were appointed to investee companies giving one director a combined pay packet of $77,689. Few public companies do this.
Scam #3: employer-sponsored funds
One of the battlegrounds in the industry since the 1980s has been default funds in awards, and freedom of choice to pick your fund.
The for-profit superannuation funds (owned by big banks in most cases) have fought for the right of employers to pick the fund that their employees must join because it generates profits for them and their affiliated financial planners.
In response to this, unions created an obligation in awards and enterprise agreements that new employees must join an industry fund unless they select another fund. This is known as "default funds". Around 60% of new employees make no choice of super fund, they do nothing and end up in the default fund. If this is an employer-sponsored fund the employee gets put into, then their inertia could be very costly.
After some opposition, most employer-associations rolled over in the early 1990s and accepted this, much to the disappointment of the for-profit industry funds. They got the benefit of fund directorships.
The Howard Government got rid of default funds with the introduction of "Freedom of Choice". This was overturned by the Fair Work Act
which required Fair Work Australia to reintroduce default funds in modern awards. There are many industry funds as default funds in modern awards; very few for-profit funds. But the for-profit funds are still fighting for a place at the table.
So what you say? All funds are the same ... not really.
Say you join a new employer which has a for-profit fund, Happy Retirement Fund, as the default fund. It is likely the Happy Retirement Fund will have higher fees than an industry fund. For example, one fund owned by a big bank has an administration fee of up to 1.5375% of your account balance, that’s $150 for each $10,000 in your account. By contrast the bigger industry funds will only charge you $78 per year in administration fees whether you’ve got $10,000 or $100,000.
But it doesn’t stop there.
If a financial planner has got your new employer to offer the Happy Retirement Fund then the financial planner will have his/her hand in your pocket. How so you ask? Well the planner and the employer can agree that the planner will receive a "contribution fee" on all contributions for providing financial planning services to all employees, and you can't object to this once you’re in the fund.
Take the fund that’s owned by a big bank, this will pay a financial planner up to 5.125% of your super contributions including any voluntary contributions. There is no obligation for the financial planner to actually provide you with any financial planning services.
As Keating said, do the maths. If you're earning $85,000, your employer must pay 9% or $7650 in superannuation contributions to the Happy Retirement Fund, out of that comes $117.62 in administration fees and $382.50 to the financial planner. Your $7650 has just become $7150. If you were in an average industry fund your $7650 would be reduced by only $78.
You can see why the for-profit funds have fought default funds and continue to fight them.
In response to all of this racketeering, the government will require that employees have a choice of a low-cost superannuation product called MySuper which will cut out the commission and some of the high fees.
But even MySuper won’t stop all of the racketeering in the Happy Retirement Fund because once you leave your employer, unless you take quick action to roll over your super, you’ll be transferred out of the employer section of the Happy Retirement Fund and into the personal section of the Happy Retirement Fund. This is because you are no longer an "employer sponsored member". The big bank that owns the fund is happy that you are now a personal member as they can extract higher fees, but good luck trying to find out how much those fees are. Try googling for the personal member product disclosure statement.