Royal Commissioner Kenneth Hayne
Most of the headlines from the banking royal commission so far have related to rip-offs like fees for services never provided, fees charged to dead clients and rotten advice costing people tens of thousands of dollars. But there’s a far bigger rip-off that is likely to go unexamined, one that costs billions compared to the hundreds of millions that the banks’ and AMP’s compensation bills are likely to amount to. And it affects millions of Australian consumers.
Each year, the big banks and AMP earn billions of dollars in fees from the retail superannuation funds they control, which compete with industry super funds, corporate and public sector funds and self-managed funds for the compulsory super contributions of Australian workers. Collectively, we have around 29 million super accounts between us, and retail super has over 12 million of them.
All super funds charge fees to manage your money; the issue is how much, and what you get for your fee. And the big banks and AMP, on average, overcharge consumers for underperforming funds compared to industry super and corporate/public sector funds. A report by Rainmaker commissioned for Industry Superannuation Australia last year showed that retail super funds charged more than half a percentage point higher fees than non-profit funds in 2016. The total fee revenue for the big four banks, AMP and Macquarie Bank was over $12 billion; for the big four banks, $8.7 billion.
True, that fee gap had shrunk considerably since 2010, when funds run by the banks and AMP were charging nearly a full percentage point more than industry super — over 2% compared just over 1% for the latter. The gap tightened considerably in 2014 — which by pure coincidence was when the Murray Inquiry into financial services got underway and heard from the Reserve Bank that superannuation fees in Australia were too high. Murray went on to conclude the same. As Stockspot has noted, what it calls “Fat Cat Funds” have been shrinking in recent years, but continue to drain consumers’ retirement incomes.
The higher fees are partly the reason why retail super funds consistently underperform other kinds of superannuation funds. The most recent five-year performance rankings by SuperGuide show that the list of top-performing funds is composed entirely of industry, corporate and public sector funds. Ten-year performance data shows just five out of the top 30 funds were retail funds, and all near the bottom. Industry Super’s 10-year table from 2017 shows the best performing funds dominated by corporates, public sector funds and industry funds, with just nine retail funds in the top quartile of performers and the bottom quartile being nearly all retail funds.
Higher fees aren’t the only reason why retail funds underperform; according to ChantWest, retail funds have more exposure to listed assets compared to non-profits, and they tend to be more volatile and perform worse than unlisted assets like property, private equity and private infrastructure, where industry super has invested far more heavily.
Part of the reason why the fees are so high for funds run by the big banks and AMP is that, as the Australian Prudential Regulation Authority (APRA) found in 2010, they pay more to related parties. Most super funds outsource various functions; APRA found that when retail funds outsourced to related parties (i.e. the banks themselves) they paid more for the services than when funds outsourced to unrelated parties. The result is billions of dollars in excessive fees flowing into the big banks.
The impact of fees and lower performance on consumers is easily demonstrated: Commonwealth Bank Group Super, which is the Commonwealth Bank’s own corporate fund for its staff, was one of Australia’s best performing funds over ten years, according to Industry Super itself, coming in fourth in Rainmaker’s ten-year table. But Colonial State retail super funds, owned by the Commonwealth, were scores of places down the league table, performing only around the median return level.
What does this mean for consumers? It’s a self-serving calculation, but Industry Super claims that a person on a $90,000 salary with a $50,000 starting super balance would be $49,000 worse off after 15 years if they were in an average retail fund compared to an average industry super fund. Even if that number is wildly overstated, the millions of retail super fund customers, courtesy of higher fees to related parties and poorer performance, will end up tens of thousands of dollars poorer when they reach retirement — with the big banks and AMP picking up most of the difference.
It’s the biggest rip-off in financial services. But don’t count on the royal commission touching on it.