Watchdog failed to act on warning over super fees

The Australian 12:00am July 23, 2018

Anthony Klan


EXCLUSIVE  The regulator responsible for the nation’s $2.6 trillion superannuation nest egg was warned by its analysts eight years ago that the major banks and finance companies were charging members more than 2½ times the market rates for services, delivering them billions of dollars a year in extra profits.

A 2010 research paper published by the Australian Prudential Regulation Authority — which can now be accessed only via a federal government archive — shows excessive fees charged by the managers of the retail, or for-profit, funds have been systemically eating into the retirement savings of millions of workers.

Despite the peer-reviewed academic paper being written by APRA’s own analysts, including then APRA research head Bruce Arnold, the regulator has not only failed to take any significant steps to address the issue, it has disbanded the research unit.

The paper, published by APRA in July 2010 by Dr Arnold, a former US investment banker whose PhD is in finance, and his colleague Kevin Liu, who now also holds a PhD, specifically in the field of superannuation fees and charges, found “strikingly dif­ferent” fee models were being used, which had a major impact on investors in retail super funds.

As revealed by The Australian last week, the super industry over the past two decades has charged more than $700 billion in fees above what typical super funds charge overseas, according to research by University of NSW economist Nicholas Morris.

The APRA paper, which called the nation’s super system a “$1.23 trillion laboratory experiment of global interest”, compared the costs of services, such as administration fees and funds management costs, paid by not-for-profit, so-called “industry” funds, and by retail super funds.

It found that when members of an industry fund, such as AustralianSuper, were charged for a service, they paid exactly the same rate regardless of whether that service was provided by the managers of the fund (or ­related parties of those managers) or an outside company was contracted to perform the services.

In each case the members of the fund were charged, for all those services, an annual fee equating to 0.51 per cent of the total value of the fund, which is the market rate.

When members of retail funds, such as those operated by the big four banks, and financial services giants AMP and IOOF, were charged for a service provided by an outside company, they paid a rate of 0.52 per cent a year — an almost identical cost and in line with the market rate.

When the managers of the retail fund or its related parties provided the service, the annual fee charged was 1.33 per cent of the fund’s assets: more than 2½ times the market rate.

“The largest difference relates to administrative services, where we find strikingly different fee models used in different contexts,’’ the report said. “For independent ­admin­istrators and not-for-profit ­related-party administrators, the fees predominantly relate to the number of members in the fund. In contrast, retail fund related-party administrators charge a large fixed fee plus a variable component based on assets under management.

“These different approaches result in the median fund paying $12.2 million in fees under the retail-related administrator model, versus only $2.3m to service provider who was independent or NFP-related.”

Dr Liu said there remained zero doubt the “systemic underperformance” of retail funds was due to the charging of excessive fees by the major banks and financial institutions.

“The theoretical argument is there can be many reasons for the underperformance of the retail funds … such as that analysis ‘doesn’t compare apples with apples’,” Dr Liu said. “But we have created performance benchmarks … this is not difficult and the methodology is not new. This systemic underperformance is not (due to) asset allocation. It’s not an investment manager’s skills. It’s fees and charges."   APRA declined to comment.

Across the sector, which overall has more than doubled in size since 2010, with every worker forced to contribute 9.5 per cent of every pay cheque into the system, these fees have collectively delivered tens of billions of dollars to the major banks and finance companies.

Those returns have flown through to the executives and managers of those big four banks and financial institutions by way of multi-million-dollar salary packages and bonuses.

Dr Arnold and Dr Liu’s 2010 APRA paper used a comprehensive data set of super fund performance from 2006, which APRA had compiled as part of a one-off increased data collection exercise, to compare 115 of the nation’s super funds which each held more than $200m.

Dr Liu and fellow researcher Elizabeth Ooi have this month published a new report, based on data reported to APRA for the year to June 2016, that finds “severe” overcharging by retail funds continues.

Despite the managers of the nation’s super having specific legal responsibilities under the 1993 Superannuation Industry (Supervision) Act, a carve-out put in place when the law was introduced in 1993 by the Keating government means they do not face penalties for breaking any one of those laws.

The federal government has proposed some changes to the super law but the changes do not reverse the carve-out.

The ALP has said it would not support the proposed changes, now before the Senate, on the grounds the changes are “limited and incomplete”.