Labor will come under more pressure to ban banks and other for-profit companies from superannuation after the Productivity Commission found fresh evidence of chronic investment underperformance and fee gouging in the retail sector.
The commission on Friday released a report that attributes most of a 190 basis point “underperformance gap” between industry and retail funds to poor investment nous on behalf of the latter.
ACTU assistant secretary Scott Connolly said it was more evidence that for-profit companies such as banks and AMP had no place in the $2.7 trillion retirement savings system.
“The conflict is irreconcilable,” he said. “We’ve made our position clear and I’m sure Labor will be considering their position in the context of an election and Labor Party conference between now and Christmas.”
Labor leader Bill Shorten told an event for bank victims in Melbourne on Friday that retail super funds should install independent trustee organisations without waiting to be told to do so by the Hayne royal commission.
But Prime Minister Scott Morrison said Mr Shorten “will always argue the case for union-based industry funds and try to provide a competitive advantage for that.
“He says he wants to run the country like a union, he must want to run the financial system like one too.”
The Productivity Commission’s draft report in May found industry funds on average have better investment returns and lower average costs.
The latest report incorporates additional data on investment returns by asset class.
While larger allocations to illiquid assets, such as unlisted infrastructure, are often cited as the reason non-profits generate better returns, the commission came up with a different theory: industry funds are superior investors.
According to the report, more of the assets managed by industry funds seem to outperform the benchmark compared to those held by retail funds.
The outperformance gap is 200 basis points.
This accounts for underperformance of retail funds against their benchmark portfolio as well as outperformance by industry funds against the benchmark portfolio.
Benchmark portfolios are weighted averages of financial market index returns.
Based on SuperRatings data, about 10 basis points of the difference is due to unreported investment costs.
But the other 190 basis points are unexplained by the data. It is what the commission calls the “residual”.
The report concedes measurement error could account for some of the residual.
“Available data suggest that indirect investment expenses only account for about 10 basis points of this residual difference, implying the remainder is likely to be differences in asset selection — the relative merit of individual investment decisions — or measurement error,” the report says.
“While asset allocation is the largest determinant of net returns, most of the variation across individual funds and MySuper products is in the residual.”
Industry Super Australia deputy chief executive Matt Linden said the commission’s latest report helped explain why so many people were switching to industry funds.
“The superior performance of Industry funds can be put down to investing members’ money in superior assets at significantly lower cost than retail funds,” he said.
Simpler products and wholesale portfolio construction is at the heart of their success.”
Having been tasked by the government with assessing the efficiency and competitiveness of the super system, the Productivity Commission has been trying to work out why some super funds and sectors consistently over perform and others underperform.
By the end of the year it will make recommendations about new government policy to nudge people toward the best funds.
It will also come up with a way to ensure underperformers are removed from the default system altogether.
The new report contains additional analysis of costs and fees. At least three million members are in high-fee products and almost all of these products are in retail funds, the report says.
The commission’s May draft report highlighted the twin problems of multiple accounts and under-performance.
Combined, these lead to much worse retirement outcomes.
In its latest report, the commission has been forced to upgrade its assessment of the system’s performance because it compares favourably with those overseas.
“At a system level, Australian funds on average achieved comparable returns to pension funds in other countries for most major asset classes,” the report says.
“But Australian funds have relatively higher investment costs for some major asset classes, including equities and fixed interest.”
The combination of the commission’s findings and the hearings of the banking royal commission have seen the super system take a battering.