TWU

Bank profits and super savings are hopelessly conflicted

Release date: 15/11/2018

AFR, by Michael Kaine and Michael O'Connor, 13 November 2018
 
The big banks have to be turfed out of superannuation altogether, and it's the duty of industry funds to make the case. We are used to singing the praises of Australia's superannuation system. This has blinded us from squaring up to the fact that the modern system has become a game of roulette.

If your employer lands you with an industry fund, you'll likely enjoy a dignified retirement. But if they stick you with a retail fund it could cost tens, perhaps hundreds of thousands of dollars.
 
The reasons for this divide are well-established. Industry fund members enjoy lower fees and are free from conflicted financial advice. The industry fund investment philosophy emphasises long-term value and trustee diligence. By contrast, retail funds focus on so-called choice, and rely upon members switching between investment options which essentially keeps them in products with high fees.
 
We know how this pans out in the real world. According to McKell Institute research, members of bank-owned funds would have to work seven extra years to reach the level of return of industry funds. This is the cost of banks in superannuation – "the pinstripe premium".
 
The Hayne royal commission has confirmed the advantages of industry funds beyond all doubt and the temptation for the sector might be to bask in our victory. We must resist it.
 
The mission of industry funds, which deliver all profits back to members, is greater than just out-competing retail funds. Our mission is to expand the benefit we provide to all Australians, and we're nowhere near close to accomplishing it. The pinstripe premium is no accident. The big banks have capitalised on disengaged loyalty and apathy. ASIC estimates up to $1 billion was fleeced from superannuation accounts charging fees for no service.
 
Consider the experience of anyone in an AMP cash account: stinging fees for a low-risk product, combined with a meagre interest payment. AMP was clipping both ends of the ticket, such that many fund members saw their savings actually shrink.


CFMEU national secretary Michael O'Connor and TWU national secretary Michael Kaine present a united front over super funds.
 
Duty calls
 
Greed encouraged this mess, but the underlying problem is actually structural. Board members of bank-owned super funds have a legal conflict between their obligation to maximise returns to shareholders and their superannuation act obligation to act in the best interests of members.
 
The banking royal commission has pointed to the tangible impact of this conflict on retirement savings. Suncorp, for example, delayed transferring members to MySuper products so it could continue to enjoy lucrative commissions.
 
Now retail funds are attempting to pick themselves up off the mat, arguing the outperformance of industry funds can be explained by the so-called "illiquidity premium". The illiquidity premium suggests that industry funds have an investment advantage because they do not need to call on cash assets at short notice and can engage in longer-term investment strategies with higher returns, such as infrastructure. Of course, this investment strategy is also available to retail funds. They simply choose not to avail themselves of it. The real distinction is not liquid versus illiquid.
 
The reason retail funds make the choice they do comes down to who they owe a first duty to. Industry funds owe a duty exclusively to the members of the fund. But for retail funds there is an absolute conflict since the fund's duty is to both the shareholders and the members of the fund. It is member alignment versus shareholder alignment. This is why banks must be run out of superannuation. The Industry Super Australia "fox and henhouse" campaign dramatised this challenge. The banks and their fellow travellers will always salivate over the $2.7 trillion in Australian retirement savings. The "fox and henhouse" adverts were spot on. The next campaign should be a fox hunt.
 
Our unions are forging an alliance at the coming ALP national conference to remove shareholder interests from superannuation entirely. Our cross-factional alliance will push for ALP national policy to amend superannuation law. This would bring legal effect to a basic principle: in superannuation, you must have only one over-riding interest, the member.
 
We will also seek to fend off some of the misguided suggestions that have emerged from the recent focus on superannuation. One of these, the so-called "10 best in show" suggestion is particularly ill-considered. Under this system, employees would be defaulted into one of 10 mega-funds that follows them for their working life. The proposal seeks to get around problems such as people having multiple funds with small balances, eroded by fees.
 
But auto-consolidation systems can already deal with the problem of multiple accounts. The remaining issue of exorbitant fees is best dealt with by removing profiteering banks who are not aligned with the interests of members.
 
The "10 best in show" proposal would also mean our members lose the benefit of intimate industry familiarity. TWUSUPER for example, provides more tailored disability and death insurance because many of its members work in the nation's most dangerous industry – trucking. This is provided free of conflict and purchased at scale, making it affordable and relevant.
 
More fundamentally, it is worth remembering that superannuation comes from the workplace. It is the outcome of spirited battles waged in the late 1970s. Workers paid for superannuation by foregoing wage rises in the 1980s under the Accord process. This enduring link between wage bargaining and superannuation is the only way to increase superannuation contributions above the legal minimum.
 
The big banks have no useful role to play in our super sector. For the sake of all Australians we should stop pussyfooting around and take the action necessary to remove them.
 
Michael Kaine is national secretary of the Transport Workers Union and Michael O'Connor is national secretary of the Construction, Forestry, Mining, Maritime and Energy Union.
 

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