Investment expert slams ‘uncompetitive’ superannuation industry

Mega-mergers are coming and there will soon be far fewer superannuation funds: expert.

Jack Gray

Investment veteran Jack Gray says there is little difference between superannuation funds’ strategies and that Australia would be better off with only one or two funds.

Dr Gray said superannuation funds, such as Australia’s big four banks, “don’t really compete … they copy each other. They have different coloured brochures, but there’s no competition there. Competition is a furphy.”

“We are in a business, an industry, where competition is really a pointless thing to worry about, he told Investment Magazine’s Market Narratives podcast.

Dr Gray is the former co-head of asset allocation at GMO Boston, chief investment officer at SunSuper, executive director at AMP Asset Management, adjunct professor of finance at the Centre for Investment Management Research at Sydney’s University of Technology and director and special adviser to Brookvine.

“When I was a CIO, that was always the first thing they wanted to know,” Dr Gray said. “How have we done relative to AusSuper or somebody. ‘Who cares?’ would have been my answer. And the second (question) was, ‘What happened in the market today?’ And again, I would say, ‘I don’t care.’ Asking the right questions is a key thing for these funds, but it’s not clear they do.”

He says clients “don’t give a damn” about the relative performance of funds, despite it being the focus of fund boards.

This is despite industry watchdog the Australian Prudential Regulation Authority (APRA) ‘naming and shaming’ poorly performing funds with its MySuper Product Heatmap which New Daily super editor Rod Myers says has led to a 42 per cent decrease in super fees.

“The financial regulator has kept the pressure on throughout the pandemic, releasing another heatmap at the end of June that showed fees had fallen for millions of superannuation members,” Mr Myer wrote.

“APRA found that funds servicing 6.1 million members of MySuper default funds, or 42 per cent of the market, had reduced account fees by a collective $110 million a year.”

APRA deputy chair Helen Rowell says she is pleased millions of members are paying fewer fees, “especially given the additional challenges and operational costs funds have faced in relation to COVID-19”.

“Furthermore, some funds and products have closed, and transferred their members to better-performing products.”

Mr Myer says APRA’s heatmap is “part of a plan to shrink the number of super funds by pressuring under-performers to merge, close or at least lift their game.

In June, APRA was explicit about its aims, saying it “continues to pressure the trustees of poor-performing funds to merge or exit the industry unless they are able to materially lift their game”.

Dr Gray agrees with the shrinking idea.

He would like to see the government create an independent body that appoints the people who run one or two large superannuation funds, saying it would increase efficiency.

“You get rid of the relative performance (question), so the pure ideas of investment come through,” he said. “And you get rid of a hell of a lot of extra baggage. Do we really need all these people? Do we really need all these funds at the moment?”

The Australian Institute of Company Directors (AICD) believes the push for superannuation mergers, following the banking royal commission, is “set to create a series of mega industry funds with potent power”.

“The (super fund) businesses are growing and developing very quickly to become much more complex institutions,” Linda Elkins, national sector leader, asset, and wealth management, at KPMG, told the AICD.

As a result, funds will need to hire directors with skills in marketing, compliance and investment.

“Consolidation is happening at a pace that hasn’t happened in the past 10 years,” said Naomi Edwards, the independent chair of Tasplan Super and a non-executive director and fellow of the AICD. “I know a lot of legal advisers and consultants who say they’re currently dealing with multiple trustee boards who are considering mergers.”

The changes came after the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry exposed serious issues in the super sector, which even included charging fees to dead people. APRA and the Australian Securities and Investments Corporation (ASIC) also came under fire for their role in overseeing the governance of the super industry.

Dr Gray understands if the ordinary investor doesn’t bother keeping up with every to and fro in the super industry.

“People don’t understand super and it’s not because they’re dumb, it’s because they’re smart,” he said. “Why would you want to know much about super? Do you trust the system to do what it’s meant to do? By and large, yeah. And what are you going to do about it? There’s nothing much you can do about it. Engagement is really an empty thing.”

Does Australia need fewer superannuation funds? Are you ‘engaged’ with your fund and its investments?

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    COMMENTS

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    Horace Cope
    16th Jul 2020
    11:04am
    "Does Australia need fewer superannuation funds? Are you ‘engaged’ with your fund and its investments?"

    Yes we need fewer funds. If there was a merger of funds it would mean fewer outgoings for boards, management and employees which must mean lower fees. Allow the survival of the fittest to rule how takeovers/mergers would be carried out.

    We're not "engaged" with our fund's method of investments. We don't really care if the investments are "ethical" as long as they produce a higher rate than the compulsory drawdown. For those who want to invest in "ethical" areas may I suggest that you create a SMSF and leave the rest of us to get on with our lives. We're over the vocal minority that demands banks stop investing in coal mines or asking companies to invest in wind farms and solar. Ideology should never get in the way of commerce.
    inextratime
    16th Jul 2020
    11:38am
    Correct....
    Louisa
    16th Jul 2020
    11:54am
    agree, absolutely correct
    old frt
    16th Jul 2020
    2:18pm
    How true Horace , we want returns not some little ponce telling our funds where they should invest . The amount saved by these enquiries is crap , $100 million reduction in fees from a fee pool of $18 billion is a half of one percent (.5%) more would have been paid to the lawyers and other buffoons involved in the enquiry.
    Hardworker
    16th Jul 2020
    1:30pm
    Yes we definitely need fewer. It should be an even playing field for workers saving for their retirement. Not one or two funds doing much better than all the rest. My theory on why there are so many superannuation funds, just like the proliferation of other businesses as well, like education colleges for instance, is that they provide JOBS. Whenever the Govt favours one scheme or industry over another, business minded people get on the band wagon and the next thing there is a proliferation of businesses all doing the same thing. IT CREATES JOBS. You just have to look at the number of travel insurance companies which are underwritten by the same group of larger insurance companies to see how it works.
    Scott
    16th Jul 2020
    2:31pm
    Impossible to reconcile the Cope & Co line with the fact that, overall, industry superannuation funds clearly outperform for profit funds.

    Along with the question ‘does Australia need fewer superannuation funds’ ought sit: ‘should Australians continue to tolerate superannuation funds with conflicting interests’?
    el
    16th Jul 2020
    4:10pm
    exactly
    el
    16th Jul 2020
    2:39pm
    not everyone thinks 'purely' of returns. Many investors (women in particular) prefer to know where their superannuation contributions are invested, whether the investments are local, global, 'sustainable' green or encouraging forward thinking ethical manufacture and development, quality infrastructure etc. Sometimes this means not so high returns but often if invested by fund managers who know their stuff, higher returns commensurate with higher risk. Accurate advice re weighting of investments is now available - and people are able to direct their funds in a direction they prefer. Fund managers (as well as advisers) are also required to act ethically in their advice to investors in superannuation as elsewhere. I ahve dealt in the past with both types (an 'independent advisor' who years ago 'advised' all funds go into a publicly listed firm (an insurer and the firm that had retained him as it turns out), another fund that I had to leave when I left my employer (and lost in fees half what I had contributed) an arm of the same publicly listed major insurer) and with UniSuper, NSW State Super and SuperSA. I'd take the industry and public sector funds over the other (corporate) funds any day. So yep, it does pay to track balances and returns - I did and industry funds and the public service 'won'. Comparing results is how I determined which fund to place all my super over time. And it sure wasn't a corporate. All super funds aren't the same.
    adbob
    16th Jul 2020
    3:13pm
    It is now widely known that Industry Funds generally give you a better result becaase of their lower fees, but their fees in pension mode (they boast mainly about their accumulation mode deals) are still quite high - it's the tax break that gives them the edge.

    OTOH ETF tracker funds and the like have very low fees and most retirees have quite alot of headroom befroe they hit the (>$32000) point at which income tax cuts in so a lot more coul probably be made of that option.

    I have never seen a performance comparioswn between ETFs and super - plenty within each of those sectors - but how do they compare with each other.

    Having only one or two big super funds sounds superficially attractive but what if their CEO started pitching at the wokery (like one did here recently) and you had no other options.

    Most retirees (of whichever political stripe) are fairly level-headed and don't want anything to do with virtue-signalling snowflakes - nor their polar opposites.
    el
    17th Jul 2020
    10:38am
    Am not referring to virtue signalling '.snowflakes'. There are some who prefer to avoid investing in gambling entities, or tobacco products; others who avoid investment in alcohol production; some who prefer to invest in companies producing and marketing alternative power (as opposed to that generated by coal mining or nuclear energy), who are willing to support an infrastructure fund. There is 'green' and 'green-washing' (just as there is virtue and virtue signalling).
    While many are not prepared to invest everything in a purely 'ethical' fund - some are willing to allocate a % of their retirement savings in such an allocation in their 'mix' of investments via their super fund. Just like few are totally 'cash' or 'domestic shares' or 'foreign' shares or 'local construction' or 'overseas construction' etc, so they can 'mix' it. Many moved a lot into 'cash'; others 'stuck the course'. Many would have asked for informed advice. That is why we have funds and fund managers.
    Getting advice can be a wealth hazard though, even with your industry superfund, if your investment is even $100-$150,000 ( a typical woman retiree balance) as it is a few thousand 'a knock on the door' each time and in times of low returns could sacrifice any gain... For those with a million or so invested the same few thousand is far more affordable. The lower the balance, the less a retiree can afford the advice they , of all people. need most.
    Mariner
    17th Jul 2020
    9:14am
    I liked the old company pension scheme where every employee was a member and at 65 we got paid out or we could draw on it on a monthly basis, worked a bit like the public service pension fund. Was an incentive to stay with the company as well. This chopping and changing of Super today is confusing for most people and if given the choice I am sure a lot of people would opt out.
    adbob
    17th Jul 2020
    10:21am
    Be careful what you wish for.

    If savers were compelled to buy an annuity with their tax-advantaged super pot that would have the same effect.

    One of the problems with the present system is that none of us know how long we've got and (esp if we use up capital) how long we need our pension pots to last.

    In the UK there was that compulsion with a proportion of tax-advantaged private pension pots which was only dropped when annuity returns became so low that it was better (for a fixed term one) to just spend the money straight out - lifetime
    annuities a different kettle of fish of course.

    OTOH in Australia if you spend your super pot down to the cut off level for the means test clawback you get the full govt Age Pension plus whatever your super generates - which - despite what the claimanty whingers say - is not a bad screw. It's more than I (and most others - ie the bottom end of the self-funded retiree cohort) get.

    That's currently. Wait for the next lot of changes.
    el
    17th Jul 2020
    10:57am
    Mostly you can stick with the same fund even if you change your employer. You can nominate your original fund at each workplace and it just accumulates in that fund
    - if the employer does the right thing and deposits it (not just saying that it does on your payslip...). Perhaps check your super balance at your fund to ensure money is going in...
    You should receive a regular statement that shows the money being deposited by your employer, any additional amounts you decide to deposit plus later any co-contribution the government adds if you are a low income earner making post-tax contributions.
    (So much better than 'the old days' when a year could go by and no funds be deposited by your employer and you be none the wiser.)
    NO super - like the very old days - and many more people would be far worse off. Voluntary super didnt work for everyone - it was too tempting to use the funds today - and then end up with nothing but the Age pension at the end of your working life... Today a super pension fund payment combines with a part Age pension or even full Age pension for a satisfactory retirement income - I agree with adbob re that.
    johnp
    29th Jul 2020
    2:49pm
    Noticed that Jack Gray is an executive director at AMP. That automatically makes him not an expert !! Also see where he says "Who Cares" E.G. "How have we done relative to AusSuper or somebody. ‘Who cares?’


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