Australia’s banks may have suffered severe scrutiny during the first part of the royal commission, but with the focus now shifting to superannuation, their situation could become much worse.
But it’s not just the retail and bank-owned super funds that will go under the microscope. Round five of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry will also focus on industry super funds, which may have cause to be nervous about what’s in store.
It is believed that the Government included super in the royal commission to embarrass industry funds for their connection to unions.
But it may be other factors that bring them undone, including their share of the tens of billions a year in fees extracted from people’s retirement savings.
“We estimate that the excess fees and charges and underperformance in super is about $12 billion a year,” RMIT University Associate Professor Michael Rafferty told the ABC.
“In other words, the rip-off in wealth management is about three to four times the rip-off in banking.”
While industry funds can hardly be accused of underperformance, Prof. Rafferty says that offering services such as financial planning, charging for insurance and prominently advertising their products make them look a lot like retail funds and “the net result of all of this is the whole superannuation industry is charging people too much”, he said.
Industry funds may also come under scrutiny for their lack of transparency, says independent financial adviser Louise Lakomy.
“I think retail funds are better at the transparency piece, because you can usually have some kind of research paper or some kind of product detail that goes into who the fund manager is, what the exposure is to a commercial property, retail property,” said Ms Lakomy.
“It goes into a lot more detail than what a typical industry fund would do.’’
Australia’s biggest superannuation provider, AMP, may have already borne the brunt of the brutal royal commission investigation, with billions wiped off the company’s value, half a billion in costs, recommendations for criminal charges and barely a body left sitting in the top offices but, if its banking practices are anything to go by, once the focus shifts to super, it can expect a lot worse.
The Productivity Commission has already indicated that it won’t be pretty for super. Earlier this year, it released a report damning providers for exorbitant fees and what it believes is a sector imbued with corruption, inefficiency and unnecessary costs.
One such cost is insurance, which can wipe out huge portions of retirement incomes. According to the Productivity Commission’s draft report on super, one in four people don’t realise they’re paying for life insurance as part of super. If these people have multiple accounts, they could be losing hundreds of thousands over the life of their funds.
“Income protection policies have terms which say you can only collect under one policy,” said Grattan Institute chief John Daley.
“So, by definition, if you have a number of those policies, people are paying premiums and they could never collect on them.”
Industry regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) are also up for a roasting, with many finance experts saying the both talk the talk when it comes to regulation, but do not walk the walk.
According to the same draft report, APRA has been missing in action when it comes to regulating Australia’s $2.6 trillion super industry.
The report revealed that one in four funds – retail, industry, corporate and government funds – consistently underperform, a fact which is hidden by the lack of quality performance data.
The Productivity Commission has accused the regulators of not holding funds accountable for bad behaviour, to the detriment of millions of Australian fund holders.
“The problem here is the regulators needing more spine,” said Mr Daley.
“Regulators in Australia, financial regulators, by and large have plenty of powers, the issue is whether or not those powers are exercised.”
One thing is certain: the next few weeks will be an eye-opener for fund holders, but will any such action taken as a result of the commission actually benefit retirees who may have been victims of super rorts over the past 25 years? Or will the result be the Government putting the onus back onto the customer, for not having chosen the right fund in the first place?
What would you expect as a fair result of the royal commission into super? Should you expect compensation for poor practice? Or do you trust that your fund has performed and behaved admirably?