Bank Royal Commission – Be careful what you wish for

Industry super fund executives can expect to be interrogated about sporting sponsorships

By Mike Taylor  Super Review  1 May 2018

Faced with having to answer for 10 years of decisions and expenditures, superannuation funds may live to regret having pushed so hard for a royal commission.

The Royal Commission may have a different view of the sole purpose test to that of Australian Prudential Regulation Authority.

Those who write the terms of reference of a Royal Commission set the agenda.

Thus, the Turnbull Government has set the agenda for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which means that none of the superannuation fund executives who received letters from the Royal Commission in early December should have been particularly surprised.

Those letters, copies of which have been obtained by Super Review, point to the fact that some superannuation funds are going to be made to pay for Industry Super Australia’s (ISA’s) strong support for the Federal Opposition’s persistent campaigning for a Royal Commission.

Key questions contained in the letters go directly to superannuation fund expenditures in the context of the sole purpose test contained in the Superannuation Industry (Supervision) Act 1993.

Traversing a period of 10 years, the Royal Commission is asking superannuation funds to explain “to what uses and in what amounts has the entity applied members’ funds other than the investment of those funds, the administration of the superannuation fund and the payment of member benefits?”

In other words, certain industry superannuation fund executives can expect to be interrogated about sporting sponsorships, the occupation of corporate boxes at sporting events and the expenditure of funds on national television advertising campaigns in the knowledge that counsel assisting the Royal Commission may have a different view of the sole purpose test to that of Australian Prudential Regulation Authority (APRA).

Super Review cannot be sure whether every superannuation fund received a letter from the Royal Commission, but its inquiries suggest that all the funds who funded the ISA’s “compare the pair” and subsequent television advertising campaigns received letters requiring them to reveal the nature of their expenditures and why they were made.

Perhaps interestingly, a survey conducted by Super Review at the Association of Superannuation Funds of Australia national conference just ahead of the announcement of the Royal Commission revealed some strong differences of opinion about whether superannuation should have been captured in the process.

The survey, the results of which are published elsewhere in this magazine, revealed that more than 60 per cent of superannuation fund executives were in favour of the Government moving to scrutinise banks and other financial services organisations but most were much less willing to have their own organisations placed under the microscope.

Asked whether they believed a Royal Commission should be held into banking and financial services, 61.5 per cent of respondents answered ‘yes’ with 38.4 per cent answering ‘no’.

Asked whether, if a Royal Commission were held it should include superannuation funds, 48.7 per cent answered ‘yes’, with 43.5 per cent answering ‘no’.

Superannuation fund executives and trustees have told Super Review that the demands of the Royal Commission will put a strain on their resources, particularly with respect to tracking decision-making and consequent expenditures as far back as 1 January, 2008.

This is because, in a number of instances, there have been significant executive and board changes within the superannuation funds, together with a number of fund mergers.

Sometimes, where politics are concerned, it is best to be careful what you wish for.

Original article here

There’s nothing passive about AusSuper’s operation

By Michael West  Sydney Morning Herald  14 Feb 2016

Glamorous ad campaigns and glitzy sponsorships were once the domain of the retail super funds, the big-fee, bank-owned money managers. On the other side of the tracks, their modest rivals from the industry super sector eschewed the limelight.

They plugged away for members, their costs were lower and their returns, year after year, were therefore superior to their showy retail counterparts.

Lleyton Hewitt helps promote AustralianSuper

They still are. Though things are changing. Those who tuned in to the Australian Open tennis over the summer could hardly have missed the deluge of advertising by AustralianSuper, now the country’s biggest superannuation fund with a gargantuan $95 billion in assets under management. Its umbrella group, Industry Super, even rolled out tennis star Lleyton Hewitt as an ambassador for its retirement campaign.

There is an unwitting irony in this Lleyton sponsorship. Unlike the typical Industry Super battler, Lleyton Hewitt is based in the Bahamas. Whether he is receiving the 9.5 per cent super guarantee on his endorsement deal with Industry Super is therefore unclear.

AustralianSuper has gone on an unprecedented acquisition binge however, and the question needs to be asked; how is this serving the interests of members? Is it vanity? Is it a costly and unnecessary exercise in empire-building?

Unlike retail funds, imbued with an explicit profit motive, the primary duty of industry super is to represent the interests of members. The AusSuper narrative is essentially, then, if we grow we can deliver economies of scale to our membership. Ergo, costs will come down per member.

Indeed chief executive Ian Silk talked a lot about scale in a series of “exclusive” newspaper articles over the weekend. Some $2 billion has been spent in recent times buying property in London and Hawaii.

The scale narrative does not stack up, at least yet, when you look at the costs line in the annual reports. Last year, costs increased 9.4 per cent last year to $292 million (from $267 million prior). That is about $140 per member for each of its 2 million members. Staff costs alone increased 35 per cent from $51 million to $69 million in one year.

The higher costs were covered by increasing fee revenues, which jumped from $233 million to $288 million. The Member Direct Option, for instance, doubled its fees. Rather than using its growing scale to reduce fees and benefit members, AustralianSuper has been deploying its rising fee revenue to become even bigger and more powerful.

This is not a one-off. Expenses have been rising steadily every year since 2010. They have more than doubled. The business mix has changed so direct comparisons are fraught but total expenses rose from $280 million in 2010 to $833 million in 2014 while expenses of the trustee operation went up from $139 million in 2011 to $292 million in 2015.

It is fair to say that, for an institution of this size, one which now rakes in $13 billion annually in super contributions, a lazy $300 million in costs is hardly material. So what if they splash a bit on the tennis and The Voice?

“With more than 2.1 million members, advertising is one of the most cost effective ways to communicate,” said a spokesperson in response to questions.

There is something to this, and it could also be argued that the interests of members may be advanced by an institution which is very large, very well-known and therefore politically powerful. It could equally be argued though that scale has not delivered cost benefits to members – yet – and AustralianSuper appears to be an exercise in empire-building and, as such, is in danger of enfeebling its future returns. Corporate cultures of rapid growth and acquisition often end in pain.

Despite all the evidence which suggests passive funds perform just as well or better than active funds (thanks to lower costs), AustralianSuper has been warning against passive products and has actually been increasing its active management. The hirings will continue this year so costs are likely to go up again.

This may be the biggest but it is merely one fund. Most industry funds are more demure when it comes to splashing their members’ money about. The danger for the sector is if others enlist in a marketing war to defend their turf from expansionist managers and the entire sector ramps up its costs.

One thing is certain. Against the present backdrop of market volatility, you can bet your bottom dollar that, while investment returns are falling across the $2 trillion sector, investment fees will prevail; rail hail or shine.

As Lleyton would say: “Come On!!!”

Original article here

NOTE:  This is yet another reason why family SMSF’s continue to grow. With your own SMSF, you keep the profits in your own fund, which helps pay for your tickets to sporting events during your retirement.


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