31 August, 2017
Industry experts say that a new regulatory system supposed to enable superannuation fund members to see the costs their fund is charging them, will not cover about 20 per cent of the industry, leaving many uninformed and worse off.
Under the system, scheduled to apply from October 1, all super funds will have to disclose information on costs in their product disclosure statement. But a special exemption will leave “platforms” run by private sector super funds out of the equation.
“If the platforms are excluded it means there is not a level playing field and a lot of retail funds will be carved out,” said Jeff Brensahan, chairman of research group Super Ratings.
Platforms are investment structures that hold members’ funds while also allowing them to choose different investment options below the platform level. They hold about 70 per cent of the $587 billion in retail super funds, or about $411 billion.
The effect of the platform carve-out means the actual cost of running the platform will be declared but the costs of the investment activity under the platform will not.
There are two problems with that carve-out. It means investors can be lulled into thinking retail funds are cheaper than they really are and encouraged to put money in which will in turn return less than they expect because the full cost structure has not been declared.
Secondly, it could make not-for-profit funds and the 30 per cent of retail funds not covered by the exemption look relatively more expensive.
“New super disclosure rules will make it impossible for consumers to compare super fund fees and costs giving bank-owed and other retail super funds another leg up by failing to capture investment platforms,” said David Whiteley, CEO of Industry Super Australia.
Mr Bresnahan said: “The platform might charge 50 basis points to manage but there could be another 50 basis points of costs under that that are not captured.”
The measure could also damage the capacity of not-for-profit industry funds to make long-term investments in areas like infrastructure and private equity by portraying their costs as higher than they actually are.
“It runs the risk of making direct investment look more expensive than indirect investment when that’s not the case,” Mr Whiteley said.
“This could negatively impact both member returns and the capacity of Australian super funds to invest in long-term, nation-building infrastructure projects.”
Direct investment where funds buy into projects or properties “can cost as much as four times the cost of passive investment”, Mr Bresnahan said. “But funds will return more from it.”
Those funds making active investment could find themselves compared unfavourably with retail funds which declare platform costs that are only half their overall costs. And their overall returns through indirect investment could be significantly less than that earned by direct assets by their competitors. “The real point is what funds return on top of all costs,” Mr Bresnahan said.
Cbus CEO David Atkin said the fund questioned whether the Australian Securities and Investment Commission’s new rules would create clear and consistent fee and cost disclosure “given that different disclosure rules will apply depending on the structure of the super fund and the way they structure their investments”.
ASIC investment and superannuation manager Gerard Fitzpatrick said: “If a super fund considers that investment costs are offset by greater returns, then they should be communicating the benefits of that investment strategy that to their members.
“These changes are intended to improve the accuracy and comparability of the information provided to consumers.” Financial services minister Kelly O’Dwyer said the ASIC move “supports increased transparency across the superannuation sector”.