The complexity of the superannuation industry can often undermine investors’ confidence, and while some experts are hesitant to draw large comparisons between the two sectors, others recognise the retail sector is falling behind.
Quite simply, industry super funds have significantly outperformed retail super funds in terms of returns, and have done so over one, three, five and 10-year periods.
What’s more, with the current Royal Commission into Misconduct in the Banking, Superannuation and Finance Industry, some super funds are facing significant challenges in proving they always act in members’ interests under the sole purpose test embedded in the Superannuation Industry (Supervision) Act (SIS Act).
Industry funds: Leaders in asset allocation and product solutions
Industry funds have been consistent top performers in the superannuation game, producing stronger investment returns than retail funds year after year.
Senior investment research manager at Chant West, Mano Mohankumar, explained that performance differentiation was primarily driven by the industry funds’ higher allocation to unlisted assets.
Industry funds tend to invest in unlisted property, infrastructure plays such as power stations and airports, and private equity while retail funds are more likely to gain that exposure through listed vehicles such as real estate investment trusts (REITs).
Interestingly, while this difference in allocations may lead to stronger outcomes in general performance, it also allowed retail funds to recover faster from the Global Financial Crisis (GFC) than their industry counterparts due to their heavier exposure to listed equities.
This higher allocation of assets derives from a combination of a reliable contribution flow entering the funds through modern awards and a disengaged member base, meaning that there is a high cash flow entering funds and virtually no chance of money coming out of funds.
As well as this, industry funds have also benefited from having a preparedness to be active with their asset allocation decisions, often shifting away from their long-term asset allocation in order to take advantage of mis-pricings.
Chief executive officer of SuperRatings, Kirby Rappell, said another key divider was that industry funds tended to focus on simpler product solutions, as opposed to retail funds who, historically, focus on more complex solutions targeted to a different audience.
But, Rappell noted the industry was changing. “I think it is hugely important that there becomes less of a divide between the sectors– it should be ‘what’s a good product?’”
Retail Funds: Transparent and tech-forward
While retail super funds have tended to linger in the shadows of industry funds in terms of performance, they’ve remained a popular option for planners and members alike.
Financial planners have long been sceptical of industry funds due to their lengthy rollover process for members and a lack of transparency in their underlying member expense ratio (MER).
In other words, planners have not trusted that industry funds are upfront about what members are really paying. They are conscious that industry funds have previously failed to provide adequate explanations for fees. For example, some industry products have been offered at higher fees than the same retail product.
As retail funds actively advertise that members must pay fees to advisers, the question becomes why the industry fund has extracted a higher fee when they claim to not do so.
The disputed status of super fund fees, payments and MERs are expected to be investigated by the Royal Commission.
Head of investments at Colonial First State (CFS), Scott Tully said member-convenience was also key, and retail funds like CFS worked to keep platforms digital and communication simple. Although this was a costly process, the presence of a parent company like the Commonwealth Bank of Australia (CBA) meant the costs did not need to be met by members.
“We spend a lot of money on technology infrastructure for our members,” said Tully. “CBA is our parent company, so when we need money invested in the business, that can happen. The issue with an industry fund is that they don’t have a parent company, so they don’t have any capital to support their business. This means that if they want to raise money, they essentially have to get the members to pay for it.”
As well as this, super funds have been asked to fork out large sums of money to comply with new regulations introduced from the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), and having these costs met by a parent company also relieves the responsibility from members to raise those costs.
Tully noted that a lot of misconceptions around the retail fund sector stemmed from APRA data that had not compared like versus like.
“Some of those surveys compare products that we have for retirees with products that are offered for accumulation members,” he said. “But, when you compare our funds with a comparable level of equities, you will find that the performance is definitely on par and up there.”
Tully said that while the comparisons could often undermine investor confidence, his advice was plain and simple: seek advice and research your funds.
Tully said the governance structure of retail funds tended to be more in the members’ best interests, and was in line with the Financial Services Council (FSC)’s regulatory governance standard, which required a majority of independent directors.
Director of public affairs at Industry Super Australia, Matt Linden, argued, however, that the governance model of industry funds was superior to that of retail funds, and formed the foundation of their consistent outperformance. It was also the model used internationally across large, reputable and highly successful pension systems.
The governance structure of funds has been the subject of significant debate, and the Government had sought to change the model of industry funds to replicate that of retail funds.
“It was highly unsuccessful,” said Linden. “These arguments were unable to convince the Senate and the Parliament that in fact those changes would lead to better outcomes for members. On the contrary, we’ve argued that it could lead to poorer outcomes.”
Linden’s central proposition was that there is a high degree of alignment of interests between the trustees and the members, which means trustees know exactly whose money it is that they’re investing.
“This is vital to delivering the best outcomes for members. That really does affect very significantly in our view the care and diligence which they approach the task, and also the way in which the funds are run and operated,” he said.
Are the fees worth the fund?
Traditionally, members of retail superannuation funds pay higher fees as the fees accommodate financial advisers who in turn provide investment advice.
The argument exists that members of retail funds in fact benefit from these higher fees as they profit in the long run from good superannuation advice positioning them to invest in the right option.
The reality, Linden explained, was that super members are very disengaged, and investment choice can often be more of a hindrance than a benefit.
“When you look through APRA data, there’s about 40,000 investment options offered by APRA-regulated funds and 95-96 per cent of them are offered by the retail sector,” he said.
“They’re attempting to maximise revenue from the system. There’s a lot of portfolio churn and switching and there are obviously fees and costs when people switch investment option as well. It’s plain as day why it is that the retail sector have the model that they do. That level of choice probably serves to confuse.”
Linden said that as industry funds do not have to deliver profits or dividends to shareholders, they are able to deliver greater returns to members.
Long-term investing is key
Superannuation has become an increasingly competitive environment. Typically, there is enough growth for every fund, reflected in performance ratings that demonstrate no fund tends to stay at the top of the charts for more than one period.
The lines are gradually becoming blurred, with both industry and retail funds competing to introduce benefits that have historically been unique to one sector, proving that the industry is becoming more member-focussed.
“Going forward, it’s a much more concentrated, focussed market place. I think that those market dynamics are having an impact on fund offerings and funds focus on making sure that their service meets what clients need,” said Rappell, and he noted “healthy competition” was key.
Customers are advised, however, that investing in superannuation, industry or retail, is a long game.
“It’s important that younger members invest in funds with higher exposure to growth equities because they’ve got a long time to invest, and a bit of short-term volatility and ups and downs in the markets is something that, when you look back, won’t be noticeable in returns,” said Tully.
However, investors need to find the performance charts that show this. For example, survey data from rating houses like SuperRatings and Chant West has separated performers into categories like MySuper, Choice and Pension, making comparisons more reliable for members.
Head of research at Chant West, Ian Fryer, and Mohankumar said Chant West’s top ten performers had not significantly changed, despite some minor positional variations.
“Someone like UniSuper is excellent, and they have consistently been a top ten performer over the last ten years, but last year they didn’t have a great year for example, so it’s a long-term test” said Mohankumar. “We have found over the past few years that our top ten performers are pretty consistent,” added Fryer.
Choosing your super fund
When choosing which super to invest in, the experts advised that customers should be looking at investment opportunities, fees, performance and membership structures.
Although fees are a primary consideration, Fryer warned investors not to place too much focus on investment fees, as the funds that charge higher investment fees often get a better return for their members
Low cost can often be correlated with low return, and what should matter to members is the return net of investment fees rather than the level of the fees, according to Fryer.
“When we rate funds and we look at fees, we remove investment fees and look at returns, net of investment fees, and then we look at the administration fees separately.”
Rappell advised that customers should seek a fund that provides them with the opportunity to be properly advised.
“There is a significant untapped demand for advice in Australia, with the optimal level quite different to what we currently see,” he said. “It’s important to see how the provider is able to support their clients in getting engaged with their super, building knowledge over time, and paving a constructive pathway to financial advice at the right time in their life.”
Going forward though, retail funds face the challenge of gaining back members’ trust, and proving their model is worth investing in.
“I think, increasingly, questions will be asked about whether retail funds are prioritising members’ interests,” said Linden. “The answer to that lies in what the retail funds do going forward in the way they offer products to members.”