KPMG’s partner in charge of wealth management, Paul Howes, has warned industry superannuation funds not to “get high on their horses” about a net-inflow surge following revelations at the Hayne royal commission about bank-owned funds’ misbehaviour, arguing that more attention needs to be given to de-accumulation.
Howes was a well-known trade union figure and is a former AustralianSuper deputy chairman. He’s now a super industry consultant and said he was “astounded” by comments being made about the potential for ascendance of profit-to-member funds.
“The word of caution that I have been providing to my industry-fund clients has been, ‘Don’t adopt the same hubris that led a lot of people in the retail sector to land where they’ve ended up,’ ” Howes said, ahead of his appearance at the Investment Magazine Chair Forum, run by Professional Planner’s sister publication, where he will be speaking about the fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“I also worry about funds not remembering…what an industry fund is, which is not the owner of capital. It is the trustee of capital that belongs to the members and, ultimately, at the trustee organisation, you shouldn’t be running anything.”
Stunning retail outflows
Net outflows of more than $3.3 billion left the funds run by AMP and the big banks in the September 2018 quarter; on the flipside, profit-to-member funds drew $10 billion of net inflows during the same quarter.
An investor note Credit Suisse published last week stated this was partially due to revelations at the royal commission that some organisations had inappropriately charged fees to dead customers – amidst a range of other headline-grabbing misconduct – at institutions such as IOOF, National Australia Bank and the Commonwealth Bank of Australia.
“I think it’s important that industry funds, in particular, don’t get too high on their horses and also think about the systemic issues that come out of the royal commission that the industry funds will have to deal with themselves,” Howes cautioned.
Issues such as conduct, culture, and the increasing complexity of the industry-fund sector could pose future problems, Howes noted.
“Now these funds are becoming far more complex, not only in the way the institutions run but in terms of the product suites developed for members,” he said. “There’s more risk within these institutions that are potentially developing products that may not be in members’ interest. That could lead to conduct issues and dealing with some pretty significant challenges there.
“When I was first a trustee director of AustralianSuper, it was a relatively small institution and the funds were pretty simple and there wasn’t a huge amount of complexity involved in the operating model, nor in services that were provided to members.”
More focus on retirement
The de-accumulation stage has not been given enough airtime amid the focus on the royal commission, Howes argued.
In October, Assistant Treasurer Stuart Robert announced super funds would not have to offer a comprehensive income product for retirement (CIPR) until July 1, 2022 – an extension of two years.
Last week, the Productivity Commission deemed this move “sensible”, as the process to create products best suited to various members’ retirement needs has so far “beset by design challenges”.
“Trustees do not always want to offer these products, and forcing them to do so may conflict with their obligations to act in members’ best interests,” the PC’s report stated. “The government should thus reassess the benefits and costs of its proposed retirement income covenant, and abandon it if the flaws cannot be sufficiently remediated.”
The government unveiled a number of retirement income reforms in the 2018 Federal Budget, including a Retirement Income Framework and an accompanying covenant.
These measures would require super trustees, for the first time, to help members reach their retirement-income objectives. A proposal calls for legislating the covenant by July 1, 2019, for commencement from July 1, 2020.
“Everyone’s been watching the royal commission and it feels like we haven’t been talking about the real issues that we still need to get back onto the table,” Howes said, “particularly where industry funds are weakest, which is around that question of retirement and creating sustainable longevity products.
“We need to ensure that we shift focus back onto de-accumulation, rather than just accumulation…or to debate the best ways to service members, and I feel like we’ve just lost that, and we’re back to ground zero. When we think about the proper purposes of super, that’s still the challenge that hasn’t been resolved.”