Garry Weaven deserves a vast amount of credit for the role he played to help establish Australia’s compulsory superannuation system, which he rightly and proudly describes as having few peers anywhere in the world.
The Hawke Labor government and the ACTU, then led by Bill Kelty as secretary and Weaven as assistant secretary, forged an agreement that spawned today’s $4 trillion pool of national savings.
But while the foundation of the system was deferred wages and compulsory contributions, today growth is fuelled primarily by investment returns.
In the March quarter of 2024, Superannuation Guarantee contributions to APRA-regulated super funds (so, not including SMSFs) totalled $26.7 billion, while $2 billion flowed in from salary sacrifice arrangements and $7.9 billion from personal contributions.
Over the same time, super fund net investment earnings totalled $124.3 billion. Weaven rightly points to the strong performance track record of profit-to-member funds as something to celebrate. Generally, these funds have performed better than their retail counterparts over decades.
But Weaven over-reaches when he claims that this performance is directly attributable to the structure of profit-to-member trustee boards. It’s tempting to make that connection, but it’s also worth remembering that correlation isn’t causation.
Equal representation of employers and members aboard level is a fundamental feature of profit-to-member fund governance. The structure makes sense for a few reasons, including the concept that because contributions are compulsory, those making contributions should be represented.
It also makes sense of you believe that the profit-for-member funds movement was established as a vehicle for unions to remain relevant and powerful in an environment where membership was declining, and industrial relations influence was being eroded.
Weaven argues that the profit-to-member fund board structure is “responsible for driving the industry fund sector’s superior approach to strategic asset allocation and careful fund manager selection, which in turn has helped drive our consistent outperformance”.
Weaven’s comments were supported last week by Super Members Council, which was formed by the merger of Industry Superannuation Australia and the Australian Institute of Superannuation Trustees to be the peak body representing profit-to-member super funds and their 11 million members with savings of $1.5 trillion.
SMC highlights what it says are the benefits of the equal representation model, and many of the points it makes are valid – including the fact that “these types of funds have largely avoided the sorts of consumer harms the Banking Royal Commission uncovered at financial services companies with for-profit governance models”. But it’s also making the wrong connection between board structure and investment performance.
Other factors at play
There are reasons profit-to-member super funds have outperformed their retail counterparts, but the structure of their respective boards isn’t the biggest one, if it’s even a reason at all. If it really were that simple, the answer to the for-profit sector’s relative underperformance would be to appoint a few fund members to trustee boards. There are obviously other factors at play that run deeper than just the board structure.
All other things being equal, profit-to-member funds should outperform their for-profit counterparts for the most obvious reason of all, namely, they don’t have to generate a profit for a shareholder; any profit they do make is returned to fund members.
A profit motivation also introduces potential behavioural issues and misalignments, including the risk that profits are put before members. A profit motive impacts on for-profit funds in things like generally higher fees, and then, when fees become a sticking point (especially in relation to the YFYS performance test), a shift to passively managed assets to match the profit-to-member funds on headline fees, irrespective of the long-term performance outcome for members.
Business structures are another major reason for the performance differential between for-profit and profit-to-member funds.
For-profit funds run their businesses as platforms that pull together individual investment options to construct balanced funds. The assets of for-profit super funds come directly from individuals or via intermediaries, usually financial advisers.
A key element of the adviser’s value proposition is to select investments that suit the client best, and to change the mix as the client’s circumstances change, or as the prospects for a fund or strategy change.
For-profit fund money is “hot” and is much more likely to move between funds, or between investment strategies offered by a fund. This relatively flighty capital makes it trickier for for-profit funds to invest in illiquid assets, such as infrastructure, which require a long-term commitment. You can only imagine what might happen if the value of chunky unlisted assets fell in value and, at the same time, advisers decided en masse to move clients out.
By contrast, industry funds manage large pools of relatively sticky money, with single asset-class options offered to the side. Sticky capital means profit-to-member funds can confidently invest for the long term in relatively illiquid assets and it’s not unusual to see 20 to 30 per cent of assets invested this way.
They can do it safe in the knowledge that SG contributions will flow in, and that it’s unlikely members will switch options (or switch funds) at scale. And that has given them a performance edge.
Whether equal representation at superannuation trustee board level remains desirable in future is an open question and a debate worth having. Super funds are becoming large, complex financial organisations. The representation model needs to be debated on the issues that matter and really affect member outcomes, such as the skills and expertise of board members in overseeing these increasingly complex organisations.
Colin Tate AM is founder and managing director of Conexus Financial, publisher of Professional Planner.
Further to what Max said above, the other concerning aspect is that APRA allow a 50% allocation of unlisted assets to ‘Defensive’.
This essentially means the asset allocation is skewed and the fund ‘neatly’ fits into a Balanced comparison list against other funds that might be more ‘transparent’.
No wonder they do so well in those leaderboards, the ones they shouldn’t actually be in!
and just maybe it has to do with the fact that industry funds are in fact giant ‘ponzi’ schemes and where the valuation of unlisted assets never have to be tested in the market place –this of course does wonders for represented investment returns.
Of course one of the features of these funds, which Garry omitted to mention was their ability to pay out millions of dollars of members; benefits to various trade union entities in a manner which defies prudent analysis.