New figures highlight industry super fund outperformance

New data released last week by research house SuperRatings shows that the industry super fund sector has once again outperformed the retail super sector in the SR 50 Balanced Option over one, five, seven and ten year periods to 31 March 2012.

The new data shows that industry super funds achieved a median rolling return of 5.86% over the last ten years, compared to a median rolling rate of return of 3.56% by retail funds over the same period, a difference of 2.3%.

David Whiteley, Chief Executive, Industry Super Network, said: “This latest data confirms yet again that the industry super fund sector continues to deliver better long term returns on average for members than their retail counterpart.”

The new data indicates that the only period for which retail super funds slightly outperformed industry super funds was for the rolling three year period to March 2012, with retail funds achieving performance figures of 8.62% and industry funds 8.15%. This can primarily be attributed to the greater exposure to listed equity markets by retail super funds.

David commented that “the new figures provide even further impetus for the principal criterion for the selection of default funds in modern awards to be that of long term net performance”.

Industry Super Network is calling for a criterion of long term net performance in default fund selection based on the Cooper Review proposal that APRA develop a reporting standard that measures the performance of superannuation funds net of all costs, fees and taxes.

SR 50 Balanced (60-76) to 31 March 2012

For more information, visit www.superratings.com.au

Media Release: New APRA data shows industry super fund outperformance

New APRA data shows that the not for profit sector, including industry super funds, continues to deliver better returns on average for members than its retail counterpart.

Read Media Release here.

New APRA data shows industry super fund outperformance

New APRA data shows that the not for profit sector, including industry super funds, continues to deliver better returns on average for members than its retail counterpart.

Read Media Release here.

Stepping up to the challenge of net performance

With many super funds underperforming in recent years, David Whiteley argues that there is only one true benchmark upon which the super industry should be compelled to compete: that of net returns.

Australia’s superannuation system is one of the crown jewels of Australia’s economic landscape. Our super system will provide Australians with a better standard of living in retirement than they would have had on the Age Pension alone. More broadly, superannuation provides a critical pool of capital for the Australian economy and supports growth and jobs. This capital also helped to buffer our nation against the Global Financial Crisis.

However, our super system suffers from market failure, caused by three factors: member inertia and disengagement; product complexity and low consumer financial literacy; and conflicted remuneration within the financial planning industry. This market failure has led to millions of workers being members of under-performing super funds, typically owned by banks and insurance companies.

To address this, Industry Super Network (ISN) has proposed a very simple principle: that the primary determinant of competition be net returns (that is, the investment return received by members net of all fees, charges and taxes).

Adopting this principle would mean that the super industry becomes aligned with the interests of fund members (who are compelled to save) and the broader community. Higher net returns means higher super savings for individuals and therefore a lesser burden on future tax payers. This competitive tension is critical to the integrity of our compulsory super system as it places members’ interests at the heart of the system and rewards the better performing super funds that deliver superior returns to members.

Major banks and insurance companies, however, appear to oppose competing with other sections of the superannuation industry on the basis of net returns. They have attempted to largely oppose or dilute reform initiatives designed to ensure super funds compete on net returns. 

Analysis of the APRA data by ISN’s Chief Economist found that over a 14-year period to 30 June 2010, the aggregate internal rate of return to investors in retail superannuation funds lagged the not-for-profit funds by 2 – 3% per annum and that retail funds returned on average 3.66% per annum, less than the average cash rate of return over this period of 4.23% per annum.

The data also shows that retail funds do not pass on the benefits of scale to their members and that profit orientation is the prime determinant of returns. In short, it seems the major financial institutions are trading off member returns for profit.

Typically, retail super funds have been unable to measure up to their competitors. According to Super Ratings SR50 Balanced data to 30 September 2011, the industry super sector outperforms the retail super sector over one, three, five, seven and 10 years. Retail super funds have also sought to retain conflicted remuneration systems such as volume rebates and commissions for risk insurance.

Australia’s super system has been described as a “public-private partnership”. The description is apt. This partnership places a higher duty of care on the private sector because of the compulsory nature of super, the tax concessions and its role in our economic future. 

With member confidence in super affected by the global financial crisis and negative returns, it is time for the super industry itself to be the leaders of necessary modernisation and change, not reluctant followers. It is deeply disappointing to find that major financial institutions continue to seek to delay and dilute reforms.

David Whiteley is Chief Executive of Industry Super Network.

New ISN research shows retail funds failing consumers

Australians collectively hold more than $1.3 trillion in superannuation savings. However, new research by ISN shows that while not-for-profit funds are delivering returns above basic market rates, the for-profit sector is seriously underperforming. This needs to be addressed to restore confidence in the system, says ISN’s Chief Economist, Sacha Vidler.

In September, Industry Super Network (ISN) released new research that reveals Australia’s not-for-profit superannuation funds have, on average, significantly outperformed retail superannuation funds over the 14-year period June 1996 – June 2010. The research also found that while not-for-profit funds provided better returns than the risk-free cash rate and a diversified investment strategy, the retail sector in general failed to even achieve the cash rate of return (after adjusting for tax and administration costs).

The research paper, entitled A comparison of long term superannuation investment performance, was written by ISN’s Chief Economist, Sacha Vidler. The research is based on official APRA data.

“This paper examines in detail the long term performance of our super funds to see whether they are up to scratch – and whether they are delivering on our super system’s promise of a markedly better retirement for all Australians,” says Sacha.

“The analysis shows that some of the biggest household names in super are failing their members – providing substandard returns that are less than cash and with high volatility. If retail funds had not underperformed over the past 14 years, Australians’ super nest eggs would be $83 billion higher than they actually are now.”

Key findings of the report include:

• retail funds have on the whole underperformed cash (a risk-free investment) even after making suitable deductions for administration and earnings tax
• the internal rate of return to investors in retail superannuation funds lagged the not-for-profit funds by 2-3% per annum
• if retail funds had earned industry fund returns, retail fund member assets would have grown to $426 billion by June 2010, instead of the $343 billion actually achieved
• not-for-profit fund members benefit from economies of scale – both in terms of fund size and average account size – but retail fund members do not typically receive any benefit from increased scale; and finally
• over the 14 year period, asset allocation has been a significant driver of net returns, with an allocation to major unlisted asset classes having a positive effect on returns on average and an allocation to foreign assets and foreign currencies having a powerful negative effect on returns.

David Whiteley, Chief Executive, ISN, said the research is unequivocal evidence that retail superannuation funds are not measuring up to their not-for-profit counterparts.

“This research shows that the Australian retail superannuation sector is yielding for the most part unacceptably poor returns to its members. It is extraordinary that the practices of major retail super funds over a long period of time have reduced the returns of their members to the point where their super would be better invested in the bank.”

Assessing long term investment performance

The research compares the long term investment performance of the four key APRA regulated sectors – corporate, industry, public sector, and for profit retail funds – to each other, and to suitable benchmarks.

Over the 14 financial years from June 1996 – June 2010 (including two significant market downturns), APRA-regulated funds provided returns averaging 5.01%. But there were substantial differences between the different fund sectors:

• corporate funds returned on average 5.84% per annum
• industry funds returned on average 5.35% per annum
• public sector funds returned on average 6.30% per annum
• retail funds returned on average 3.66% per annum.

The average cash rate of return over this period was 4.23% per annum.

An analysis of volatility in annual returns by sector found that there was very little difference between sectors on this basis. The superannuation sectors had broadly similar volatility, further highlighting the very wide differences in average returns, says Sacha.

The research also investigated the impact of profit-orientation, scale and account balance on superannuation returns. The results confirm previous research that profit orientation is the prime determinant of returns.

“Either economies of scale are not available to retail funds – or, much more plausibly, retail funds do achieve economies of scale but the benefits go to shareholders and other stakeholders, as opposed to members,” comments Sacha. “This is compounded by the fact that retail funds are paying 2.6 times the market rate to outsourced entities.”

With the research finding marked differences in fund performance between the not-for-profit and for-profit sectors, the question must be raised as to how Australians’ retirement savings can be protected from significant underperformance by the retail sector, says Sacha.

“More than half of Australian superannuation accounts are in retail funds. Given the outcomes of this research, it will be important to act urgently to ensure that Australians’ retirement savings are not eroded by poor performance and inflated fees in the retail sector over the next 14 years, as they have been over the last 14 years, especially with the Government’s proposed increase in the Superannuation Guarantee in the pipeline.”

The full report is available here.

For more information about the report, contact Sacha Vidler: svidler@industrysuper.com