By Tim Lyons
29 June 0215
In another time and place, Trotsky had a saying about war: “You might not be interested in war, but war is very interested in you.”
An accurate modern take might substitute finance for war. Because modern finance is very, very interested in you – and your superannuation, in particular.
At present, there is about half a trillion dollars of superannuation assets held in not-for-profit industry superannuation funds. Although some have independent directors, the traditional board structure is 50% member representatives (often unionists) and 50% representatives of contributing employers.
Industry funds are a large pool of capital that isnâ€™t being controlled by for-profit finance. In a world where everything is a ticket to be clipped, this has always driven the big banks and their friends in the Liberal party a bit nuts.
And so, as part of a series of attacks, the government has announced a plan to require industry superannuation to dismantle its highly successful governance model.
Those wondering what this is all about might start with the scoreboard. Industry funds, as a sector, produce higher returns to members than bank funds, as a sector. This holds over three, five, seven and 10 years – therefore in rising and falling markets – and averages out at nearly 2% per year.
Tellingly, analysis by the Australian Prudential Regulation Authority has said that industry super funds with appropriate scale beat the banks by having both lower costs and higher investment returns.
Now, in the language of financial services, past performance doesn’t guarantee a particular future. But the outperformance of industry superannuation funds, measured against bank-owned funds over a range of time periods, suggests this isn’t a mere accident.
Institutions dedicated to members do better than ones where the interests of bank shareholders are ever-present. This matters a lot to the end retirement incomes of Australians. With the wonder of compound interest, even small differentials in fees and performance produce six-figure differences in final balances over a working life.
These numbers are a huge problem for the assistant treasurer, Josh Frydenberg, and the other spear-carriers for the banks inside the government.
If the governance structure of these institutions does not affect the performance of the funds, then there is no public policy question to be answered. What does that leave us, beyond favouritism for the banks and prejudice against unions?
Alternatively, governance does matter – and accountability via a trustee system made up of representatives of workers and employers focuses the fund on member interest and helps deliver better outcomes.
Unconvinced? Well, the union and employer directors of industry super funds already meet the current ASX definition of independent director. So, of course, a different, higher bar will be proposed.
At best, it’s pointless politics.
Or, much more likely, it’ mindless vandalism of a part of the financial system that is actually working well. Either way, the government is prepared to muck around with the retirement savings of six million Australians for reasons that are poorly motivated.
This is an old obsession. In a 1985 parliamentary debate, John Howard called industry superannuation a “Chicago-style protection racket”. Now it’s Frydenberg’s turn on the bike. It takes a special kind of commitment to ideology over substance for a minister for financial services to look at the industry and see this as the issue that needs fixing.
The government proposal is for more finance types to have more say over more of our money; perhaps some of the “independent” directors who have presided over the recurrent financial planning (and other) scandals in for-profit finance, or whoever in the gene-puddle of Collins St and Martin Place needs another sinecure.
Perhaps we can take comfort from a recent scientific study that found that the toxic culture of banks fostered individual dishonesty and cheating, and that the propensity of bankers to cheat rose when you reminded them about their profession.
Whatever might be wrong with the superannuation system, the last thing we need is more power to more finance spivs and less connection between people’s work and their super.
In fact, if there was a change to be mandated to superannuation governance, a good start would be requiring bank-owned funds to have at least a third of directors representing the members of the fund.
This whole push is unnecessary if your real concern is governance. Apra, which regulates all of these superannuation funds, already has enormous powers to nudge and direct funds to change. It even has the power to sack a trustee and replace them, if it believes it’s necessary. There’s a legal “fit and proper” test, and standards around skills, tenure and training.
Industry funds already have a range of governance structures, including some independent directors and chairs and external committee members. Plus, superannuation boards are supported by staff, asset consultants, solicitors, auditors and other advisors. Directors aren’t day-trading stocks and you don’t have to be a finance wizard to be a good director.
My support for the representative model is grounded in my own experience as a director of industry superannuation funds in logistics, in health and community services and in hospitality and tourism (incidentally three of Australia’s largest industries).
I’ve watched a hospital administrator and nursing unionist, in their capacity as directors, work over an insurer on behalf of workers with back injuries. I’ve seen the attention paid to ensuring unpaid superannuation is chased, a multi-billion dollar problem that the bank funds do precisely nothing about. And I’ve watched countless times as representative directors have pushed back against obscene fee structures for fund managers, looking to capture profit that belongs in member accounts.
The fact that superannuation is compulsory, complex and accessible only in the distant future means it is particularly vulnerable to agency problems. Having boards with a deep knowledge of, and responsibility to, members whose jobs are in the real economy outside finance is important.
Because finance is very interested in you, but is much less concerned with your interests.