Improving superannuation transparency

Last month, AustralianSuper’s Paul Schroder asked on Twitter whether readers would reach to get $20 if it were down the back of the couch. He was referring to lost superannuation and questioning why Australians aren’t hunting that money down.

The same could apply for investing your superannuation. If $20 represented 9.5 per cent of your salary, would you be careful in what you did with it?

Instinctively the answer is yes, but the public knows alarmingly little about the super funds that take 9.5 per cent of each pay cheque and supposedly invest it to safeguard their futures.

And despite remonstrations from the Productivity Commission and the Banking Royal Commission, this lack of transparency isn’t improving quickly.

Value for money

In the Productivity Commission’s superannuation report earlier this year, it identified that an underlying principle for designing a model for a competitive process should be credibility and transparency. By this, it meant “make relevant information public; avoid room for gaming the process; and ensure metrics are clear, simple, difficult to dispute and difficult to manipulate”.

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This just hasn’t happened, and there’s no clear pathway for how the industry intends to make it happen.

Superannuation funds are in the unique position where people must invest in them. Sure, you could set up a self-managed fund, but realistically most people don’t have the wealth to make that viable.

This comes with an immense responsibility to ensure that investors get value for their money and understand what their earnings are going toward.

Determining value also requires transparency around performance. The Productivity Commission found this year that over a quarter of funds offering a MySuper option are underperforming; if members were aware of this, expectations may be a bit higher.

The data is there, it just needs to be communicated to members better. Perhaps the answer lies in the approach taken by the European Union to funds – through the MiFID II template, or the Key Information Documents investors receive providing brief, plain English overviews of performance.

This doesn’t need to mean regulation necessarily, if super funds are proactive in providing this information themselves. The Royal Commission has made it clear that this sadly often isn’t the case, however.

Speaking to the United Kingdom parliamentary inquiry on pension costs and transparency recently, former Financial Conduct Authority Institutional Disclosure Working Group chair, Dr Chris Sier, suggested that a public register for institutional investors of those who comply, or don’t, with reasonable data requests would be useful to both current and future consumers assessing their investment options.

A similar system for superannuation funds here could let members know if more is going on under the hoods of their funds than they’re aware of.

As a side note, it is interesting that other countries are also looking at retirement savings transparency closely.

Further, there is little transparency around fees. As the Productivity Commission found, “this lack of fee transparency harms members by making fee comparability difficult at best, and thus renders cost-based competition largely elusive”.

And how can you assess whether a fund is good value for money, for a client or even yourself, if you don’t know how much it is actually charging?

This shouldn’t be difficult for the industry to improve. In the Netherlands, for example, the pension industry went from next to no fee transparency to a point where almost all funds report asset management fees, transaction charges and administration costs to members regularly and in a simple format, so it is possible.

Furthermore, in a financial services climate dominated by concerns around transparency and trust, there’s a clear benefit to funds willing to provide simple data to members and advisers as trust becomes a valuable asset.

“[Asset managers] who are unwilling to give data will lose market share, full stop,” Sier told the UK inquiry. “Let’s face it, if you cannot trust your asset manager you do not want to work with them, and you do not trust them if they do not give you data.”

We should be saying the same of super funds.

Governance

As in the case of fees and importance, the compulsory nature of superannuation again makes transparency vital where governance is concerned. Members are required to rely on others to make decisions on their behalf; decisions that will deeply impact the shape their future takes. 

The Productivity Commission again pointed this out in its superannuation report this year, noting that unlike shareholders in listed companies, super fund members have no voting rights and very little influence over board appointments. Transparent and regulated governance practices are vital in this situation.

And while superannuation governance has improved since the system’s inception, it still lags best practice approaches.

You only have to look at some of the mergers (or, rather, lack thereof) that sparked questions at the Royal Commission or dig into some related party provider outsourcing decisions for proof.

Neither body traversed what greater transparency in this area would look like. In a Royal Commission that hit most witnesses for six, however, the industry funds got off remarkably lightly as far as questioning over governance was concerned.
Consumers deserve to know more about how their savings are invested, and it’s time funds stepped up to that responsibility.