Super war reaches a stalemate

If there’s a constant in the ongoing debate over whether industry funds or retail super master trusts are better for super fund members, it is the regularity with which the key players have asked the Australian Securities and Investments Commission (ASIC) to intercede on their behalf.

The latest request is from Industry Funds Services (IFS) chair Garry Weaven.

Just this month Weaven asked the regulator to verify claims by retail super master trusts that they “offer lower fees than those in their product disclosure statements”. The claims can only be proved by ASIC holding a “public audit process, with full and random audits of claimed fees and costs”, he insisted.

The super choice war

However, it’s doubtful Weaven will be holding his breath in anticipation of ASIC’s response. He’s still waiting for the regulator to act on a complaint he fired off last month over a “deliberately misleading” analysis report by researchers Chant West Financial Services.

The report found that a current IFS advertisement comparing ‘net benefits’ of industry fund members favourably to that of retail master trust investors was itself based on “misleading” figures.

As things panned out, Chant West, which issued the offending report as a “disinterested” researcher, had beaten the IFS to ASIC’s door.

Principal Warren Chant retorted publicly to Weaven that the report had already been sent to the regulator, with a request that the IFS advertising be withdrawn.

“We approached ASIC long before you did because we want to stop you from issuing exaggerated, selective, advertising that could mislead a substantial section of consumers,” Chant said.

Weaven has not officially responded to Chant, who went on to accuse him of taking an “aggressive approach”, but the strengths of his feelings on the veracity of the advertisement are evident in comments he made to Money Management. The advertisement, which was timed to coincide with the launch period of super choice, would continue to run “full bore”, he says.

“It’s based on independent quarterly research we’ve commissioned six times over the past 18 months. Each of these has confirmed that industry funds provide a better net benefit for members than do retail master trusts.”

Entitled Net Benefits to Members, the offending advertisements form a new part of industry funds’ press and television advertising campaign. Its methodology is based on an historical analysis of returns, combining fees and past performance into one measure.

It defines ‘net benefits’ as the dollars that super funds deliver to members after fees and taxes. The underlying research is based on the actual fees and charges of industry funds, and the advertised fees and charges of retail master trusts. All fees in the underlying research are said to be the fees published in the funds’ most recent product disclosure documents.

By contrast, an earlier television commercial, entitled a Lifetime of Difference, projected an accumulated sum a member can look forward to in retirement. It projects fund performance purely on fees. There is no investment component in the returns.

The television commercial is not a source of controversy, despite ASIC having ordered it to be modified soon after it first went to air. ASIC asked for additional disclaimers to be added to the commercial, Weaven says.

“We were told it made the assumption costs stay the same over very long periods, which it [ASIC] said may not actually be the case.”

Research integrity

Geoff Bresnahan, director of Superratings which produced the research underpinning both advertisements, has rallied to Weaven’s side.

Bresnahan says “no one has ever questioned the validity of our data”.

He adds: “There’s been a couple of media releases [from Chant West, accompanying the release of its report] claiming it was not representative of the market, which we reject. We supplied a series of numbers to IFS, covering most Australians. They chose to run with one particular group of numbers.

“However, irrespective of which group of numbers they chose to run with, the gist of the results was very similar.”

Bresnahan says he was “surprised” by the release of Chant West’s report, and by its findings.

“It’s not representative of the true position in Australia. In fact, the universe in the report appears to cover less than 4 per cent of Australia’s population. But, of course, anyone can grab a selective group of numbers to come up with a different result to ours on net benefits.”

The case for industry funds

Rainmaker Information conducted the latest IFS research, but it is essentially a confirmation of the earlier findings by Superratings. It represents the sixth consecutive quarter in which its commissioned research has found that the average industry super fund member received more dollars in their accounts after fees and taxes.

This research looked at results over the past one, three and five years to March 31, 2005. It applies to industry fund members and retail master trust investors with an opening balance of $50,000, earning $50,000 per annum, and in an employer plan size of $10 million.

A total of 99 funds were reviewed, covering $163 billion in funds for 10.3 million Australians’ retirement. This included 39 industry funds, 32 corporate master trusts and 28 personal master trusts.

In essence, industry funds were found to deliver:

$791 more to member accounts over one year than corporate master trusts;

$2,966 more over three years; and

$5,516 over five years.

In addition, over one year they delivered $20.50 in earnings for every dollar in fees taken out, against $8.20 for corporate master trusts. Over three years the earnings comparison was $15.10 against $5.60, and $11.30 against $4.00 over five years.

Where members invest in growth options, industry funds were also found to deliver $1,119 more over one year to members than personal master trusts. Over three and five years respectively, industry funds delivered $6,274 and $10,535 more to members. They delivered $24.90 over one year in earnings for every dollar in fees taken out, against $5.30 for retail master trusts. Over three years, the comparison was $17.80 against $3.20, and over five years $12.90 against $2.00.

The research claimed industry fund members would have paid on average $441 less in fees than they would in an average corporate master trust. Over five years, the advantage for an industry super fund would have been $2,486. In the personal market, industry fund members would have paid $980 less in fees than the average member of a retail master trust. The five-year fee differential would be $4,493 in favour of industry super fund members.

Finally, the research also found that industry funds, on average, also outperformed master trusts in eight out of 10 investment sectors over one year, and seven out of 10 over five years.

Defining an ‘average’ investor

It is probably not by accident that the Rainmaker research applies to an account balance of $50,000.

A major concern of the Chant West report was that the net benefits advertisement research was based on an account balance of $10,000, and on a corporate plan with $150,00 in total assets.

“While a $10,000 account balance is broadly representative of the average industry fund member, it’s not representative of the typical member of a corporate master trust,” Chant said in the report.

“Our research suggests a figure of $50,000 would be far more realistic.”

He added that using this “very small” employer plan of $150,000 was calculated to “produce almost the highest possible fees in a master trust”.

“We would suggest there’s an awful lot of plans in the $75 billion corporate master trust asset universe that are much bigger than $150,000 and where the fees are consequently much lower than depicted by the IFS ad.”

In outlining the basis of the Chant West analysis report, it is fair to say that Warren Chant himself is complimentary of the performance of industry funds per se.

In an open letter to Weaven, Chant said the advertisement “exaggerates the case for industry funds when there’s no need to do so. Industry funds already have a good story to tell. They can justifiably claim an advantage over retail master trusts, but in the real world this advantage is much less than portrayed in the ad.”

The thrust of the report’s argument is that “asset allocation rather than fees have accounted for most of the industry funds’ outperformance over retail master trusts in recent years. The question is whether the industry funds, which are overweight in Australian equities and property and underweight in international equities, can continue with this out-performance if asset sector returns revert to their long-term relativities?”

The case for master trusts

The report also took issue with the advertisement’s portrayal of fees as a net benefit measure, specifically with its calculations of the net benefit per dollar of fees taken out.

The advertisement found specifically that the net benefit for members with a $10,000 balance in an “average” industry fund was $8.34 over the five years to December 31 last year, compared to $2.24 for equivalent “average” retail corporate master trusts.

By contrast, the Chant West report calculated — under a column entitled ‘real world accounts’ — that the net benefit to members of large corporate master trusts actually exceed that of average industry fund members (see table p25). The real world accounts, also a combination of fees and performance, are a projection of net benefit before any administration fees are deducted.

Unlike the industry funds, the report said most retail employer and personal master trusts report performance after deducting administration fees of 1 to 1.5 per cent.

“The different treatment of fees can result in material difference in reported performance, and is consequently an important area for industry to address.”

The report found the comparative average ‘real world’ net benefit for an industry fund member over the same five-year period was $8.12, the same as its net benefit projection for a $10,000 account balance.

The net benefit for a $50,000 industry fund account holder was $10.30. Its real world net benefit accruing to a large corporate master trust for the period was $8.57, the same as its projection for a $50,000 account holder. The real world net benefit for a member of a medium-sized corporate master trust was $6.15, the same as for a $50,000 account holder.

Commission: fee or distribution cost?

Chant said the superior net benefit accruing to larger corporate retail master trusts was due largely to lower fees. He conceded the result is “unlikely to be the case with large industry funds, where fees are low and performance has been strong”. He also commented that the magnitude of the net industry fund benefit over medium-sized retail master trusts is “much smaller” than the industry fund ad portrayed, and was due more to investment performance than to fees.

A ‘real world’ comparison of retail personal master trusts versus industry funds was similar to those in the advertising research, notably for a $10,000 account balance (see table p25). Again, however, the report claims a less significant net benefit to industry funds than stated in the advertising research when these are compared to retail personal master trusts before adviser commission is taken into account.

Chant said this was an “attempt to deal with the argument that including adviser commissions in the fees of retail [corporate and personal] master trusts is unfair, because presumably members receive an additional benefit [advice for the fees they pay]. There is much debate about whether adviser commission is really a distribution fee or a fee for advice. If it’s an advice fee, it is clearly unfair to include it in the net benefit calculation.”

In turn, Weaven rejected the notion. “It’s quite laughable to say commission is a fee to cover some otherwise free advisory services. The point is if it’s an advice fee, it should be paid by those who go and seek advice. But if it’s built into the product and everyone pays, regardless of whether they get any advice, then clearly it’s a distribution fee. You pay that commission as a master trust to various dealer networks, such as financial advisers and accountants, and in return they deliver you with members. Industry funds don’t pay those commissions and in return they get better results.”

Size of account balances

Weaven’s key concern with the Chant West report is that the real world figures “purport to show the benefit for an industry fund member as less than, slightly, that for a large corporate master trust member. On closer analysis, however, this figure is based on a $50,000 account balance for the master trust investor and a $10,000 balance for the industry fund member. My basic contention is that this is misleading.”

That’s aside from what Weaven described as the “weakness” of the Chant West report’s argument. “If you couldn’t make a lot more dollars — not just a little more dollars — on investing $50,000 than you could on $10,000, you would have to be absolutely and totally hopeless. The master trusts depicted in the Chant West report must be hopeless, because the differences are very minimal.”

Weaven’s defence of the advertising campaign is a familiar refrain. Early in the piece he had to ward off criticism by the Financial Planning Association (FPA) of its prediction (in the television commercial) of future performance solely on the basis of fees.

In this instance, Weaven turned defence of the advertising into an attack. He said he was concerned the FPA made reference in its criticism to research by Rice Walker, which suggested fees of industry funds and corporate master trusts were largely similar.

He said the Rice Walker data’s referral to management expenses as a percentage of assets “meant the higher average account balances in master trusts disguised the fact that in dollar terms they have much higher fees”.

The Rice Walker research, which was conducted for the Investment and Financial Services Association (IFSA), actually found that very large corporate master trusts, those with $20 million or more in funds under management, have a lower fee as a percentage of assets than industry funds.

Claiming to be a “little bit baffled” over why the report is “the subject of debate”, Rice Walker director Michael Rice said the “fee differential in this one case was very small, in the order of 1.14 per cent compared to 1.17 per cent. If you take the whole of our report together, however, you will find that it makes quite clear that industry funds are the cheapest.”

It’s clear from IFSA executive director Richard Gilbert’s support of the Rice Walker research that he too is baffled over why it ever became an object of debate.

“It suggests there’s good performing funds in both sectors, and it’s for consumers to make the judgement,” he said.

This could equally be the assessment ASIC eventually makes of the broader industry debate.

In which case, Weaven and Chant could be in for a long wait for its arbitration on their grievances.