A new battleground is starting to open up over superannuation — and members will be paying attention

There's a saying that trust is hard to earn and easy to lose.

When Cbus chair Wayne Swan fronted a Senate inquiry into super late last week, he played the dual role of showing contrition at the scandal engulfing the super fund he chairs and promoting the performance and governance structure of industry funds, but he didn't mention trust.

"It can't be a coincidence that the [strong] returns have a lot to do with our governance structure," Swan told the committee.

Swan was referring to the relative investment outperformance of industry funds versus their retail fund rivals over the decades. 

He linked the performance to the equal representation model adopted by industry funds of 50 per cent union-appointed directors and 50 per cent employer-backed directors. (Some industry funds including Cbus include an independent chair and one or two independent directors.)

While board structure and investment performance may be correlated it doesn't mean it's the cause of the investment performance. A number of factors are at play.

And as more and more cracks appear in the burgeoning super industry, performance won't take centre stage.

As one industry expert says, lower management fees are no longer a source of competitive advantage for industry funds as retail funds have started to lower theirs.

Put simply, the investment performance gap between industry funds and retail funds is closing and, according to global market consultancy Coredata, so is the trust gap.

A new battleground

As ASIC prepares to release a claims handling report covering death and disability claims into super early next year and is widely expected to bring a few more cases like Cbus to fruition, the new battleground will be trust, customer service, transparency, liquidity and accountability.

Liberal senator Andrew Bragg, who chairs the senate inquiry into super, says industry funds have an unsustainable governance model. 

He told the ABC the committee will release its report into super next February. 

He said it will look at capital requirements, governance and board relationships with sponsoring organisations as well as claims handling in light of ASIC's decision to Cbus alleging systemic claims-handling failures, after lengthy delays in death and disability claims.

"Super must be more than a gravy train for unions, employer groups and the banks," he said.

Bragg has long held concerns about the board composition of industry funds, arguing that the equal representation model isn't fit for purpose or in keeping with modern governance, which requires a broad skill set of independent directors and reduces conflicts.

He isn't alone.

Board composition was first addressed in a review of the entire superannuation sector by Jeremy Cooper in 2010, which recommended government and industry fund boards move from the 50:50 equal representation to one-third being independent directors and the remainder split between union-backed directors and employer-backed directors.

It has been raised multiple times over the years, including by David Murray in the Financial System Inquiry in 2015 and in 2017, when the coalition introduced a bill to change the board composition to one-third independent directors, but it was withdrawn from the Senate after industry funds and unions successfully lobbied backbenchers to vote against it.

Indeed, some industry fund CEOs and chief investment officers are known to lecture listed companies that they invest in on a range of social and governance matters.

The AFR reported in March this year that industry fund HESTA, which owns a small stake in the ASX-listed Woodside, put forward director candidates it considered appropriate for the Woodside board to consider appointing.

"We have shared with Woodside for their consideration, independent and highly credentialed potential director candidates, whose new energy and business transformation skills we believe would add to the board's current capabilities," the fund told the AFR.

Members won't stay silent

As more and more Australians start reaching retirement, or de-accumulation phase, and start interacting with their fund, more members will start airing their grievances.

Some members are already vocalising their complaints via social media, thousands have lodged complaints with the Australian Financial Complaints Authority (AFCA) and hundreds are going to mainstream media.

In a weekly update, global financial consultancy group Coredata says the trust gap between industry and retail super funds has halved over the past three years and continues to narrow.

It believes service quality is a key driver of the change.

Coredata's trust index for industry funds has gone from 62 per cent in the first half of 2020 to 73 per cent in the second half of 2024, while retail funds have moved from 36 per cent to 62 per cent in the same period.

"Retail funds are closing this gap by delivering stronger service, which continues to challenge the trust advantage held by industry funds," it says.

"As retail funds maintain their focus on service, the dynamic between trust and performance becomes increasingly important for Australians planning their retirement."

In business, complacency is the silent killer of success. The upshot is if the standard of service doesn't improve, members will take their funds elsewhere, including into self-managed super funds, which recently hit more than $1 trillion.

The days of disengaged members who rarely check on their fund's performance are coming to an end. So, too, are the days of light touch regulation.

More scrutiny ahead

Australians have benefited hugely from a compulsory super system introduced in 1992. Quarterly statistics released by the Australian Prudential Regulation Authority (APRA) last week show superannuation assets hit $4.1 trillion at September 30, 2024, rising a staggering $1 trillion since 2020.

For most of the 30-odd years that super has been in place, the focus has been on investment returns. But the sector has become so big that the Reserve Bank and International Monetary Fund issued warnings this year of its potential to pose system risks.

One insider who works in the financial services industry said given default funds are in industrial awards, industry funds have been effectively guaranteed gushing inflows of new members. 

It has enabled some industry funds to invest more heavily in longer-term, higher yielding and less liquid investments than retail funds. 

"This is why you see the industry funds so heavily invested in private equity, venture capital and infrastructure — all unlisted, long tenure and illiquid," he said.

In June 2023, the Financial Regulator Assessment Authority, run by former Macquarie Group boss Nicholas Moore, an expert in infrastructure assets, released a report into APRA which said the regulator needed to improve its oversight of super funds, particularly in relation to unlisted valuations. 

It said APRA's focus on emerging and industry specific risks relevant to super were "not yet as well-developed compared with its more mature regulation of the banking and insurance industries."

It goes some way to explaining why the regulators are so focused on investment governance in super funds. Listed equities and fixed interest have a price on them at all times but unlisted and illiquid investment valuations are more judgemental and much less frequent. 

"Increasingly liquidity management will become a big deal for industry funds as more members start reaching the retirement, or de-accumulation phase," the industry insider said.

For instance, ASIC launched a surveillance program into investment switching in 2021 of 23 super funds and was shocked at the level of deficiencies in the conflicts of interest policies, the lack of oversight and control measures and concluded that the conduct fell below ASIC's expectations.

It said it had expected to find proper systems in place to prevent directors and executives from potentially misusing price sensitive information for personal gain.

ASIC didn't take action against any individuals but instead wrote to the 23 funds in April 2022 it had reviewed outlining its concerns and requesting they improve existing policies and procedures.

ASIC and APRA are reportedly preparing to use their Financial Accountability Regime powers for super that come into effect next March to focus on misuse of member funds, including naming individuals responsible. Any dubious spending on advertising, marketing or money flowing to unions will expose directors and executives.

APRA will also be able to use its new Operational Resilience standard, CPS230, which comes into effect next July, which focuses on management of critical service providers and supply chains of super funds and other regulated entities.

When Swan doubled down at the Senate committee hearing last Friday, blaming the administrator, Link Group (which was recently sold to Japan's MUFG for $1.1 billion and then changed its name), for claims handling delays on death and disability payments, it was a reminder that this could become a much bigger issue next year as Link is used by 43 per cent of the sector, and the other main third party operator has also had issues.

"We are not the only fund that has a challenge with a third-party provider and has delays in the processing of insurance claims," Swan told the Senate committee last Friday. "So, this is also an issue elsewhere in the industry, but in saying that we accept complete accountability for the outcomes."

It seems super is about to get a dose of scrutiny it should have been getting years ago.