August 05, 2018 05:10:39
If rounds one to four of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry were brutal for the banks, there are plenty of reasons to think round five, which starts on Monday, will be even worse.
The reason? The commission will be examining superannuation.
“We estimate that the excess fees and charges and underperformance in super is about $12 billion a year,” RMIT University Associate Professor Michael Rafferty told the ABC.
“In other words, the rip-off in wealth management is about three to four times the rip-off in banking.”
That’s $12 billion a year being ripped out of people’s retirement savings.
Australia’s biggest superannuation provider, AMP, has already been hammered by the royal commission.
Its chairman, chief executive, three other directors, and its top lawyer are all gone.
Billions of dollars wiped off the value of the company, half a billion in costs stemming from the commission, a recommendation for criminal charges, and that’s before the commission’s even looked at superannuation.
“I think the AMP model has been exposed for what it was in that it was egregious in the way it was treating customers,” Professor Rafferty said.
$30 billion in fees
A Productivity Commission report in May described a superannuation industry where providers cream off $30 billion a year in fees and preside over a sector riddled with rorts, high costs, low returns, inefficiencies and conflicts of interest.
To maximise their own profits, the banks, AMP and others use their own in-house services, rather than shop around.
Their superannuation customers are likely to suffer as a consequence.
“They’ve been investing it so that it gets a return for the members, but it looks as though it has not been invested so its gets the maximum return for the members, and instead the bank in which it’s been invested has made a higher return than you would expect,” John Daley, head of Melbourne-based think tank the Grattan Institute, said.
Mr Daley is also hoping the royal commission will put insurance within superannuation under the microscope.
Insurance in super is a $12 billion-a-year industry.
But with many people having multiple superannuation accounts, all with insurance, much of that insurance is useless and the premiums can wipe hundreds of thousands of dollars from retirement incomes.
“Income protection policies have terms which say you can only collect under one policy,” said Mr Daley.
“So, by definition, if you have a number of those policies, people are paying premiums and they could never collect on them.”
Industry funds in the spotlight
While the banks and AMP will be nervous about what lies ahead next week, so too will industry super funds.
It’s widely believed superannuation was only included in the royal commission’s terms of reference to try to embarrass industry funds, because of their links to trade unions.
The Government has done nothing to dispel that view.
Hostplus, AustralianSuper and Cbus are Australia’s best performing super funds, but they’re among the five industry funds the commission will be looking at in a rare public examination of that sector.
RMIT University’s Michael Rafferty believes industry funds, in some ways, are starting to look a lot like the for-profit funds of the banks.
“They’ve started to offer a lot of services like financial planning, they’re charging for insurance, we know that the super funds are advertising — on a lot of sporting teams you can spot the corporate logos with super funds on them — and the net result of all of this is the whole superannuation industry is charging people too much,” he said.
As an independent financial adviser, Sydney-based Louise Lakomy is less than impressed with the transparency of some industry super funds.
She said they make it difficult for advisers to get the information they need to help their clients with insurance, and also don’t provide meaningful information about the asset classes their funds are invested in.
“I think retail funds are better at the transparency piece, because you can usually have some kind of research paper or some kind of product detail that goes into who the fund manager is, what the exposure is to a commercial property, retail property.”
“It goes into a lot more detail than what a typical industry fund would do,” said Ms Lakomy.
Regulators faced a grilling too
The royal commission will also be applying the blowtorch to the superannuation industry regulators, the Australian Securities and Investments Commission, and the Australian Prudential Regulation Authority.
In its report into superannuation back in May, the Productivity Commission accused them of a lack of accountability and said there were cracks through which bad behaviour could fall
“The problem here is the regulators needing more spine,” the Grattan Institute’s John Daley said.
“Regulators in Australia, financial regulators, by and large have plenty of powers, the issue is whether or not those powers are exercised.”
As the royal commission puts the superannuation industry under the microscope over the next two weeks, there is one big bank which may be able to relax.
Westpac is the only one of the big four which is not listed to appear.