The bank-owned superannuation fund sector has performed so poorly that putting your money in term deposits over 10 years would have earned a better return than retail funds, according to new research from Industry Super Australia.
That is despite the funds including growth assets like shares, property and private equity in their asset portfolios.
Not-for-profit industry and other super funds outperformed retail funds by almost 2 percentage points a year, the study found.
Over 10 years, retail funds returned an average of 3.3 per cent a year, compared to industry super’s 5.1 per cent.
That outperformance makes a huge difference to your account. If you had $50,000 in a retail fund at the start of the period and you made no additional contributions, it would have grown by 38.3 per cent to a total of $69,170.
If you had the same balance in an industry fund, it would have grown by 64.4 per cent to $82,220. Double the starting balance and you’d have $164,440 in your industry fund compared with $138,340 in a retail fund.
The reason for the difference is the profit model, Industry Funds Australia CEO David Whiteley said.
“Consistent outperformance by industry super funds over bank-owned super funds reflects the differences between for-profit and not-for-profit business models, which over the last two decades have seen significantly different member outcomes.”
The ISA report also looked at the dollar value to fund members of the outperformance of industry funds and the underperformance of retail funds. The industry funds returned their members an extra $42.91 billion in outperformance above the median of all super funds over 10 years.
The retail funds, meanwhile, cost their members $25.42 billion by underperforming the industry median.
Interestingly, the industry funds returned more to their members through outperforming the median despite having a smaller asset base. The latest figures from APRA (Australian Prudential Regulation Authority) show that retail funds had $579.9 billion in assets while industry funds have $517.9 billion.
The outperformance of industry funds showed up in other ways. Three-quarters of bank-owned super fund assets were in funds listed in the lowest 25 per cent of return tables, and 94 per cent of them performed below the median.
For industry funds, the situation is reversed. Three-quarters of all industry funds were in the top performance quartile, and 91 per cent of them performed above the median.
The underperformance of retail funds happens regardless of size. Larger funds only reported higher returns in the not-for-profit sector, meaning the for-profit fee model undermined any advantage members might have got from economies of scale.
The five largest public-offer funds owned by the banks and AMP, each with more than $30 billion in assets, performed well below the median, the research found.
Matt Linden, public affairs director for Industry Super Australia, said “the performance of the system is being weighed down by bank funds”.
While bank funds underperformed, they have managed to hold their membership.
“Lots of people are disengaged with super and are not financially literate,” Mr Linden said.
“Maybe the bank-owned funds are exploiting this disengagement for their benefit.”
Industry Super Australia CEO David Whiteley said the for-profit model “sits very uneasily” with both the interests of members and the “social policy objectives” of compulsory super.
“It is now time for the banks to disclose the profit from compulsory super and for the regulator to investigate the chronic underperformance of bank owned super funds.”
* The New Daily is owned by a group of industry super funds
