Hobbled by hubris, industry funds in danger of failing their members
There has been a fair bit of hubris involved in the ascent of industry funds, which grew from localised union offshoots in the late 80s to overtake the established retail fund giants, and then the SMSF collective, shortly after the 2018 Hayne royal commission.
Brimming with confidence after delivering outsized returns driven by unlisted assets, they’ve given us a new-age change of nomenclature, blockbuster mergers and even funky marketing campaigns based on engineered hand signs.
Yet since the underdogs became top dogs, ‘profit-to-member‘ funds have struggled to maintain their position on a number of fronts.
The first real batch of criticism actually missed the mark. Rumblings about the illiquidity risk of unlisted assets became hysterical during the pandemic, when the government’s early release scheme brought into question industry funds’ ability to pay back members in a condensed redemption period.
These concerns were largely unfounded, but when Hostplus chief executive Sam Sicilia called the issue “an absurdity”, it sounded arrogant and reinforced a swelling belief that industry funds considered themselves beyond reproach.
Sicilia was right about the liquidity risk issue, but his slightly haughty attitude pitched him as a divisive figurehead for the sector.
Since then, criticisms of industry funds have focused on much more valid concerns around member services, culminating in stern warnings from both APRA deputy chair Margaret Cole (pictured) and financial services minister Stephen Jones last week.
“I’ve spent the last year putting funds on notice,” a testy Jones said at the AFR Wealth Summit last week. “I won’t spend the next year doing exactly the same thing.”
(Worth noting is that there are tailwinds to the ire of both regulators and policymakers, with APRA still stinging from Hayne’s royal commission rebuke that it wasn’t holding super funds to account, and Jones bristling at suggestions that industry funds enjoy a cozy relationship with the government.)
Unlisted assets remain a problem, with valuations replacing liquidity risk as the primary issue for regulators. But it’s a lack of accountability on member engagement that is really undermining the standing of industry funds.
The retirement income covenant requirement for funds to innovate on member engagement and appropriate decumulation plans is where the sector has failed most clearly. As well-funded market leaders, industry funds are expected to be at the front edge of product development, but the underwhelming response has policymakers and regulators steaming.
At the same time, recent court cases against TelstraSuper for its failure to meet complaint handling requirements, and AustralianSuper for member account duplication, have reinforced the notion that industry funds are dragging their feet on trustee duties.
AustralianSuper’s poor performance has been particularly egregious; the fund this week was also named the worst for complaints in the country by the Australian Financial Complaints Authority. Another large industry fund, Cbus, came in second.
These funds have a wonderful opportunity to lead one of the greatest pension systems in the world. They’ve grown considerably on the back of superior performance and historically strong member engagement, which millions of Australians have benefitted from.
But they’re in danger of failing the members that drove their growth.
Jones was brutally honest in his assessment last week when he called them “slow” and “not member focused”. Like Cole, who said funds need to “show foresight” and “step up”, Jones was saying in no uncertain terms that it’s time for industry funds to be better.