Industry super funds are playing with fire

The Industry Super Network is playing a dangerous game in suggesting past performance should be accepted as an indicator of future returns.

The latest data from both Chant West and SuperRatings has confirmed that, notwithstanding the 12 months immediately after the global financial crisis, industry superannuation funds have outperformed retail funds over the past 10 years.

However, the Industry Super Network is absolutely misguided in suggesting that the Productivity Commission should accept this past performance as a primary basis for selecting default funds under modern awards.

There are very good reasons why it has been a longstanding practice in the financial services industry not to accept past performance as a guide to the future.

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To illustrate this, the Productivity Commission should look no further than MTAA Super, which was unquestionably a stellar performer in the SuperRatings monthly analyses for the half decade leading up to the global financial crisis (GFC), but fell off a cliff when market conditions changed and its allocations were found wanting.

MTAA Super has been slowly recovering, but its history represents an object lesson on the foolishness of the position adopted by the Industry Super Network (ISN) and the good sense of sticking with the old industry maxim that past performance should not be relied upon as an indicator of future returns.

Of course, the ISN’s agenda in pushing past performance is quite transparent. It wants to influence the Productivity Commission to recommend criteria for the selection of default funds under modern awards, which inherently recognises the performance of industry funds over the past 10 years.

The ISN has two objectives. The first is to seek to maintain the primacy of industry funds in the default fund arrangements.

The second is to ensure this occurs before the next Federal Election – after which, a Coalition government might be inclined to change the rules.

Thankfully, there are enough experienced economists and policy analysts within the ranks of the Productivity Commission to recognise the thinly veiled agenda being pursued by the ISN, and weight it accordingly.

The problem with the position being pursued by the ISN is that, while taken as a group, industry superannuation funds have outperformed retail superannuation funds, this belies the fact that there have been more than a few funds which have not only lagged their industry fund peers, but also the majority of retail funds.

Further, (and as financial planners frequently point out), the relative outperformance of industry funds is often owed to their higher allocations towards unlisted asset classes - something which has provided a buffer to the roller-coaster ride being endured by both domestic and international equities.

The importance of that buffer is reflected in the fact that (according to the latest SuperRatings data) Australian shares declined 6.4 per cent last financial year, while international equities declined 3.3 per cent and property and alternatives increased by 6.5 per cent and 5.2 per cent respectively.

However, it is worth reflecting that when markets started recovering from the GFC in 2010-11, it was the retail master trusts which consistently outperformed the industry funds on the basis of steadily improving equity markets.

What the Productivity Commission should accept is that, by and large, most industry superannuation funds have had solid track records in terms of delivering returns to their members, with some industry funds having better track records than others.

However, the Commission should also have in mind that some retail funds have similarly outperformed industry funds.

The bottom line should therefore be that the Productivity Commission should not be judging funds on whether they are industry funds or retail funds, but on their capacity to meet the requirements of members and their employers.

The current Productivity Commission review of default funds under modern awards represents an opportunity to put an end to the quasi-political ‘us and them’ agenda inherent in the arguments being proffered by the ISN.

If the ISN continues to play politics in superannuation, it must accept the consequences which will flow from a change of government in Canberra.