The outlook for independent superannuation trustees post Royal Commission

The Australian superannuation industry consists of five different types of superannuation funds;  Industry funds, Public sector funds, retail funds, corporate funds and self-managed superannuation funds (SMSFs).

The Australian superannuation industry consists of five different types of superannuation funds;  Industry funds, Public sector funds, retail funds, corporate funds and self-managed superannuation funds (SMSFs). 

They can be categorised into for-profit and not-for-profit funds: 

  • Not-for-profit funds pay their profit back to their members and not to their shareholders. They are considered independent because they don’t have a conflict of interest: As they don’t make a profit from selling one service over another, they won’t make money out of selling more expensive products or by having high fees or commissions. 
  • Conversely, for-profit funds do make money off the fund’s services and products. They have an obvious conflict of interest. They constantly have to weigh their members’ best interest up against the natural drive to make a profit. 

Retail funds are for-profit funds owned by banks and financial institutions, while industry funds and Public sector funds are generally not-for-profit. Corporate funds can be both while SMSFs are private funds.

Post royal commission, many of the issues with for-profit funds – including high fees, commissions and neglecting the best interest of members – have become illegal. 

The retail funds have suffered a loss of confidence and their reputation has been severely damaged.

“The royal commission changed perceptions of funds with people seeing negative publicity about retail funds,” said Ian Fryer, research chief with super specialist Chant West.

“That encouraged them to say ‘I’ll get out of that’ and they moved to an industry fund. That was a short term impact but whether it will continue into the longer term is an open question.”

According to KPMG the post royal commission regulatory amendments could be the most significant changes to the structure of the superannuation industry for years to come.

But even before the Royal Commission, the not-for-profit industry funds saw an uplift in membership by 1.39%, at the expense of the for-profit retail fund sector which saw memberships decline 5.2%.

Similarly, the Assets Under Management (AUM) growth rate in the industry fund sector grew 16.3%, which was a significant increase from previous years. The retail fund sector on the other hand grew only 5.9 %. 

At the moment independent funds make up only 5% of the market but the government would like them to make up 50%.

The post royal commission regulations mean that regulators will be less accommodating to misconduct and neglect in the future, giving independent industry funds an advantage over retail funds. 

Funds will need to follow strict compliance measures to adhere to the new regulations, but as KPMG points out it’s unlikely they “can comply their way to trust”, as trust is not just about obeying the law but also about meeting expectations. Not-for-profit funds have the advantage of being trusted and being inherently member-oriented. 

However, the barriers of entry for independent trustees are incredibly high. Trusts that wish to operate in Australia must first obtain a licence from The Australian Prudential Regulation Authority (APRA). This process is difficult and APRA has not issued any new licenses in the last 15 years. Currently there are only eight licences in circulation and more of these are being handed over for retirement. This leaves only a handful of companies to manage the assets worth $2.9 trillion currently under management within the Australia superannuation industry.

Australia is the 54th largest country globally in terms of population, but the third largest in regards to Assets Under Management (AUM). By 2029, experts predict the total superannuation asset pool in Australia will reach $5.4 trillion and that growth within the fund asset industry is likely to increase faster than that within other sectors. Deloitte projects it might climb to $10.2 trillion by 2038.

The industry is subject to government mandated growth. The mandatory contribution rate is currently 9.5% of an employee’s salary, and is legislated to increase to 12% by 2025, starting from 2021-2022.

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