Using Super to Save for a Deposit Clashes with Retirement Needs

From The New Daily.

Consultancy firm KPMG has thrown into question the legality of the Turnbull government’s budget measure to allow first home buyers to use superannuation to save for a deposit.

In its Super Insights Report, released on Wednesday, KPMG said the policy, which would allow home savers to salary sacrifice up to $15,000 a year into their existing super fund, was “difficult to reconcile” with the government’s own definition of the purpose of superannuation.

“Arguably, policies to address housing affordability do not fit comfortably within their proposed primary subsidiary objectives of superannuation.”

The Turnbull government introduced draft legislation in 2016 stating that the purpose of super was to substitute or supplement the age pension. It is yet to pass Parliament.

Labor has also seized on the issue, with Shadow Financial Services Minister Katy Gallagher branding the measure “inconsistent” with the proposed definition.

The KPMG report also called for a national debate to determine whether super should be able to be passed on through wills and whether it should be directed for national purposes like infrastructure.

The report found that industry super funds have caught up with their retail competitors, creating an even split between the two at the top end of Australia’s super system.

But while large funds are getting larger, there are still too many smaller funds which need to be consolidated, according to KPMG.

The report also found that the 9.5 per cent super guarantee (SG) needed to be lifted as it is not sufficient to provide the 65 per cent of working income considered adequate for retirement.
“The 9.5 per cent is a good starting point but you need to keep building,” KPMG actuarial partner Michael Dermody said.
However the planned increases in the SG to 12 per cent from 2025 will help provide adequate retirements.

“KPMG has calculated that a person on average earnings who starts their career after 2006 and works for 40 years will retire with a superannuation balance of more than $545,000,” he said.

“That is the level estimated to be needed for what the Association of Super Funds Australia has defined as a ‘comfortable’ standard of retirement living.”

The industry fund sector has been growing faster than the retail funds over the past decade and this is now almost on a par with its main competitor. When the other not-for-profit fund types, public sector and corporate, are added in they easily outstrip their for-profit competitors.

However self-managed super funds have also been a major growth area over the period and now have more assets under management than either retail or industry funds. The not-for-profit sector collectively still outstrips the SMSF sector however.

Super sector makeup. Source: KPMG

However, the member profile of fund types varies quite dramatically. Industry funds have a much younger profile resulting in much lower withdrawals and higher levels of net contributions.

The industry funds also appear to have lower-income members with the vast majority of contributions coming from employers under the SG. For the retail funds, however, more than one-third of contributions come from members themselves.

The net inflow of industry funds of $19 billion yearly is over 40 per cent larger than the $12 billion reported by retail funds.

The super gender equation. Source: KPMG

The gender divide remains an ongoing concern in superannuation with women in the 45 to 64 cohorts holding significantly less in their super accounts than men. The differential is driven by the gender wage gap and women’s disrupted career patterns as a result of caring responsibilities for children and the aged.

The workforce is still very gender segmented with building industry funds, Cbus and BUSSQ, reporting 92 per cent and 94.2 per cent male members. Meanwhile, health industry fund HESTA and pharmacists fund Guild Super report 80.7 per cent and 86.4 per cent female members, respectively.

KPMG wealth management partner Manish Prasad told The New Daily: “There is a shift to more equal positions between the retail, industry and public sector funds.

“Account numbers are flattening out with the industry rationalising, the introduction of [the ATO’s] Super Stream and the government’s lost account portal starting to work.”

Government may water down private super borrowing restrictions

From The NewDaily.

The Turnbull government has taken planned restrictions to borrowing by self-managed superannuation funds off the agenda in the short-term in a move that may presage a weakening of the proposals.

Under a plan announced in April, debt on the books of SMSFs would be added to fund values when calculating the new $1.6 million limits for tax-free super pensions.

The move was designed to stop people effectively getting around the cap by using borrowings to reduce asset values and paying the debts off over time.

The initial consultation period for the move expired on May 3 but the government has opened discussions again with the superannuation industry.

A spokesperson for acting Financial Services and Revenue Minister Mathias Cormann said: “Following stakeholder feedback, the government will consult further with stakeholders on the proposal to add the outstanding balance of a limited recourse borrowing arrangement (LRBA) to a member’s total superannuation balance measure in conjunction with consultation on the non-arm’s length income integrity measure announced in the 2017-18 budget.”

The SMSF industry has kicked back on the moves, saying they may force some investors to sell properties because they won’t be able to make extra non-concessional contributions to their fund needed for debt repayments once it has hit the $1.6 million limit.

“Some self-managed funds may not be able to use limited recourse borrowing arrangements if they will be relying on non-concessional contributions to repay some or all of the loan interest and capital because the gross value of the asset(s) will take them over the $1.6 million total superannuation balance and they will be unable to make further non-concessional contributions to service the debt,” the SMSF owners alliance said in a submission on the issue to Treasury.

The opposition has not expressed a view on the legislation, saying instead it would like to ban SMSF’s borrowing altogether.

“Labor has previously stated that we will restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry, to help cool an overheated housing market partly driven by wealthy Self-Managed Super Funds,” a spokesman for Labor’s shadow Financial Services Minister Katy Gallagher said in response to questions from The New Daily. 

“This has seen an explosion in borrowing from $2.5 billion in 2012 to more than $24 billion today.” 

Stephen Anthony, chief economist for Industry Super Australia, said there was an argument for leaving out existing arrangements from the changes.

“I’d be happy to see transition arrangements put in place and allowing the restrictions to apply to arrangements from here on in,” he said.

“But if the outcome of the consultation is just to water down what I see as a useful structural reform, I’d be very disappointed.”

The industry fears that introducing the new restrictions to existing arrangements would mean some SMSF owners would be forced to sell properties held in their funds because they would not be able to make loan repayments.

The explosion of SMSF property debt has been a concern for regulators, with the Murray inquiry into the financial system in 2014 recommending SMSF borrowing be banned, warning “further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system”.

The Reserve Bank concurred.

DomaCom test case: super-for-housing is back on the agenda

From The NewDaily.

Listed investment group DomaCom Ltd is suing the tax man to allow self-managed super fund investors to buy into properties they live in – a test case with potentially huge implications for superannuation and housing affordability.

DomaCom’s ambitions were stymied last October when the Australian Taxation Office said the company’s plans did not pass the ‘single purpose test’ for superannuation.

DomaCom uses trust structures to allow SMSF investors to buy a percentage of a property that they or their families live in. The ATO considered this creative use of trust structures to essentially allow people to gain a benefit by living in their property while holding it as a superannuation investment.

But DomaCom didn’t take that decision lying down. It moved to start an internal dispute process with the ATO. That process proved inconclusive, so now the company is asking the Federal Court to rule on the situation.

It would like the court to say that DomaCom’s structures are not in-house or related trusts for the purposes of superannuation.

To bring the case, DomaCom is financing a civil action taken by one of its clients, who has invested in an apartment built for student accommodation and would like his daughter to rent it while she completes her studies.

DomaCom CEO Arthur Naoumidis told The New Daily, “if we get the ruling in our favour then we would argue we have a precedent and we could follow it”.

However, were the courts to find in DomaCom’s favour, regulators are likely to be concerned on two counts. The purpose of superannuation could be undermined by allowing SMSF owners and their families to live in properties part-owned by their private super funds.

There would also be concern that housing affordability could be further damaged by SMSFs pouring money into residential property.

Even if that idea holds water legally, the ATO and Treasury would be unlikely to let it lie.

Helen Hodgson, associate law professor at Curtin University, told The New Daily last year that “if it was found to be technically possible I imagine fairly soon we would find someone saying the loophole should be closed”.

DomaCom is a listed investment company with lots of units and investments. But unlike other investment companies it allows people to choose a property they want to buy into and purchase through a dedicated sub-fund.

When a property is found by would-be buyers, DomaCom organises a book build where would-be investors promise to buy units at a certain price. If enough money is raised the sub-fund buys the property, essentially through crowd funding.

DomaCom has claimed it is not restricted by the sole purpose test because it ensures when people buy into a sub-fund they are legally buying into a small part of the overall DomaCom structure, rather than buying a single asset.

What DomaCom believes is that if an SMSF buys a stake in, or all of, a sub-fund, its owners can legally live in the building or rent it to their children because the SMSF would receive income from the overall revenues of the fund, not rent paid.

It would also allow children to build stakes in properties their parents bought in an SMSF through purchasing units in the sub-fund over time using their super contributions.

“The ability to use superannuation to help people into a home is clearly a topical issue in Australia and it is our belief that the DomaCom Fund can play a key role in solving this issue whilst still protecting the assets of the SMS,” Mr Naoumidis said.

Cost of ‘modest’ retirement up 33%: ASFA

Rising costs of living are impacting retired households according to new research.  The figures reveal couples aged around 65 will need to spend $59,971 a year and singles $43,665.

Significant hikes in the cost of power, health care, food and rates over the past 10 years have driven increases in the amounts needed to achieve both modest and comfortable retirements, according to the latest data from the Association of Superannuation Funds of Australia (ASFA).

It is more than a decade since the first release of the modest and comfortable ASFA Retirement Standard (RS) budgets.

Every three months since June 2006, they have tracked the rise and fall of items that comprise average household budgets. Updates reflect inflation and provide detailed budgets of what singles and couples need to support their chosen lifestyle.

Between June 2006 and March 2017, the RS budget at the modest level for a single person increased by 33 per cent, while the single comfortable budget rose by 23 per cent.

The budget for a couple at the modest level increased by 36 per cent and at the comfortable level by around 26 per cent.

ASFA CEO Dr Martin Fahy said the figures compared to an overall 28.6 per cent increase in the Consumer Price Index (CPI).

“The categories of expenditure that really impacted the budgets are not altogether surprising,” he said.

“Over the period, electricity costs increased by 124 per cent, health costs by 60 per cent, property rates and charges by 83 per cent and food costs by 24 per cent.

“Price changes for less essential items tended to be lower and in some cases prices fell.

“The price of clothing fell by a total of three per cent over the period with an eight per cent fall in the cost of communications (including telephone and mobile phone charges).

“The cost of international holidays rose by a relatively modest 16 per cent over the period.”

Over the more than 10 year period, the maximum Age Pension increased in real terms, by 70 per cent for a single person and 54 per cent for a couple, from a starting base far too close to the poverty level.

The Age Pension is adjusted by what is the greater of the increase in average wages or the CPI. During the period, average earnings rose by 43 per cent.

There also were some discretionary increases made to the rate of the Age Pension, particularly to the single rate. However, despite these various increases, the Age Pension alone still does not permit a retiree to achieve even a modest standard of living in retirement at the levels set by the ASFA RS.

The increases in the Age Pension over and above the increase in the CPI and in wages have helped contain the savings required at the time of retirement, in order to support either a modest or comfortable lifestyle.

On the other hand, the tightening of the means test has led to an increase in the amount of retirement savings needed to support a comfortable standard of living in retirement.

Other price increases of interest included: tobacco (not in RS budgets but consumed by many retirees) up by 178 per cent; wine up by only six per cent, but beer up 45 per cent; rents up 51 per cent; postal services up 45 per cent; vet fees (not in RS budgets) up 49 per cent; and, insurance costs up 72 per cent.

Dr Fahy said both budgets assume retirees own their own home outright and are relatively healthy.

“Of increasing concern is the reality of many more retirees at the mercy of the private rental market, so when you consider the increase in renting costs, it highlights the need for increasing numbers of retirees to have much greater super balances to support a reasonable retirement,” he said.

In the latest RS updates for the March quarter, there was a slight increase in the cost of living for retirees, with increases in the prices of petrol, medical and hospital services and electricity.

The ASFA RS March quarter figures indicate couples aged around 65 living a comfortable retirement need to spend $59,971 per year and singles $43,665, both up 0.3 per cent on the previous quarter.

Total budgets for older retirees increased by around 0.3 per cent at the comfortable level and 0.6 per cent at the modest level.

Over the year to the March quarter, there was a 1.8 per cent increase in the budgets, slightly lower than the 2.1 per cent increase in the All Groups CPI.

Dr Fahy said the cost of retirement over the most recent quarter only increased by a relatively small amount but many individuals would still find it difficult to achieve a comfortable standard of living in retirement.

“Over the longer term, the cumulative increase in retirement costs has been considerable,” he said.

The most significant price increases in the March quarter contributing to the increases in annual budgets were for automotive fuel (5.7 per cent), medical and hospital services (1.6 per cent) and electricity (2.5 per cent). Fluctuations in world oil prices continue to influence domestic fuel prices.

The most significant offsetting price falls were for international holiday travel and accommodation (-3.8 per cent) and fruit (-6.7 per cent).

Overall, food prices fell 0.2 per cent in the March quarter. The main contributor to the fall was fruit (-6.7 per cent), due to plentiful supplies of both year-round and summer fruit. Over the last 12 months, food prices rose by 1.8 per cent.

International holiday travel and accommodation prices fell 3.8 per cent due to the winter off-peak seasons in Europe and America.

Clothing and footwear prices fell 1.4 per cent in the quarter, reflecting discounting during the post-Christmas sales.

The price rises for both medical and hospital services and pharmaceutical products reflect the annual cycles for the Medicare Benefits Scheme and Pharmaceutical Benefits Scheme (PBS).

Insurance prices increased 0.8 per cent in the quarter. Over the last 12 months, insurance prices have increased by 6.8 per cent.

Expenditure on education is not included in the retirement budgets but some retirees paying school fees for their grandchildren would be affected by a 4.1 per cent increase in secondary education school fees following the commencement of the new school year.

Retail funds harvest 50% of all superannuation fees

From The New Daily.

Retail super funds are soaking up half of all fees in the superannuation system despite holding only 29 per cent of retirement savings, according to new research carried out by Rainmaker for Industry Super Australia.

‘Retail’ includes the big four banks, who last year alone scooped up 28 per cent of all fees, totalling $8.7 billion.

Overall, the survey found that in 2016 Australians paid $31 billion in fees on $2.2 trillion of superannuation. That amount of fees is about the same as the cost to the government of superannuation tax concessions, and more than half the $45 billion spent on income support for the elderly.

Of that $31 billion in fees, the for-profit sector (which also includes self-managed super funds) ends up with $28 billion, or 91 per cent, Rainmaker found.

That’s because while the not-for-profit sector (including industry, public sector and corporate funds) charged a total of $12.7 billion in fees, $9.9 billion of that went to private sector wealth managers to provide insurance and fund management services. The not-for-profit sector kept only $2.8 billion.

A further breakdown of super costs shows how retail funds harvest more:

  • Retail super funds, with 29 per cent of funds under management (FUM) and an estimated 45 per cent of members, received 50 per cent ($15 billion) of all fees
  • Not-for-profit funds (industry, public sector and corporate) accounted for 42 per cent of FUM, 45 per cent of members and collected 42 per cent (roughly $13 billion) of fees
  • SMSFs with 30 per cent of FUM and 10 per cent of members received 7 per cent of all fees

Within the for-profit sector there is further inequality. Rainmaker estimates that Australia’s five major banking groups and AMP receive 40 per cent of total super fees, or $12.3 billion, while the big four banks alone account for $8.7 billion in fees.

David Whiteley, CEO of Industry Super Australia, told The New Daily that “the banks have been getting significant funds from superannuation yet they have been underperforming the not-for-profit funds”.

“The government should be evaluating whether they think its appropriate for the banks to be generating nearly $9 billion a year from fees on super.

“The government and regulator need to find out if the bank-owned super funds are eroding workers’ super savings by generating profits for the parent bank.”

Alex Dunnin, research director at Rainmaker, said there had been some pressure on for-profit funds to reduce costs in recent years but they still have high costs. “There’s nothing necessarily wrong with being in high-fee products but you need to make sure it’s worth it.”

Source: Rainmaker

As the above chart shows, retail funds have significantly underperformed not-for-profit funds over the last 10 years.

“The bank-owned super funds delivered returns of 2 per cent less per annum when compared to industry super funds over 10 years. For an average income earner, this under-performance, if continued, could cost $200,000 in retirement savings over their lifetime,” Mr Whiteley said in a statement.

Mr Dunnin said the research showed retail fund members spend about $5.4 billion on advisors because much of their business is advisor driven. Advisory fees include entry advice fees, grandfathered ongoing trail commissions for pre 2013 business and fee for service portfolio structure and investment advice fees.

Industry funds do provide some advice but its total is very small and not captured by the research, he said.

Total fees paid by superannuation fund members across Australia decreased marginally during 2015-16 from 1.19 per cent to 1.18 per cent.

The Financial Services Council declined a request for comment.

*The New Daily is owned by a group of industry super funds

We Paid $31 billion in Super Fund Fees Last Year

From Business Insider.

Australians paid $31 billion as fees to fund managers to handle their superannuation funds last year, according to a study by Rainmaker.

These numbers put it in perspective.

  • There were 28 million pension or superannuation accounts in the country, according to the The Association of Superannuation Funds of Australia Limited
  • A total of 12.06 million Australians were employed as of March out a population of 24.5 million, according to government statistics
  • Australian retirement assets totaled $2.3 trillion, the fourth largest such savings pool in the world

This works out to a fee of $1,107 per pension account a year, or $2,570 for every employed Australian. That compares with the average weekly total earnings of $1,164.60.

The following chart from Rainmaker shows the distribution of fees.

Rainmaker/ Supplied

The survey also underscores that the Australian savings pool isn’t gaining from the economies of scale as one would expect.

While total retirement assets soared 11% in the year to March 31, total fees paid by members across Australia stood at 1.18% last year from 1.19%, the previous year.

As the following table points out, the drop in fees has slowed to a trickle. From 1.33% in 2010, it fell to 1.19% three years earlier thanks to reforms by the government to institute a low-fee passive investing product. Since then the numbers have stagnated while assets have soared.

Rainmaker/ Supplied

Fees are coming down predominantly because of falls in administration fees, which are often paid out when an account is set up, rather than falls in investment fees, Rainmaker said.

The nation’s retirement assets are projected to reach $7.6 trillion by 2033, according to Deloitte.

The estimate is based on the guaranteed pension contribution climbing to 12% from 9.5% now and investment growth, Deloitte says.

Australia introduced a compulsory retirement savings plan in 1992 to address the burden an ageing population would exert on the pension system and public finances.

While that has boosted assets, the focus is shifting to fees in a low yield environment. There are nine different type of fees the funds charge including exit and activity-based fees, according to the Australian Securities & Investments Commission.

A 1% difference in fees now could be up to a 20% difference in 30 years, the regulator says in its website.

Retirement Income Stream Review Outcomes

In its superannuation policy for the 2013 election, the Government stated that it would review both the minimum withdrawal amounts for account-based pensions and the regulatory barriers currently restricting ‘the availability of relevant and appropriate income stream products in the Australian market’. The Treasury has now released the outcomes of the review.

The paper says the current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement and should be maintained.

An additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule.

In regard to the existing minimum drawdown rules:

1. The current annual minimum drawdown requirements are consistent with the objective of the superannuation system to provide income in retirement and should be maintained.
2. The Australian Government Actuary should be asked to undertake a review of the annual minimum drawdown rates every five years and advise the Government to ensure that they remain appropriate in light of any increases in life expectancy.
3. Any other changes to the minimum drawdown amounts should only be considered in the event of significant economic shocks and based on further advice from the Australian Government Actuary.

In regard to the development of other annuity-style retirement income stream products:

4. An additional set of income stream rules should be developed which would allow lifetime products to qualify for the earnings tax exemption provided they meet a declining capital access schedule.
5. The alternative product rules should be designed to accommodate purchase via multiple premiums but additions to existing income stream products should continue to be prohibited.
6. Self-Managed Superannuation Funds (SMSFs) and small Australian Prudential Regulation Authority (APRA) funds should not be eligible to offer products in the new category.
7. A coordinated process should be implemented to streamline administrative dealings with multiple government agencies.

Minimum drawdowns in practice

Chart 1 (below) illustrates a drawdown scenario for male and female retirees commencing an account-based pension with a balance of $200,000 at age 60 and drawing down at the minimum payment amounts with investment returns of 6 per cent per annum. The chart shows the account balance at various ages and the income drawn down each year in both nominal and net present value (NPV) terms.

An account-based pension drawn down only at the minimum rates can be expected to last beyond average life expectancy, although the NPV of the annual income will generally gradually diminish. In the below example, the net present value of the account balance at life expectancy is around 25 per cent of the initial opening account balance. The net present value of income from the pension declines steadily over time, but ‘ratcheting-up’ occurs when the regulated percentages increase, resulting in a somewhat variable income stream in nominal terms.

Chart 1

Note: The analysis assumes an average nominal investment return of 6 per cent. This is also the discount rate for net present value.

Proposed capital access schedule

Under the proposed alternative income stream rules, products would qualify for the earnings tax exemption provided the maximum amount that could be returned to the product holder if they withdraw from the product at a later date declines in a straight line from commencement to life expectancy.

In addition, products would be able to offer a death benefit of up to 100 per cent of the nominal purchase price for half of this period, with the maximum death benefit limited to the capital access schedule thereafter.

For example, male life expectancy at age 65 is approximately 19 years.

Under this proposal, a product sold to a 65 year old male could offer a declining commutation value such that the amount of the purchase price that could be returned on withdrawal would be zero by age 84, but a death benefit of 100 per cent could be offered for around 10 years (to age 75). Income payments would continue for life (see Chart 2).

In the case of deferred products, the schedule would commence at the same time as the product becomes eligible for the earnings tax exemption. For example, where an individual retires at age 65 and buys a deferred annuity that pays an income stream from age 80, the earnings tax exemption and the depreciation schedule would both commence from age 65, even though income payments would not commence until age 80.

Chart 2

AMP provides update on growth strategy

AMP is today providing an update on its group strategy and growth opportunities at its  Investor Strategy Day, being held in Sydney.  This includes discussion on the changing role of financial advisers.

The strategy will direct investment towards higher-growth businesses in wealth management, AMP Bank and AMP Capital; leverage AMP’s  strengths in overseas markets; and maintain focus on driving cost efficiency.

Key elements of the strategy include:

  • Tilt investment to higher-growth, less capital-intensive businesses. Release and recycle capital from lower-growth business lines to fund growth and returns.
  • Grow wealth management by broadening its revenue streams via increasing contributions from advice and SMSF, while continuing to invest in product and platform development.
  • Build and integrate a goals-based advice operating system across face-to-face, phone, digital and corporate super employer channels.  Explore options to extend advice capability and systems into international markets.
  • Leverage AMP  Capital’s investment management expertise in fixed income, infrastructure and real estate to selected international markets, including Europe, North America and Asia.
  • Continue the rapid growth and increasing contribution of China businesses.
  • Manage Australian wealth protection, New Zealand and mature for capital efficiency and value, emerging embedded value as soon as possible.
  • Continue focus on costs to drive operational leverage.

AMP Chief Executive Craig Meller said:

“Our  strategy continues AMP’s shift from a product and distribution business to a  customer-led organisation focused on helping our customers achieve their  personal goals.”

“We are uniquely positioned to benefit from favourable domestic and global thematics including the mandated growth of the Australian superannuation system, a  growing banking market and the structural increase in demand for investment yield as the world’s population ages.

“The strategy is focused on realising our potential while adapting to an increasingly competitive market place and technology-driven disruption.

“In  Australia, we will continue to lead the wealth management market, changing the sector’s traditional economics by driving greater revenue from advice and self-managed super fund (SMSF) services.  We will help more Australians get more advice, more often through our transformed goals-based operating system.

“We will also diversify and drive revenue growth internationally through investment management, particularly infrastructure and real estate, and by extending our unique wealth operating system to offshore players.  Our partnerships with market leaders in China  (China Life) and Japan (MUTB) provide strong platforms for future growth.

“The approach for our Australian wealth protection, New Zealand and mature businesses is to manage them for value and capital efficiency.  These businesses have significant embedded value and we continue to look for ways to economically accelerate the realisation of this value.

“The  strategy will be underpinned by a continuing focus on operational efficiency  and cost discipline right across the group.”

 

Bank-owned super funds earn less than term deposits

From The New Daily.

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

Vanguard’s UK Online Investment Platform Is Credit Negative for Incumbent Players

From Moody’s

Last Tuesday, low-cost fund provider Vanguard (unrated), announced its intention to enter the UK’s direct-to-consumer online investment market. Vanguard’s entry into the UK retail online investment market is credit negative for incumbent online platforms such as Hargreaves Lansdown (unrated) and FIL Ltd.’s (Baa1 stable) Fidelity FundsNetwork because it will likely trigger a price war that costs incumbents their profitability.

Vanguard’s online service, the Vanguardinvestor, lets UK retail investors directly access a wide range of Vanguard’s exchange-traded funds (ETFs) without using a broker or financial advisor. So far, most of Vanguard’s UK business has been sourced from brokerages and financial advisors, which typically require clients to have minimum account balances of at least £100,000. Using Vanguard’s online platform, retail investors will now be able to open an individual savings account with £500 or a monthly investment of £100. And, Vanguardinvestor will charge a flat administrative fee of 0.15% (capped at £375 per year), which is lower than the 0.45% fee that Hargreaves Lansdown, the UK’s largest online provider, charges (see Exhibit 1).

Vanguard will target investors from both the mass and mass-affluent markets – those with savings of £5,000-£50,000. These investors lost access to advice in 2013 with implementation of the UK’s Retail Distribution Review (RDR) and invest directly. In a November 2012 publication, Deloitte estimated that the RDR had created an advice gap population of as many as 5.5 million people.

Gross inflows into stock and share individual savings accounts in 2015-16 totalled £21.1 billion, and this segment has been growing (see Exhibit 2), driven by the tax-free individual savings account allowance increase to £20,000 from £15,240 in April 2017 and new products. In addition to individual savings accounts and defined-contribution pensions, general investment accounts without any tax wrapper are benefiting from investor inflows as people become increasingly aware of their investment options. Vanguard announced plans to launch a self-invested personal pension in the future.

Vanguard’s online service also targets younger investors such as millennials, who are comfortable with online services and are not yet a target for financial advisors or wealth managers. As they evolve in their careers and garner higher incomes, this demographic will be accustomed to low-cost services and investment funds. Vanguard’s online service in the UK is so far limited, but we can see it evolving toward robo-advice as it has in the US with The Vanguard’s Personal Advisor Services.

Incumbent platform providers will likely lower administrative fees and increase services to maintain market share, but this will compress their margins. Given the high and rising costs of running online services, smaller platforms with less price flexibility such as Interactive Investors (unrated) and Nutmeg (unrated) will be most challenged. Cheap online investment services will also accelerate the adoption of low-costs index trackers and ETFs among UK retail investors. Active managers such as Aberdeen, Henderson, Schroders, and FIL Ltd. Will face fee and margin pressure as a result.

In addition, the UK’s Financial Conduct Authority’s upcoming investment platform market study to improve competition between platforms and improve investor outcomes is likely to challenge most platform providers’ prices and Vanguard would be well positioned for any price war. As the best-selling fund manager in 2016 and second-largest asset manager globally, Vanguard has the scale, resources and brand necessary to disrupt the UK retail market, which was £872 billion as of year-end 2015. In the US, where Vanguard provides a similar online-value proposition, platform costs went down.