Are bank-owned funds only in it for the margins?

Retail superannuation funds which operate under vertically-integrated structures and which use affiliated trustee directors tend to significantly underperform their peers, according to two senior academics, Dr Kevin Liu and Dr Elizabeth Ooi.

The pair have used a submission to the Productivity Commission (PC) Inquiry into the Competitiveness and Efficiency of Superannuation to argue that the structure and the related party arrangements inherent in many retail funds is directly contributing to their relative under-performance.

What is more, the submission argues that the use of related parties in retail funds is “motivated by their business model to maintain control of and capture margins in each of the functions in the value chain of their conglomerate group”.

It said that while outsourcing was prevalent in the superannuation industry, retail and not for profit funds tended to use different outsourcing models with not for profits predominantly using unrelated service provides, while retail funds tended to outsource to related parties.

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It noted that at the trustee level, retail funds were more likely to use affiliated trustee directors and that, on average, 78 per cent of retail fund trustees were affiliated.

“The assets and member accounts in the retail sector are predominantly managed under a highly-affiliated trustee environment,” the two academics said. “Over 94 per cent of the retail assets and member accounts are managed by trustee boards that are dominated by affiliated trustee directors.”

The submission claimed that retail funds that used related-party service providers and affiliated trustee directors tended to significantly underperform their peers.

“This negative relationship is both statistically and economically significant, and consistent across different measures of investment performance (e.g. net return, over-benchmark return, risk-adjusted return with asset allocation adjustment) in both the short-term and the long-term at both the total fund level and MySuper (i.e. default investment option) level,” the submission said.

“A higher level of trustee director affiliation on retail fund boards is associated with lower investment performance,” it said. “Retail funds that are part of a vertically-integrated conglomerate group are likely to be subject to more severe conflicts of interests and duties, which lead to more significant underperformance.”