FSC targets scale of under-performing industry fund defaults

There are a substantial number of not-for-profit default superannuation funds which are under-performing and this represents a reason for reforming the system, according to the Financial Services Council (FSC).

In a submission guaranteed to enrage some industry superannuation funds, the FSC has used a submission to the Productivity Commission (PC) to utilise the PC’s own analysis to point to the problem of underperforming not-for-profit funds.

It said a diagram developed by the PC has shown “there is a very significant underperformance problem for some not-for-profit funds for many asset classes, relative both to the median/mean, and relative to retail funds”.

“This tail underperformance problem is particularly stark for Australian listed equity (around 4 per cent), international listed equity (5 per cent), and international fixed income (4.5 per cent), but it is also present for cash (1.5 per cent) and Australian fixed income (2 per cent), with the only exception being listed property,” the FSC submission said.

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“This result should be of significant concern, particularly when viewed in conjunction with the average asset allocation in the super system,” it said. “The asset classes with tail underperformance by industry funds represent about 75 per cent of average industry fund asset allocation.”

The FSC said that while some caveats needed to be placed on the FSC data it nonetheless supported several key points including “there is a substantial underperforming tail in the default component of the superannuation system, strongly supporting the case for reforming this system to ensure underperforming funds improve performance or merge with better performing funds”.

The FSC submission also noted that the PC data showed “any supposed underperforming tail of retail funds does not exist in the most recent figures – in other words, the problem of the underperforming tail appears not to be a particular feature of retail funds”.