Gouging banks: Mamma mia, here we go again, my, my
It goes down easier if you sing ABBA’s song, Mamma mia, as you review your super returns—lightened considerably by bank pickings.
Superannuation companies owned by the big four banks are boosting their revenues by hundreds of millions of dollars a year by paying customers invested in the lowest-risk “cash” options interest returns that are as little as one-quarter of actual market rates. Retirees and other risk-averse investors are hard hit by the systemic gouging because they are most likely to allocate super to cash options, which are considered safest.
Source: News Corp
Big-four bank super funds gouge millions
According to internal industry data by analyst SuperRatings, obtained by The Australian, over the past five years people in the Westpac-owned $144 million BT Business Super fund who selected the “cash” investment option received an average return of just 0.5 per cent a year, after paying fees and taxes.
This is despite the five-year cash rate and the federal government five-year bond yield — both benchmarks for cash investments — having averaged 2.03 per cent and 2.48 per cent a year in that time.
Super funds held by workers, while they are in the “accumulation” phase, pay tax of about 15 per cent, but even taking out 15 per cent from the five-year cash and bond yields, the return would be 1.73 per cent and 2.11 per cent respectively, still more than three times the rate paid by BT.
Super accounts in the pension phase, after the account-holder has retired, pay no tax.
Industry experts have suggested systemic gouging by the big four banks could explain the chronic underperformance of their super funds, which operate 12.3 million Australian super accounts holding $309 billion.
Industry Super Australia, which represents industry funds that are in competition with the big-bank-run “retail” funds, last year published analysis of Australian Prudential Regulation Authority data that showed more than 95 per cent of accounts held by retail super funds had not delivered returns above the median over the past decade.
Of all superannuation funds offering cash investments surveyed by industry analyst SuperRatings, the median annual return for cash investments for super funds in the accumulation phase was 2.06 per cent a year over the past five years.
By contrast ANZ’s OnePath superannuation holders invested in OnePath Integra-OnePath Cash received just 0.59 per cent a year for their cash investments, while those superannuation investments held in the NAB-controlled MLC MasterKey MLC Cash Fund earned an average of just 0.5 per cent a year.
The SuperRatings data is paid for by the super industry and it is not made available to the public, with superannuation fund industry users being required to sign forms stating they will not share the data.
That data collated is provided voluntarily by the superannuation funds themselves, and not all data for all funds is provided, suggesting returns for those funds not disclosed may be worse.
The SuperRatings data sets out the upper quartile of cash returns for funds — the point at which 25 per cent of funds perform better.
It also sets out the lower quartile, the point at which 25 per cent of funds perform worse.
Funds in the lowest quartile pay lower than 1.79 per cent interest a year. According to the data, super funds owned by the big four banks almost all paid substantially less than 1.79 per cent.
The returns reported by SuperRatings are the returns super holders actually receive, after taking out fees and taxes.
Analysts say that using the cash returns paid between big four bank super funds and other super funds is preferable for comparing funds on a “like-for-like” basis because it strips out variables, given the five-year bank-bill rate is a known value.
The big four banks and their super companies have in the past argued against suggestions their diversified super funds were not passing on all the returns, claiming such analysis was not comparing like-for-like — or was like comparing “apples and oranges”.
The median return paid on cash by funds in the pension phase is 2.45 per cent a year over the past five years, while the bottom quartile is 2.16 per cent.
The bank-owned super funds also almost all paid well below that bottom quartile, with, NAB-owned MLC MasterKey AP — MLC Cash Fund, for example, paying 0.81 per cent after fees are taken out.
One of the highest returns of the big four bank super funds listed is the CBA-owned Colonial First State FC AP — CFS Cash, which is recorded as paying 1.59 per cent per annum to retiree account holders in the pension phase.
However, in an aberration, noted as “remarkable” by analysts interviewed by The Australian, that return is less than the 1.96 per cent a year paid to super fund investors in the accumulation phase in the CBA-owned Colonial First-State-FC Wholesale Personal — despite super tax having been removed from those accounts.
A CBA spokeswoman said the returns for the investors in the accumulation phase fund were lower because it had a “different fee basis” and that “the additional fee is usually paid to the client’s adviser”.
Analysts said the return on cash should be higher for super accounts managed by bigger institutions, because those institutions had large amounts of money to invest and economies of scale meant they could get better rates.
Experts suggested super funds could be gouging across many superannuation investment options — that is, potentially short-changing investors who have allocated their funds to be held in, for example, Australian shares or property, potentially costing members billions of dollars a year.
The royal commission into banks will hold its public inquiries into superannuation later in the year, but it is expected The Australian’s exposure of gouging on cash investments will be a key focus.
According to the Association of Superannuation Funds of Australia, superannuation companies owned by Westpac, ANZ, the CBA and NAB managed $309bn worth of superannuation funds at June 30 last year, based on the most recent figures.
That represented 53 per cent of the entire “retail” superannuation fund sector.
Of that, according to the latest figures from the Australian Prudential Regulation Authority, super funds owned by the big four banks control $46.2bn in funds invested in cash, holding a substantially higher amount of funds invested in cash than retail super funds generally.
Analysis by The Australian shows that of those big-four bank cash super funds listed by SuperRatings, the weighted average annual return on cash investments in the accumulation phase is 1.36 per cent and in the pension phase it is 1.175 per cent.
If the $46.2bn of cash investments in big-bank super funds were invested at the average super fund accumulation phase cash return rate of 2.06 per cent, instead of the bank super fund average rate of 1.36 per cent, super holders would earn $952m a year in returns, instead of $628m — a $324m annual difference.
If the $46.2bn was invested at 2.45 per cent paid by the average super fund in the pension phase, the return would be $1.13bn a year, but if it were invested at the bank super fund average rate for accounts in the pension phase of 1.175 per cent it would return $543m — a $587m annual difference. That suggests investors in big-four bank super funds are potentially losing hundreds of millions a year.
However, that effective loss to investors is likely even worse, because the 2.06 per cent and 2.45 per cent accumulation and pension phase median industry return rates are weighed down heavily by the poor performance of the big four bank super funds.
When asked what the five-year cash rate return, after fees and taxes, was for its super clients, NAB declined to comment.
The same request about funds ultimately owned by Westpac and ANZ was met with the same response.