Dec 14, 2009

Super funds leak $13 million a day

MORE than $13 million a day is being sucked from Australian retirement savings because of underperforming retail superannuation funds and commissions paid to financial planners, according to industry super funds.

The claims are contained in an Industry Super Network submission to the Government's Super System Review, which today unveils draft findings from the first phase of its year-long inquiry.

The three-phase review, led by former Australian Securities and Investments Commission deputy chairman Jeremy Cooper, will also today release the issues paper for its third and final stage, examining the structure of Australia's $1 trillion super industry.

In its submission for the Cooper Review's second phase, examining the operation and efficiency of the system, ISN argues that most super fund members are ''passive and disengaged'', leading to a market failure requiring regulatory intervention.

It argues that default funds - the funds workers are placed in if they do not make an active choice - should be chosen on set criteria and should continue to be included in industry awards.

The issue of default funds has bitterly divided the super sector. Retail funds, the for-profit rivals of the industry super funds, were mostly overlooked when default funds for major industries were named during the Federal Government's industrial award modernisation process last year.

Retail funds have faced criticism - especially from industry funds - over fees and commissions, especially the perceived conflict of interest in paying commissions to financial advisers. The Investment and Financial Services Association, which represents retail funds, this year pledged to phase out in-built commissions.

The Cooper Review's second issues paper canvassed the possibility of a government-operated, national default fund.

ISN's submission calls for workplace default funds to be chosen on ''objective criteria'' - requiring the fund to be of sufficient size and scale, to not pay commissions to intermediaries and to cap fees.Its submission estimates that the commission system is costing members $13 million a day, including $8 million in ''lost investment income from retail sector under-performance over the past 13 years''.

''ISN does not accept that commissions are a legitimate or acceptable cost to individual investors or the system, but rather 'inertia costs' which create an indefensible drag on the system as a whole and on individual retirement systems,'' the submission said.

ISN also calls for a no-disadvantage test to apply when a worker is ''flipped'' into a different fund when he or she leaves their job. It reiterates its call for financial planners to be required by law to act in their clients' best interests, and for commissions to financial advisors to be banned.

In its submission, Australian Institute of Superannuation Trustees, the peak representative body for the $450 billion not-for-profit super sector, laid out eight changes it believes could reduce costs and promote efficiency in the super industry.

Among these are better use of tax file numbers and the use of technology to ''to streamline the collection, distribution and publication of superannuation data and statistics''.

The AIST also argued the Government should extend the criteria that default funds must comply with, that all funds be required to publish ''quantifiable investment objectives'' by which they would be judged, that fees be more clearly disclosed and that investment managers' fees be performance-based.

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