Victims of superannuation fee rip-offs should be compensated

While the current focus in superannuation is on under-performance and its remedies, the issue of compensation should loom large for both industry and government in the aftermath of the banking royal commission and the Productivity Commission’s default super report.

In cases where banks, AMP and retail super funds have broken the law and charged fees for no service or, in the case of AMP, charged dead people fees, full compensation is required and in many cases is underway, despite the best efforts of major institutions like NAB to devise reasons not to compensate for such theft. The final bill for this kind of compensation is still growing, into the billions. But there are other areas where major financial institutions have behaved appallingly and inflicted serious financial damage on their customers that will cost them hundreds of thousands of dollars in retirement.

One area is grandfathered trailing commissions which were left intact, at the behest of the institutions, by the FOFA reforms in 2013. In the wake of the royal commission, however, Westpac, Macquarie, NAB and ANZ are now abandoning them, even though they aren’t (yet) legally obliged. Why? Because the royal commission has shown how grandfathering created an incentive for its beneficiaries — financial planners and the companies that employ them — to keep clients in expensive legacy products that continued to generate commissions, rather than move them to products that are more in their interests. Typically of major financial institutions, just like big companies of all stripes under neoliberalism, it wasn’t enough to secure an exemption from regulation — they had to rort and abuse it.

The Productivity Commission, based on royal commission data, found that the 11 largest retail funds had earned $400 million from trailing commission in 2016-17. They should repay every single cent of it back, with interest. And they should pay back every cent they’ve earned in trailing commissions since July 1, 2013, the day the FOFA regulations came into effect. Based on the above numbers, the total would be in the order of $8.7 billion.

The second area where compensation is an issue is in relation to the sustained high fees earned by major retail funds. The extent of overcharging by major financial institutions is neatly shown by the PC in a graph:

It shows a sustained gap of around 0.5% of assets between the fees charged by industry, corporate and public sector and those charged by retail funds. That 0.5% has been pure profit for the major institutions, and it will contribute to significantly poorer retirement incomes for the victims of retail funds. There is thus a strong case for compensation, mitigated only by the sheer size of any faintly adequate compensation: even 0.1% of the funds currently under management by retail funds is nearly $6 billion.

The third area of potential compensation relates to the persistent under-performance of both retail and industry funds, though primarily the former. According to the Productivity Commission, “about 1.6 million member accounts and $57 billion in assets are in MySuper products that under-performed conservative benchmarks tailored to each product’s own asset allocation over the 11 years to 2018. This suggests that many members are currently being defaulted into under-performing products and could be doing better. If all members in bottom-quartile MySuper products received the median return from a top-quartile MySuper product, they would collectively be $1.2 billion a year better off.”

In relation to the full range of superannuation funds, not just MySuper products, the PC found industry funds outperformed retail funds by around 2 percentage points annually — although there are dud industry funds among the under-performers as well. If retail fund owners and the relevant trade unions and employer groups behind under-performing industry funds were required to make up for their under-performance over the long term, the bill would again run into the billions.

It’s clear that full compensation to superannuation account holders is beyond the capacity of financial institutions and, to a lesser extent, unions and industry groups. But that shouldn’t mean no compensation: an industry levy drawn from company profits could channel perhaps half a billion dollars a year into a fund to partially compensate those in each of the three classes of people harmed by fees and under-performance. That would at least signal to the community that those responsible for inflicting so much harm faced some consequences.

And if there were any justice, the political party that did so much to facilitate it, the Liberals, would be made to contribute as well.