The government together with APRA ( Australian Prudential Regulation Authority ) are monitoring the behaviours of super funds in relation to potential conflicts of interest, in particular within funds that have high levels of asset exposure to related parties. The governments review into Australian’s superannuation system nicknamed the Cooper Review, emphasised the obligation of super fund trustees to make decisions that are in the best interests of members.
Retail funds are typically owned by banks and wealth management companies and are known as ‘for profit’ funds. Industry funds on the other hand, are not for profit funds, designed to benefit members of particular industries. Retail funds pay commissions to financial advisers, Industry funds do not. This in itself, many believe, leads to a conflict of interest. The governments review has recommended banning commissions paid to financial advisers in retail super funds as this advice may not always be in the best interests of the member.
Investment strategies and costs differentiate the two types of funds, with retail funds often investing assets with related parties. APRA, in its Annual Superannuation Bulletin this year, revealed that its research found that retail super funds had the most exposure to related party assets. Individuals often opt to invest in retail funds with the belief that investments will be managed within the group. However, APRA noted that:
‘while trustees may believe that this arrangement produces operational advantages, it can also introduce conflicts of interest that must be managed to ensure trustees continue to act in members best interests.’
It was also noted that 60% of directors of retail super funds are also employees of the organisation creating a significant conflict of interest.
The concern is that, if decisions by the fund are being made in the interests of others rather than in the interests of members, this may affect member’s returns through higher fees as well as the opportunity cost of other investments.
As at 30 June 2010, information provided to APRA by super funds showed that most super funds invested at least 20% of their assets with a single party which can create significant risk to the fund and can result in the fund underperforming for members.