Workers who save through a not-for-profit industry superannuation fund may have twice as much money at retirement as those who invest in a for-profit retail fund, according to research by Macquarie University and University of Sydney Business School economist Mike Rafferty.
The research, conducted for the independent think tank the McKell Institute, is based on industry data covering returns on superannuation investments over the past quarter of a century.
The data indicated a member of a retail fund who invested a single lump sum 25 years ago needed to work an additional eight years to reap the same benefit as a member of an industry fund who invested the same amount.
Using the data to compare the performance of the two fund types over a working life of 50 years, the researchers found that industry fund members had almost twice as much money when they retired.
A contribution of $1,000 a year into a retail fund generated a retirement benefit of just over $400,000 over 50 years while the industry fund returned nearly $800,000.
Economist Mike Rafferty says the difference in performance reflects the way super funds are governed at the board level.
Not-for-profit industry funds date back to the mid 1980s and are run by employer associations and-or unions operating within an industry sector and are required by law to have board members representing member’s interests.
“Retail funds, on the other hand, usually appoint employees to governing boards who are understandably focused on maximizing profits via management fees,” says Rafferty.
“For this reason, their short term objective is to grow the size of the fund rather than maximising member’s benefits over the long term.”
Australians currently have more than $1.8 trillion invested in superannuation funds.
The federal government has governance of industry super funds in its sights, looking at ways to ensure that boards of not-for-profits, and retail funds, have a majority of independent directors.
Mr Rafferty’s research reflects similar United States findings.
The Chief Investment Officer, Yale University Endowment, David Swensen, recently said the fundamental market failure in the US mutual fund industry involves the interaction between sophisticated, profit-seeking providers of financial services and naïve, return-seeking consumers.
In this situation, he said: “Investors fare best with funds managed by not-for-profit organizations, because such firms focus exclusively on serving investor interests.”
In Australia, industry super funds say the research shows how important the need for a default super safety net to ensure only the best performing funds are default funds.
David Whiteley, CEO of Industry Super Australia, says eight out of ten Australians don’t choose their own fund.
And the funds they end up in are typically owned by banks which, Whiteley says, have historically underperformed compared to not-for-profit funds over the medium and long term.
“Bank-owned super funds are seeking to abolish the safety net and intend to cross-sell their super funds by leveraging existing business banking relationships,” he says.
The Australian research was conducted on behalf of the The McKell Institute. Its report, Success of Representative Governance on Superannuation Boards, is available here.
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