By Joe Montero
The banks are pressing the federal government to open industry superannuation funds to them, by allowing employers greater discretion in choosing funds for their employees.
At present, unless the employee has chosen otherwise, employees must be signed up with well performing funds. These fall under the category of default funds. Industry funds fall under this category. Either removing the category or including the funds operated by the banks , would be a game changer.
Industry funds are not for profit, do not pay commissions and distribute net earnings to policy holders. The other kind of superannuation funds are called retail funds and they are for profit, pay commissions and distribute a portion of net profits to shareholders. The is the type of fund provided by the banks.
Another difference between the two types of funds is that industry funds are overseen by a board made up of representatives of employers, government and unions.Industry funds are overseen by a board of directors like any other company. The banks are also pushing to get rid of the industry type of boards.
These changes would help to open access to a $2 trillion industry and provide for direct control over these funds for re-investment by the banks.
Although the four banks currently rank among the most profitable of businesses operating in Australia, in terms of the volume of profit made, they are facing a major downside. This is that the per dollar return on investment, or rate of profit is at a historical low. It means that the quantity of money invested to achieve the same volume of profit, must be larger than would otherwise be the case.
The low rate of profit is revealed in the low interest rate. Faced with this, the banks are driven to seek more new sources of funds than would otherwise be the case. This need has been a major driving force for the expansion of credit and the ballooning of private debt in Australia. It is unsustainable and access to superannuation funds offer an alternative.
Open access requires the dismantling of the industry superannuation funds. The federal government has made it clear that it agrees and intends to bring in these changes. The only things holding this back have been a Senate inquiry and the fear of a public backlash.
There are very good reasons why the changes should not go ahead.
The money paid into superannuation funds comes out of the pockets of employees. On paper, the employer pays a percentage of the wage. What is rarely explained is that these contributions are made from unpaid wages, which means that employers do not contribute.
Those who put in the money should expect that it will be used for their benefit and have a right to a say on how it is used.
Industry superannuation funds are a form of social capital and so long as it is not under the control of private corporate interests, can in part be used to meet social needs. Examples are funding the growth on new sustainable industries, alternative energy sources, state up capital for new initiatives, research and development, infrastructure and investment in affordable housing.
Australian wage earners have been forced into superannuation to pay for their own pensions on retirement. They also make a large contribution through a lifetime of paying income tax. In other words, they pay for their retirement and some more. Age pensions and superannuation are not a handout, but a return of what has been paid with interest. It is wrong to take part of this and hand it to fat cat shareholders and as commissions.
A lower rate of return for the banks means that there is an incentive for the banks to sink the money into riskier investments. Riskier investments bring a higher rate of return. Using superannuation funds in this way, transfers the risk to the superannuation funds. When something goes wrong, it is the retiree who will pay the price, especially in an economy that is becoming increasingly unstable and uncertain economy.
A look at recent history provides grounds for further concern.
In the last few years, thousands of Australians have been ripped off by the big banks. Sick and dying people have been denied insurance payouts by the Commonwealth Bank’s insurance arm, CommInsure. More than 1,100 people lost savings after following fraudulent and misleading advice from CommBank financial advisors, and thousands more lost their life savings after the big banks underwrote a timber financing “Ponzi scheme”.
Since 2009, several of the big banks and many of their subsidiaries have been forced to pay more than $340 million in refunds, fines and compensation to wronged customers.
According to evidence from UMR Research, Banks have offered incentives to employers to switch to bank owned retail funds. Note that these incentives do not involve benefits to employees. The research shows that the banks have been able to use this to increase their share between 2014 and 2016.
This takes advantage of the fact that few of the 8 million Australians covered by superannuation choose their fund. The employer does this and usually via the existing the default funds.
Last year’s Senate inquiry into the big four banks report, found that “the culture of these institutions is often not one that has consumers at its centre”. The same report found that 97 percent of their member accounts were held in funds that earn below median returns.
Some of the banks related funds have even been vetoed by the Fair Work Commission. Westpac’s BT Financial Group has been taken to court by ASIC for cross-selling superannuation products to businesses that use other Westpac services. This is a practice that has doubled between 2011 and 2015 and Westpac is not the only bank responsible.