Super in crosshairs of Shorten’s planned royal commission

By

10/08/2017

Bill Shorten wants to be the next prime minister of Australia and is in with a fighting chance. Should he succeed in leading the Australian Labor Party to form our next government, one of the first things on his to-do list will be to establish the party’s promised royal commission into the banking and financial services sector.

When Shorten first formally lobbed his threat at the big end of town back in April 2016, it immediately struck a chord with large swathes of the voting public. Support for Labor’s proposed royal commission into the banks has gathered steam ever since, seemingly prompting Prime Minister Malcolm Turnbull to respond with his own displays of getting tough on the sector.

Polling day is probably still more than 12 months away. But with every passing day that the Coalition Government remains internally riven by factional divisions, the odds against an incoming Labor government shorten.

Investment Magazine sat down with the opposition leader in his Canberra offices for an exclusive interview, in which he took aim at “fee-gouging” bank-owned superannuation providers and outlined the reasons behind his determination to launch the much-touted royal commission. The inquiry has been estimated to take two years and cost about $53 million. In comparison, the Royal Commission into Trade Union Governance and Corruption reportedly cost more than $46 million.

Shorten says it would be money well spent.

“We’ve tried just about everything else,” he says. “A royal commission is the king of all inquiries. It has the power to look behind…there are basically no excuses you can give not to give evidence. It has very strong powers.”

And those powers are needed to address “a pathology” in elements of the banking sector and the financial services industry that creates a lack of accountability, he says.

“Too many problems occur too often,” Shorten asserts. “And every time it does, we all get the mea culpas and they say it won’t happen again, until the next time.”

As for what tangible outcomes might be gained from such a massive undertaking, Shorten says Labor would “have a serious look” at setting up a compensation scheme for victims of bank malpractice.

Industry vs retail funds

Labor’s plans for a royal commission were hatched amid the fallout from the current government’s Royal Commission into trade unions that turned a spotlight on alleged misconduct within the industry-fund sector.

A Labor-instigated royal commission into the banks would ratchet up the already fierce partisan rivalry between the retail and industry superannuation sectors.

“We haven’t finalised the terms of reference, so I wouldn’t want to say a particular issue in superannuation is a particular focus,” Shorten says. “But we’ll look at case studies where there have been problems across financial services and banking.”

The political divide within superannuation is driven by fundamental differences of opinion and ideology, which Shorten says are embodied in the Coalition’s set against the industry funds.

“I can’t think of any other sector of the Australian economy that represents literally hundreds of billions of dollars where the government wages such an ideological war,” Shorten says. “But industry funds, I think, are good competition for banks in superannuation: low fees, good performance.”

The Turnbull Government has drawn the ire of the union-aligned industry-fund sector with moves to smash its equal representation board model and gut the role of the Fair Work Commission in arbitrating how employers select default funds for their workers. New rules around how funds must disclose their underlying portfolio holdings, and the fees and costs associated with those investments, have also been controversial.

Shorten says he believes choice – of fund and investment options – is an important pillar of the superannuation system; however, he argues it should not cost “an arm and a leg” or be hindered by unethical practices.

“If something is not performing, you should be allowed to pull out,” he says. “But choice is getting undermined, quite often, by life insurance products now. People reach a certain age and all of a sudden they’re stuck in a bank fund because they can’t get a comparable life insurance policy in another fund, but they keep getting gouged on fees.”

Fee gouging

However, the purpose of superannuation may ultimately be defined, “it wasn’t created to make the banks rich”, Shorten says, with a nod to the ongoing stoush over the exact wording of a proposed legislative definition for the objective of the mandated retirement savings system.

In August, the Productivity Commission is due to deliver its final report on the allocation of individuals to default funds under the industrial award system and alternative ways of doing it, potentially that could open up greater competition between industry and retail funds. Shorten shrugs off the need for change, saying competition for default funds is already “not too bad”.

“The government is just hung up on unions and industry funds, that’s [the root of] it,” he says. “It’s all politics. Competition for default funds is not a bad idea at all. But by the same token, people have choice [of fund] when they move around.”

It’s true that most Australians are now entitled to choose their own super fund, but there are still about 2 million people who can’t, due to their specific workplace determination or enterprise bargaining agreement. Under Shorten, Labor has opposed the Turnbull Government’s push to change this.

Shorten says super funds generally deliver “pretty good returns”, and communication with members about features and choice is improving.

“I think that’s important,” he says. “The more control you give to individuals in their lives, the more granular quality you get in relationships.”

Even so, a continued focus on minimising costs, and on ensuring fund members are getting value from service providers is needed. Shorten reserves particular scorn for a style of funds management that masquerades as active, and charges a fee accordingly, but delivers quasi-index returns. He is equally scathing of funds that charge high fees for individuals with “modest accounts, in vanilla investment products”.

“If they’re giving you Commodore service, they shouldn’t charge you Rolls-Royce fees,” he says. “It’s a regulated, mandated flow of capital, and people are making a lot of money out of just indexing.”

His advice to funds is blunt: “Charge less for doing the vanilla products, and always remember whose money it is.

“It’s not the money of the trustees; it’s not the money of the people [working] in the funds. It’s the beneficiaries’. It’s the account holders’. It’s not the only factor, but if you don’t focus on costs, they’ll get away from you every time.”

The ‘43-year-old’ rule

Shorten’s experiences as a union official and fund trustee have imbued him with a deep understanding of what superannuation means to working people, as well as an insight into how the industry works.

He first joined the Australian Workers Union (AWU) as a trainee organiser in 1994. From 1998 to 2001, he was a director of AustralianSuper, the country’s largest industry superannuation fund, then from 2005 to 2007 he sat on the board of the Victorian Funds Management Corporation.

By 2001, Shorten had been elected AWU national secretary, a role that brought him to Australia-wide prominence as a skilled negotiator and media performer during the Beaconsfield mine disaster in 2006. He parlayed the resultant profile into a political career that started in 2007 when he was elected to Federal Parliament.

In 2010, he embarked on a nearly three-year stint as minister for financial services and superannuation and was elected leader of the opposition in 2013.

During his time with the AWU, Shorten came to an understanding of what he calls the “43-year-old rule”: that until people reach the age of about 43, they are just not engaged with superannuation.

“You start thinking about your next 20 years and what you’re going to have when you retire in your 60s,” he says.

“There’s no science to it [but] at literally hundreds of workplace meetings, the young people, they’re interested in getting their house. The older people, they’re interested in what they’re going to get when they retire.”

Super’s shortcomings

When Labor introduced the superannuation guarantee under Bob Hawke and Paul Keating, it was designed to provide all working Australians with access to the sort of retirement savings system previously available only to well-paid, white-collar workers. But 25 years later, Shorten concedes that the system still doesn’t serve low-income earners or women particularly well. He proffers assurances that these shortcomings will be addressed by a series of Labor policies to be released before the next election.

Shorten describes as “just hopeless” the current freeze on the rate of compulsory employer contributions under the superannuation guarantee at 9.5 per cent, with plans to reach the originally outlined 12 per cent delayed until 2025.

One can assume, then, that he and shadow treasurer Chris Bowen have a plan to figure out how to finance fast-tracking that timeline. Addressing the system’s shortcomings as they affect women specifically will be an even more complex challenge.

The Association of Superannuation Funds of Australia (ASFA) states that in 2013-14, the average superannuation account balance for a man was about $98,500, while for a woman it was less than $55,000.

“It’s a big issue…we’re working on our policies there. We see it as a gap in the current system,” Shorten says. “Women lose their super when they go on parental leave. The pay gap is real. In the public service, it’s 8.6 per cent; across Australia it’s nearly 20 per cent. Women, on average, have much lower account balances. Paying women equally to men would be a good start, because then the 9.5 per cent would be the same for everybody. Get more women into positions of power.”

For all of the system’s shortcomings, Shorten still sees many more positives than negatives to compulsory super. One obvious marker of the system’s success is the $2.3 trillion pool of capital that has accumulated since 1992.

“It’s created greater liquidity in our markets, and it’s meant that people have something to retire upon other than potentially just having their house. It’s diversified the asset base of Australians.”

Shorten says Labor will continue to resist policies that conflate the purpose of superannuation with other objectives, such as the Turnbull Government’s First Home Super Saver Scheme, which allows first homebuyers early access to voluntary contributions, and earnings on those contributions, to fund a first home purchase.

Labor took a much more radical and comprehensive plan to help address housing affordability to the 2016 election, pledging to reform negative gearing and concessional capital gains tax rates. The party has promised to stick with that proposal at the next poll.

“The government needs to stop tampering with first homebuyers’ schemes, raiding superannuation. I don’t agree with that,” he says.

One of Shorten’s key criticisms of the new First Home Super Saver Scheme is that it will not be any help to those who are least able to afford their own home.

“It’s only going to benefit people who have the capacity when they’re young to put money in at a tax-preferred rate…not those people who are locked out of the housing market,” he says. “If there’s money sloshing around in the system, it  doesn’t deal with supply…it’s [just] a price stimulus,” he says. “The point is, we’re now talking about housing affordability…and that’s not the purpose of superannuation.”

Disclosure: Conexus Financial, the publisher of this masthead, was the major sponsor of the 2017 Labor Business Forum annual gala dinner.