Is transparency the pathway to greater trust?

The Australian Institute of Superannuation Trustees (AIST) noted in a research report this month that the superannuation industry suffers “a systemic lack of comparability of data” across funds.

It argued that this was a result of regulatory carve-outs pushed by the for-profit super fund sector, but in reality, this applies to industry and retail funds alike.

With data transparency increasingly a hot topic amongst consumers, why is this the case?

The industry has become complacent around the fact that people must invest in super regardless of the information, or lack thereof, available around their options, and that’s in neither funds’ nor the public’s interests.

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In the report, the AIST called on the Australian Prudential Regulation Authority (APRA) to collect and publish performance, fees and costs data for Choice funds as well as MySuper products as it does now.

We need this, but in truth the industry needs more too. There needs to be an easier means of accessing and comparing information on funds. And as the industry is forced to take a hard look at itself after a year in the spotlight, it’s a pertinent time to consider how to do this and the trust benefits it may bring.

Value for money

In the Productivity Commission’s superannuation report earlier this year, it identified that an underlying principle for designing a model for a competitive process should be credibility and transparency. By this, it meant “make relevant information public; avoid room for gaming the process; and ensure metrics are clear, simple, difficult to dispute and difficult to manipulate”.

This just hasn’t happened, and there’s no clear pathway for how the industry intends to make it happen. It’s in its interests to do it too; as we enter an era of informational transparency and open data, consumers’ expectations for what they know about where their money goes is increasing. The funds that will come out on top will be those who can meet this need.

“[Asset managers] who are unwilling to give data will lose market share, full stop,” former Financial Conduct Authority Institutional Disclosure Working Group chair, Dr Chris Sier, said to a United Kingdom parliamentary inquiry on pension costs and transparency recently.

“Let’s face it, if you cannot trust your asset manager you do not want to work with them, and you do not trust them if they do not give you data.”

We should be saying the same of super funds.

Superannuation funds are in the unique position where people must invest in them. Sure, you could set up a self-managed fund, but realistically most people don’t have the wealth to make that viable.

This comes with an immense responsibility to ensure that investors get value for their money and understand what their earnings are going toward.

Determining value also requires transparency around performance. The Productivity Commission found this year that over a quarter of funds offering a MySuper option are underperforming; if members were aware of this, expectations may be a bit higher.

The data is there, it just needs to be communicated to members better. Perhaps the answer lies in the approach taken by the European Union to funds – through the MiFID II template, or the Key Information Documents investors receive providing brief, plain English overviews of performance.

This doesn’t need to mean regulation necessarily, if super funds are proactive in providing this information themselves. The Royal Commission has made it clear that this sadly often isn’t the case, however.

Sier suggested that a public register for institutional investors of those who comply, or don’t, with reasonable data requests would be useful to both current and future consumers assessing their investment options.

A similar system for superannuation funds here could let members know if more is going on under the hoods of their funds than they’re aware of.

As a side note, it is interesting that other countries are also looking at retirement savings transparency closely.

Further, there is little transparency around fees. As the Productivity Commission found, “this lack of fee transparency harms members by making fee comparability difficult at best, and thus renders cost-based competition largely elusive”.

And how can members assess whether a fund is good value for money if they don’t know how much it is actually charging? How can you ask them to trust you and keep their money with you if they don’t know this information, especially when other investment options (especially new funds in the digital retail super space) are getting better at doing it?

This shouldn’t be difficult for the industry to improve. In the Netherlands, for example, the pension industry went from next to no fee transparency to a point where almost all funds report asset management fees, transaction charges and administration costs to members regularly and in a simple format, so it is possible.

Governance

As in the case of fees and performance, the compulsory nature of superannuation again makes transparency vital where governance is concerned. Members are required to rely on others to make decisions on their behalf; decisions that will deeply impact the shape their future takes. 

The Productivity Commission again pointed this out in its superannuation report this year, noting that unlike shareholders in listed companies, super fund members have no voting rights and very little influence over board appointments. Transparent and regulated governance practices are vital in this situation.

And while superannuation governance has improved since the system’s inception, it still lags best practice approaches.

You only have to look at some of the mergers (or, rather, lack thereof) that sparked questions at the Royal Commission or dig into some related party provider outsourcing decisions for proof.

Neither body traversed what greater transparency in this area would look like. In a Royal Commission that hit most witnesses for six, however, the industry funds got off remarkably lightly as far as questioning over governance was concerned.

Consumers deserve to know more about how their savings are invested. It’s time funds stepped up to that responsibility, and if they want to remain competitive in a data and regulation-heavy market, they’re going to have to.