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Wednesday, 18 March 2015
Page: 2896


Mr CONROY (Charlton) (11:50): I rise to make some brief remarks about the review of APRA undertaken by the House of Representatives Standing Committee on Economics. First of all, I would like to thank the committee secretariat for their excellent work and APRA for appearing before us and participating in quite a lively discussion about the various issues confronting Australia's financial system.

I will concentrate on just a couple of aspects of the report in my contribution today. The first of those goes to our superannuation industry and its governance, which was the subject of a fair amount of commentary and questioning during the public hearing. Some coalition MPs, led by the then chair of the committee, the member for Higgins—and I congratulate her on her promotion to parliamentary secretary—concentrated on a couple of instances of perceived misgovernance in the industry super funds area. While I am in no way excusing any of those instances, if they are found to be true, I think the debate was missing some context and an understanding of the scale of the issues confronting the superannuation industry.

I think the coalition MPs who were questioning APRA about the expenditure of $100,000 by a certain industry fund and so forth missed the main game. The main game is the fees that super fund members are paying to their funds and what they are getting in return. APRA's own publications and reports, which we explored during this review, found that industry super fund members paid $88 million in directors fees. That compares with $449 million paid to directors of retail super funds—$88 million versus $449 million. That is despite the fact that retail funds manage only 26 per cent of total superannuation assets in this country. They manage 26 per cent of total superannuation assets but collect 82 per cent of directors fees, a massive mismatch between funds under management and fees paid. That is a real concern, not only to me but to people who have been involved in superannuation policy for decades.

But it is worse than that if you take into account the performance of retail super funds versus other super funds, be they commercial funds, industry super funds or SMSFs. The high fees—in comparison to industry fund fees—paid by retail super fund members do not buy them better performance. In fact, if you look at average annual returns from super funds over ten years, which is the best measure because it gives you a long enough time horizon, retail super funds have delivered returns of, on average, 4.9 per cent per annum for their members. That compares with industry super funds, which have returned 6.7 per cent. So retail fund members are paying much more in fees, but the headline performance they are getting is nearly two per cent per annum lower on average—and that difference compounds over time. That is not to say that all funds in the retail area are performing poorly. APRA made some quite valid points about how sometimes these comparisons may not necessarily be apples with apples, but these are the best comparisons we can make from official APRA statistics—and they are a real concern. We also explored the fact that, of the top 47 superannuation funds by 10-year performance, only one was a retail super fund. This report should be a wake-up call to retail super funds that they do need to confront issues in their sector, just as industry super funds and SMSFs have issues in theirs as well.

Another aspect of the report that we explored was related party services. This is where members of super funds are charged for services by parties related to the super fund they are a member of. In a particular hearing, I explored with APRA a working paper published by some of their staff in 2010 that found that, on average, the average retail fund member paid $485 per year for related party services—versus $184 by members of not-for-profit funds—so they are paying 2.7 times the market rate for related party services. There could be good reasons for this, but related parties is an area where there is not a lot of transparency, there is not a lot of visibility, about whether directors, who are obliged to look at the best value for money for their members, are really doing that or whether they are looking at services offered by related parties as a way of bulking up the income to their entity. It is something we need to explore further. APRA assured us that they are looking at this very closely in terms of compliance, and I commend them for that; but I urge them to keep a very close eye on this issue because it is one of great concern to members—this lack of transparency and the relationships between directors of super funds and related entities.

The other aspect of the report that I want to touch on quickly is the Basel III reforms to our financial systems industry and the related work that has been done under the Murray inquiry. APRA testified before us that there will be a reduced scope for the big four banks to use internal models to generate lower risk weightings for their capital requirements. In plain language, they have basically been able to, in the past, argue that their internal models of handling risk mean that they need to hold less capital than smaller financial entities to meet any requirements. This has given them a competitive advantage over smaller banks, such as Bendigo Bank, the Adelaide Bank in the past, or Members Equity Bank, and given them a significant advantage over building societies and mutual societies. It has been an unfair advantage, because it is linked to this concept of being 'too big to fail' and the implicit subsidy that federal governments give to the big four banks. I am pleased to hear from APRA that the big four banks will be required to hold more capital, which is in their own interests because it means that they are more secure in terms of their lendings but it also levels the playing field for smaller banks and building societies.

In my home area of Newcastle and the Hunter region, we have got a great network of building societies and mutuals that really are at the heart of our community. They do great work sponsoring local groups, sporting clubs, schools and, while they should not get a competitive advantage because they are embedded in the local community, they should be on a level playing field with the big four banks that have plenty of other advantages. So I am very pleased that APRA is looking into this area, and hopefully the playing field will be levelled in the future.

I commend the report to the House. I think it is an excellent report, but there is more to be done on the governance of superannuation funds and levelling the playing field for banks.

Debate adjourned.