Are your super fund’s directors acting in your best interest?

Members of superannuation funds aren’t entitled to vote on who the directors are. In fact, as a member, do you have a say on anything to do with your superannuation company? Who runs it; how it is run; the direction in the organisation is headed?

The answer is no. The only option most of us have is to vote with our feet: either select another investment option, or select another superannuation fund.

So, does this mean that super funds and the way they are run is less like a democracy and more like a dictatorship?

This question is somewhat interesting. Let’s delve deeper.

The trustees and directors of your superannuation fund should be acting in your best interest and those of all its members. Yet surprisingly, many fund trustees have never asked their members to vote on issues that have a direct impact on them financially.

This month, AMP Superannuation Funds was in hot water with APRA, which subsequently imposed directions and conditions on AMP Super due to potential concerns about its conduct. Did they act in the best interest of fund members? At this stage, it is unclear what the findings will be.

Some super funds do conduct surveys to find out what members want. Media Super mentioned in their 2018 annual report that they had surveyed their members.

This raises yet another question: is a survey different to allowing a member to say, ‘Actually, I disagree and I vote that this board member should not be re-elected’?  A vote can be legally binding and has a lot more power than a ‘How are you feeling about us?’-type survey. Isn’t it about time members have a real voice via a vote?

You may wonder why this is important. It is. Let me explain further.

On 1 February 2019, the Australian Financial Review reported that Media Super had invested in a collectable 429-year-old violin (see our recent blog post https://www.ajfp.com.au/2019/02/15/how-can-i-tell-if-my-super-fund-provider-is-in-financial-difficulty/). As a result of this ‘unusual’ investment, I became interested in the directors of Media Super, and how are they handling the best interest of, and duty of care to, its members.

So, who are the directors or Media Super and why is it of concern? Reading their website, it calls itself the industry ‘super for creative people’ and is focused on the ‘print, media, entertainment and arts professionals’. Their annual report is full of colourful pictures depicting these professions.

It would make sense that the directors also have backgrounds in at least one of these industries, and to ensure the board is fairly balanced from the point of view of skills, capability to perform the role, and experience in different sectors of the industry.

Looking at page 49 of Media Super’s 2018 Annual Report, if my interpretation of this information is correct, it is interesting to note the following:

  1. In 2018, the fund had 12 directors with four alternate directors.
  1. It looks like the AMWU (Australian Manufacturing Workers Union) may have held three of these directorships and the union was paid directly $128,891 for these four seats on the board at $42,963 per person for six meetings per year, with the proceeds all going back to the AMWU.
  1. Of the 12 directors, only four of them were women.

You might ask why is this a problem?

Firstly, I am confused what a manufacturing union has to do with “… media, entertainment and arts sectors and works…” I can see a somewhat-vague link with the print industry, but that is just one small part of the industry as a whole. 

The questions this raises are: does the AMWU really need to have four people on the board to voice their opinions on this organisation; and is there an appropriate level of board diversity, both in terms of male/female ratio and also the range of backgrounds and expertise?

The annual report does not really go into any detail to explain this board composition, or how and why it is servicing its members.

Page 32 of the Annual Report displays the sectors represented and the stakeholders that Media Super has identified. There are 28 organisations from the media, entertainment and arts sector, but the majority of these groups seem to have no representatives on the board. Why is this so?

This throws up yet more questions, which could apply not just to Media Super, but to superannuation more broadly:

1. Is this board stacked?

2. What about gender equality on board positions?

3. Are the directors from a range of backgrounds, skills and experience?

3. When do I get to have a real vote about what is going on with the super fund and its directors?

4. Do I really want to put my life/retirement savings with this group and be a part of this fund?

For some people, the answer to this last question might be a resounding yes! For others, maybe not.

As I mentioned, on the back of the Royal Commission these are just some of the issues super fund boards are facing scrutiny over. A large number of super funds might find themselves having to take a long, hard look at themselves on these and other matters surrounding best interest duties.

If you own a self-managed super fund (SMSF), this is less of a problem and I guess this is why more people are thinking about this option. They are getting fed up with the present arrangements and looking to take control of their own super. Equally, other people are happy to go along with the current arrangements.

Like all things to do with super, it is important that you critically consider the fund you are in and what exactly is going on with your superannuation including fees, performance and ethics, too.

Keep in mind that SMSFs are not suitable for everybody. You need to meet a range of criteria before you can set one up and there are ongoing requirements.

Like all great investment ideas, it is important that you seek professional guidance from a practising and qualified financial planner, and of course I recommend AJ Financial Planning.

 

 

1 Media Super, Our Community, https://www.mediasuper.com.au/about-our-community/super-creative-people, accessed 24 June 2019

2 Media Super Annual Report 2017–2018, https://www.mediasuper.com.au/sites/mediasuper.com.au/files/msup_54061_yearbook18_web_final.pdf, accessed 24 June 2019

3 Ibid.

Does your retirement super need to be ‘Zengosaidan’?

I often like to read ‘peculiar’ books that give me some insights into different ways of thinking. I recently came across a book review in The Monocle Minute. It inspired me to buy the book: A Monk’s Guide to a Clean House and Mind by Shoukei Matsumoto (Penguin Books 2018). Now, I am not Buddhist, but I did find this little book an interesting read. In particular, it spoke about the concept of Zengosaidan, which is defined as ‘… a Zen expression meaning that we must put all our efforts into each day so we have no regrets, and that we must not grieve for the past or worry about the future … Don’t put it off till tomorrow …’

I found this idea thought-provoking – particularly when I consider my daily work, which is retirement planning. Because at some point, most people in Australia will stop working and retire. For a lot of them, they will need an asset base to fund this stage of their life. Best-case scenario, they will be 100 per cent reliant, or partially reliant, upon these funds.

However, despite this reality many people drift through life without placing much emphasis on, or at least paying attention to, the preparation required for saving for later life.

Now, I am not saying everybody needs to become an expert in retirement planning. I think the important distinction is we should become engaged with our impending retirement and ensure that when the day arrives, we have no regrets.

We often take a ‘no regrets’ approach to life experiences such as holidays, ticking off the bucket list or achieving other major lifetime goals. However, shouldn’t we be turning our attention towards what steps might need to be taken to ensure that our retirement savings are maximised during our career and particularly in the lead-up to retirement?

Today, the only discussion we often hear about retirement is having ‘no regrets’ about spending the kids’ inheritance and driving off into the distance.

It’s probably time this conversation matured.

I think this philosophy of ‘no regrets’, or Zengosaidan, needs to be front of mind as we approach retirement. For example, consider the following mental checklist:

  • Do you have enough to live on in retirement – for the whole of your retirement?
  • Have you maximised all possible options within your retirement strategy to ensure that you are well placed when you retire?
  • Looking at your retirement picture, what are the financial trade-offs if you make particular financial decisions today?

Believe it or not, virtual reality can make this process a lot easier. In a few years’ time I will be able to sit with a client, get them to put on a virtual reality headset, and then pull up a picture of what they might look like at retirement age. This might help them appreciate what they need to do to help the older-looking them in retirement. Potentially, we can create a real-live model of what retirement will look like if they do nothing, compared with what it will look like if they put into action the recommended steps to maximise their financial position opportunities.

Until this technology catches up with us, though, we will need to use our own imagination for the time being. I think, however, it is important that you keep in mind the following: When you stand at the threshold, about to take the leap from your working life into retirement, and reflect on what you have achieved, you want to be confident that you have optimised your financial situation, so the next chapter of your life can be everything you wished for and more.

Like all great ideas, it’s important that when you think about retirement planning, you don’t go it alone and seek advice from a practising and suitably qualified financial planner and, of course, I recommend AJ Financial Planning.

Which would you prefer: a 7% or 12% return on your super?

It seems like a simple enough question. If you had a balance investment option in your super, would you choose a 7% or 12% return? Yet, before you decide it’s a no-brainer, it’s worth probing a little deeper into what could cause this 5% variance, as the reporting returns are not standardised.

Let me explain.

Using the mortgage industry as an example, when you consider look at taking out a home loan, the lender will normally quote two interest rates. The first is the principal interest rate, which might be around 4.86%. However, right next to it will be the ‘principal and interest comparison rate’, which might be around 5.25%.

You might reasonably ask, what do home loan interest rates have in common with superannuation?

Well, home loan providers have historically been really great at disguising the real cost of a mortgage. Even today, they might advertise a very cheap interest rate, but then they load up the product with fees throughout the life the loan, or top and tail it with some expensive loan application or exit fees. A comparison rate was introduced as a way for loan applicants to quickly determine the total costs of a loan, by factoring in most of the fees and charges incurred during the life of the loan. Essentially, it allows lenders to easily make an informed, like-for-like comparison of the true costs of this financial product.

The issue with superannuation is there is no standardised reporting or common ground. Personally, I believe that for the ‘Mysuper’ option, standardised reporting is well overdue. The government introduced these low-cost, default investment products were introduced into the superannuation industry to enable consumers to easily select which investment option might be best for them, given a range of variables.

So, getting back to the 7% or 12% question; it is important that you understand the drivers for such discrepancies. It’s probably time that government decided to introduce changes to avoid the barely disguised tricks of superannuation funds, such as calling a product a ‘balance fund’, but investing the assets at a growth asset allocation (refer to our recent article, Could Your Hostplus Index Balanced Fund be a disappointment?). They might also provide a great return, but then hike up the administrative fee structure and other costs that might not be reflected in the net return reported.

So, similar to the mortgage industry, super funds get up to a number of shenanigans. For financial professionals and expert investors, these are often easily spotted, but to the majority of average, day-to-day investors, it is a bit of a minefield.

I feel that the idea of a comparison rate return is a sensible approach, as if super funds are over-inflating an investment option with risky assets, they would be required to standardise the returns. ASIC and/or APRA could set strict formulas between growth-based assets and defensive assets.

In addition, all funds would be required to adjust their reported return as if the asset allocation was a true balanced investment, which would be 50/50 between growth-based asset to defensive assets. This would mean that investors would have a fairer way to assess the true merits of a super fund, and also be able to have a sensible discussion on their overall net return.

Until this occurs, however, investors will continue to be bamboozled by the returns offered by super funds.

Before selecting an investment option or super fund, it’s important that you seek suitable advice from a qualified, practising financial planner and, of course, I recommend AJ Financial Planning. Contact us today.

Could your Hostplus Index Balanced Fund be a disappointment?

Around $2.5 billion has reportedly flowed into the industry super fund Hostplus in recent times. This influx of funds has largely been on the back of media commentators promoting Hostplus, in particular its Hostplus Index Balanced Fund.

My understanding is that the main thrust for this investment boost was on the back of lower fees and the merits of index investing.

We recently had a client who, after reading media commentary, wanted to move their funds from another industry super fund into the Hostplus Index Balanced Fund. Their existing fund’s fees were 0.19%, while the Hostplus Index Balanced Fund was reportedly charging a low-cost fee of 0.07%. But was switching funds the right decision?

Does the argument start and finish with fees and does index investing mean a better result? To get an overall picture, let’s compare the performance of the Hostplus Balanced Fund compared to the Hostplus Index Balanced Fund. As both are reportedly ‘balanced’ funds (refer to our article ‘Industry funds headed for an asset allocation disaster’ https://www.ajfp.com.au/2017/07/17/are-industry-super-funds-headed-for-an-asset-allocation-disaster/), if these products are true to label, then it should be a fair comparison.

At the time of writing this article, the Hostplus website reported the following performance returns, net of all investment and administration costs.

It is important to note that historical performance is no guarantee of future performance. However, over time it might given an indication of the level of competence of the fund’s managers and the soundness of their investment strategy. Unfortunately, 10-year figures were not available for the Indexed Balanced Fund and are therefore not included. But I believe seven years is a reasonable timeline to afford some sensible analysis.

If low fees are the only matrix for success, then why is this not reflected in the end result – net performance over the longer term for the investor?

In fact, over the shorter, three-year period the performance variance between the two funds was 2.71% p.a. So while investors saved 0.99% in fees, they potentially gave away 2.71% in returns. Assuming a super balance starting point of $100,000, if this variance continued at its present pace, over an investor’s working life it could result in a total loss of return of around $171,839.

In short, when considering investing in a superannuation fund, you need to factor in all the elements. At a minimum, these include the ongoing costs of the fund, and the net return on a like-for-like basis. There are plenty of low-cost super funds around, but very few actually produce a decent return. And while performance is difficult to gauge, competence and quality of management can sometimes be illustrated over the longer term.

Like all sound investment decisions, it is important to seek professional guidance from a practising financial planner. Contact AJ Financial Planning today for a chat.