Super's Justice League Gets a Fail for Pinning It on AMP

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(Bloomberg) -- If Australia’s fund management industry wanted a scapegoat, it couldn't do much better than AMP Ltd. 

The venerable fund manager – one of the country’s oldest companies and, with about 751,000 individual shareholders, one of its most widely held stocks – is in deep distress

A Royal Commission into the financial services industry turned up 196 occasions when AMP charged financial advice fees to customers without providing any service. On top of that were instances of lying to the Australian Securities & Investments Commission, or Asic, about the practice, and editing a purportedly independent report to the same regulator.

Chief Executive Officer Craig Meller resigned over the revelations just over a week ago and on Monday, Chairman Catherine Brenner quit as well, while directors’ fees were cut 25 percent. AMP’s shares have fallen 20 percent so far this month and dipped below A$4 for the first time in six years – not a great look for a company that’s meant to be all about safeguarding wealth.

AMP’s misdeeds are certainly egregious. But the risk with the current bloodletting is that the sacrifice of one prominent company will be seen as sufficient to atone for the sins of the industry as a whole. The problem here isn’t that AMP is one bad apple, rather that the whole barrel is rotten.

Take fees-for-no-service, the practice for which AMP has come in for most criticism. It’s probably not the worst offender here. A 2016 report by Asic found that three of the country’s big four banks had engaged more deeply in the practice, with only Westpac Banking Corp. paying less in compensation to affected customers.

Beyond that, the elephant in the room is the way Australia’s entire retirement savings system has been set up.

Established in 1992 by the reformist Labor government of Paul Keating, the system – known locally as superannuation, or super – is in some ways a remarkable success. Australian employers are obliged to pay 9.5 percent of income into individual retirement accounts, meaning that the sorts of worries many wealthy countries have around an unfunded “pension time bomb” are rarely voiced.

The nation’s $1.58 trillion pension pool is the world’s fourth largest after the U.S., Japan and the U.K. – an extraordinary record considering a population of just 25 million. Where most countries fret that they’re not saving enough for retirement, it’s not uncommon for Australians to worry they’re instead at risk of saving too much.

That’s the good side of it. The problem is that super is poorly regulated and costly, meaning the benefit to consumers is far less than it ought to be.

For instance: While most funds provide basic (and attractive) charts showing that money invested in their funds will tend, gee whiz, to grow over time, transparency rarely goes much further than that.

The ability of individuals to track the performance of their investments against rival funds, against the benchmark S&P/ASX 200 index, or even simply the ever-inflating price level is limited.

If you want to find out how much your investment returns have been affected by the fees you’ve paid – let alone compare that to how you’d have gone with a different fund – good luck. And if you’re investing in an active fund, don’t even consider asking about the largest holdings in its portfolio, or inquiring whether the manager is doing anything much more strenuous than buying the index.

What needs to happen for this to change?

One thing the industry badly needs is consolidation. Despite the size of Australia’s superannuation pool, the largest individual fund barely scrapes into the top 40 in global terms, just ahead of the University of California Retirement Plan and the New Jersey Pension Fund. Just 16 funds make it into the top 300 globally, according to an annual survey by Willis Towers Watson. That means there are few opportunities to reduce fees via economies of scale.

The best outcome for savers would likely be an increase in the assets under management of the union-linked, not-for-profit so-called industry super funds, which tend to outperform their retail rivals in large part as a result of their low fees.

Such consolidation is unlikely to happen with the industry structured as it is, of course. About two-thirds of people stick with the fund they’re assigned by their employer, and there’s little incentive to shop around.

When the government takes such an active role in corralling people’s money into superannuation accounts, it’s a dereliction of duty for them to then leave under-informed punters at the mercy of the market.

A series of strong nudges like those suggested by Australia’s Productivity Commission last year is needed to encourage employers and individuals to shop around. Funds that underperform the market over the medium term shouldn't be eligible to be picked as a default, and the government should run a central clearing house where people can benchmark the performance of their own investments against other funds.

For-profit funds are enjoying the schadenfreude of watching AMP go through the wringer, but they should fear for their own future. The fairer financial system that the Royal Commission is showing Australians so badly want won’t be a friendly place for those who’ve grown fat off the status quo.

  1. The compensation amounts are meant to reflect the fees that shouldn't have been charged, plus an adjustment for lost interest.

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