Law turns blind eye to fund managers as SMSFs hit

The Australian

14 July 2018

Anthony Klan

The managers of $1.2 trillion of the nation’s retirement savings — the fourth biggest pool of pension money in the world — face no penalties under the law for any wrongdoing, facilitating gouging of the nest eggs of millions of Australians over the past 25 years.

The Weekend Australian can reveal the laws governing super trustees enacted in 1993 under then prime minister Paul Keating carry serious penalties for members of the public who operate self-managed super funds, but carve out those penalties in relation to corporate and “industry” funds that manage the life savings of about half of all Australians. The legislation states super “trustees”, the legally designated protectors of super, must legally exercise “care, skill and diligence” in overseeing those funds and to always act in the “best interests” of members, or face up to five years’ jail and “punitive” financial damages.

But while those wide-ranging laws apply penalties to members of the public who run self-managed super funds, they do not apply penalties to the trustees managing more than $1.2 trillion in super.

The loophole, evident via a reading of the Superannuation Industry (Supervision) Act, has been allowed to continue ­despite the federal government overhauling super laws in 2016, in a move it said would “enshrine the objective of legislation” into law.

Every federal government over the past 25 years has publicly boasted that the nation’s super system is secure and the envy of the world.

However, these investigations show that while there are many, descriptive and specific “criminal” and “civil” laws governing ­superannuation, the trustees of the bulk of the ­nation’s super cannot receive even a $10 fine for breaking the law.

But self-managed super fund trustees, who are in the vast ­majority of cases the owners of their super, can face up to five years’ jail, restitution of losses and even “punitive” costs for the wrongdoing.

Financial Services Minister Kelly O’Dwyer said the government had reforms before the Senate, introduced last September, but they had been “frustrated” and the law had not passed ­because of “lobbying against them by vested interests within the industry”.

“The Members Outcomes Package of reforms, currently ­before the Senate, includes a measure to extend the civil and criminal penalty rules in the Superannuation Industry (Supervision) Act 1993 to cover breaches by directors of their covenant ­duties,” a spokesman for Ms O’Dwyer said.

“From the time the Members Outcomes legislation receives royal assent, the court may make a civil penalty order against a ­director in breach of their trustee obligations and may issue them with a fine of up to 2000 penalty units.

“In addition, serious breaches of the directors’ duties (such as those involving intentional or fraudulent contraventions) will constitute a criminal offence punishable by up to five years’ imprisonment.”

A report in The Australian this week showed financial services giant IOOF, which manages $26 billion of the public’s super, has been accused by almost 100 of its own employees of fee gouging.

In a May 4 letter, almost 100 of the 150 financial advisers working for Bridges Financial Services, the biggest network of advisers ­responsible for funnelling the money into IOOF, accused the group’s management of “unfathomable” behaviour by attempting to increase the fees it charges its 350,000 member accounts.

In a letter to IOOF managing director Christopher Kelaher and IOOF chairman George Vernados, the group of financial planners said the gouging was “quite simply” a move to “increase revenue to IOOF”.

The group had told all investors, or their financial advisers, that it planned to introduce “exit” fees — making existing investors in super products less likely to leave those products, and raising more money for IOOF when they eventually did — and lift its fee for managing simple, risk-free, cash investments by 33 per cent, for no disclosed reason.

The Bridges planners said the moves by IOOF were particularly egregious given they occurred amid an active royal commission into financial services, which ­includes examining superannuation fund managers. Hearings into super will start on August 6.

Following the backlash by Bridges, IOOF told Bridges planners their clients would be exempt from several of the new fees.

Any person can become a government-certified financial adviser, with a “diploma of financial planning” requiring no exams and taking four days to complete.

People are not even required to have completed Year 10 of high school to complete that brief course, governed by the Australian Securities & Investments Commission, which consists of some multiple-choice questions and some “short-answer” questions, which can be completed online with no supervision.

The Australian revealed on Wednesday that the 340,000 member ­accounts in the IOOF Portfolio Service Superannuation umbrella, had earned an average annual return of just 2.1 per cent a year on their ­retirement savings in the 10 years to June 30, 2017.

The nationally recognised return on risk-free “cash” investments — based on the returns on simple short-term deposits paid by the nation’s big four banks and the amount the government pays in its guaranteed “bonds” it sells to investors — was 66 per cent higher over the past decade.

The returns on those 340,000 super member accounts was even less than the rate of inflation, meaning despite hundreds of thousands of investors paying between 9 per cent and 9.5 per cent of every pay packet in government mandated super, those nest eggs have actually lost money.

Both Mr Kelaher and Mr Vernados have repeatedly declined to comment when contacted by The Australian in recent days.

The most recent overhaul of superannuation laws passed the Senate in 2016.

“On 9 November 2016, the government introduced the Superannuation (Objective) Bill 2016, which will enshrine the ­objective of superannuation in legislation,” the government said at the time.

“It sets out a clear ­objective for superannuation: to provide ­income in retirement to substitute or supplement the Age Pension.”

The Coalition and major banks — and IOOF and AMP — fought against the royal commission into financial services.