30 June 2018
The nation’s prudential regulator has called on superannuation funds to “review and restructure” their cash investment options, after it found many were improperly investing the money in higher risk products such as funding mortgages.
The Australian Prudential Regulation Authority said its investigations into the $100 billion-plus of the public’s money held in super as “cash” — sparked by an expose by The Australian — had found numerous funds were instead investing that money in other areas, including commercial bonds and “hybrid debt instruments”.
“Assets that APRA has observed forming part of cash options’ underlying investments include asset-backed and mortgage-backed securities, loans and other credit instruments,” APRA deputy chairwoman Helen Rowell wrote to the trustees in the nation’s $2.6 trillion super industry.
The regulator would not disclose which funds were targeted, but it is understood the problem went beyond a handful of outliers, prompting the public action.
Yesterday’s announcement is the first of two components to APRA’s investigation into super cash investments. The regulator will continue to investigate why many super funds, including funds operated by the nation’s four biggest banks, were paying returns on cash investments which were as low as a quarter of market rates.
The second component of the investigation is more important because that gouging is collectively costing millions of super savers hundreds of millions of dollars a year while the misallocation of “cash investments” was actually increasing returns, albeit by introducing slightly more risk.
As revealed by The Australian in April, the major banks are paying returns of as low as 0.5 per cent a year on cash — in the case of at least two ANZ funds the annual returns on cash have been negative — despite the market rate being about 2.2 per cent.
On May 30, fronting the Senate Economics Legislation Committee, Mrs Rowell was questioned about those revelations, which showed people with super funds owed by the big four banks were collectively losing hundreds of millions of dollars a year in the fee gouge, and about whether APRA was concerned.
“Yes, we are,” Ms Rowell said.
She said the regulator had launched an investigation and found some funds seemed to be “returning much less” on cash investments than “what you would expect”.
She said APRA had also found some funds were delivering higher returns than “we would expect from what you might call a pure cash option”, which led to yesterday’s announcement.
Some banks, including ANZ, have argued the returns they are paying on some super investment options are much lower than the market rate, and lower than the banks are offering in term deposits to the general public, because those deposits were “at-call”.
This argument was rebuffed by Financial Services Minister Kelly O’Dwyer, who told The Australian she did not accept that long-term investments such as super could be classified “at-call”.
Most industry super funds provided returns on cash investments in line with the market rate. Returns on cash investments for super funds operated by the major banks were almost all in the lowest quartile for returns on cash.
Despite this, The Australian has revealed super funds run by ANZ, Commonwealth Bank and NAB for staff members and their families are delivering returns on cash in line with market rates, and in line with industry funds.
Rates of return on “cash” for members of the NAB’s staff super fund averaged
2.54 per cent a year for the past five years, after adjusting for tax, about 6½ times more than what customers received from the public version of the same product.
APRA declined to comment on which funds it was targeting, or when it expected to report on the second stage of its investigations.