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Industry super funds out perform retail funds by nearly 50 percent - university study

14 Aug 2014

Research commissioned by the independent think tank, the McKell Institute, has found that workers who have saved through a "not for profit" industry superannuation fund may have twice as much money at retirement as those who have invested in a "for profit" retail fund.

The research carried out by Macquarie University and University of Sydney Business School economist, Mike Rafferty, was based on industry data covering returns on superannuation investments over the past quarter of a century.

The data indicated that a member of a retail fund who invested a single lump sum 25 years ago needed to work an additional eight years to reap the same benefit as a member of an industry fund who had invested the same amount.

A retail fund member making regular contributions would need to work an additional six years to retire with the same benefit as an industry fund investor.

Using the data to compare the performance of the two fund types over a working life of fifty years, the researchers found that industry fund members had almost twice as much money when they retired.

A contribution of a thousand dollars a year into a retail fund generated a retirement benefit of just over $400 thousand over 50 years while the industry fund returned nearly $800 thousand.

"We were asked to examine the relationship between fund performance and governance structures of superannuation funds in the Australian market and what we found was startling," said Mike Rafferty. "In our view, the difference in performance clearly reflects the way super funds are governed at the board level."

Not for profit industry funds which date back to the mid 1980's are run by employer associations and/or unions operating within an industry sector and are required by law to have board members representing member's interests.

"Retail funds, on the other hand, usually appoint employees to governing boards who are understandably focused on maximizing profits via management fees," said Mr Rafferty. "For this reason, their short term objective is to grow the size of the fund rather than maximising member's benefits over the long term."

Mr Rafferty says the study is particularly important in the context of the Federal Government's decision to raise the retirement age to 70 by 2035. "People hoping to retire at an earlier age need to look very closely at these findings," he said.

Boosted by requirements under the Federal Government's Superannuation Guarantee Regulations, Australians currently have more than $1.6 trillion invested in superannuation funds.

Mr Rafferty's research reflects similar United States findings. The Chief Investment Officer, Yale University Endowment, David Swensen, recently said that the fundamental market failure in the [US] mutual fund industry involves the interaction between sophisticated, profit-seeking providers of financial services and naive, return seeking consumers.

In this situation, he concluded that, "investors fare best with funds managed by not-for-profit organizations, because such firms focus exclusively on serving investor interests."

View the McKell Institutes full research report, Success of Representative Governance on Superannuation Boards.