The chief executive of Industry Super Australia, David Whiteley, says not-for-profit funds may move to sell down their large and high-performing direct infrastructure and property holdings if the corporate watchdog’s new fee disclosure rules go through unchanged.
The Australian Securities and Investments Commission has found “considerable inconsistency” in the way fees and charges are listed by funds and confirmed last week that from September 30 this year trustees will be forced to disclose more granular detail about how and why they charge members particular fees.
As part of the changes in ASIC’s new Regulatory Guide 97, the costs associated with super funds’ investments in unlisted property and infrastructure will need to be disclosed. These investments can have higher costs but can also deliver better returns for members.
But according to ISA, “inexplicable carve-outs” in RG97 will exclude costs associated with investments via the investment platforms favoured by 70 per cent of retail super funds.
ISA says this will result in direct investments in infrastructure and unlisted property “looking more expensive” and has the potential to “bamboozle” consumers.
“We agree with the policy in ensuring there is transparency about what the costs are, but there needs to be a level playing field because the issue comes back to platforms. The retail sector says that it is too complex for them to report these underlying costs [for property and infrastructure investments on platforms],” said Mr Whiteley.
“We’d call that nonsense. If it means it takes longer for them to disclose these figures accurately then what ASIC should be doing is taking the time to sure that they are not rolling this [RG97] out until these costs are revealed, so there is complete disclosure.”
ISA director of public affairs Matthew Linden said the “carve-out” may see industry funds exit illiquid assets because consumers may perceive them to be “more expensive”.
“These disclosures may have an effect on how trustees potentially invest. They will give the impression that investing directly is high-cost when in fact it is the lowest cost group relative to a listed investment, or one that is provided through a platform,” he said.
“If the focus becomes fees and costs as a yardstick to decide where people put their super savings then it potentially could affect the way in which trustees invest.”
But ASIC’s senior executive leader for superannuation, Gerard Fitzpatrick, denied there was a “carve-out” for investment platforms under the RG97 disclosure requirements.
“If a super fund considers that investment costs are offset by greater returns, then they should be communicating the benefits of that investment strategy to their members. There are no exemptions from RG 97 for investment platforms,” he said.
“These changes are intended to improve the accuracy and comparability of the information provided to consumers. We have consulted with industry throughout the process.”
Rice Warner said the investment teams of many super funds are concerned that RG97 in its current form is likely to have “significant” unintended consequences.
“We question whether the treatment of unlisted assets will increase transparency and comparability. Business management activities of listed infrastructure businesses are included in the cost structure of the business – in Australia and worldwide,” the actuarial firm said.
“In contrast, business management costs of unlisted infrastructure assets are swept up in the RG97 dragnet if they are incurred within interposed vehicles. This potentially gives the appearance of much higher costs for unlisted assets than would be presented if the same assets were listed.”
‘Consumers are being misled’
Interposed vehicles are entities sitting between a fund and its unlisted assets and are typically property and infrastructure.
Mr Whiteley says “consumers are being misled” and has called on the government to defer the implementation of RG97.
“Consumers should be able to compare super funds on both performance and cost and charges, but the RG97 exemptions will make this impossible,” he said.
“It could well lead in the long run to industry superannuation funds adjusting their investment strategies and to asset allocation that appears to be cheaper and that could have a negative impact on member returns.”
ASIC said following “extensive consultation” with industry on the introduction of these changes, it has agreed to extend the deadline for disclosure of property operating costs in the investment fee or indirect costs to September 30, 2018.
“The extension on this component will help provide additional time for discussions between ASIC and industry about how to calculate these fees,” the corporate watchdog said.