Colonial First State has admitted the entire reason some of its super funds generate vastly different returns for members has to do with the fees it charges.
The banking royal commission heard on Wednesday that executives from Colonial and Commonwealth Bank were “unhappy” earlier this year when the Australian published an article explaining why the returns of retail super funds linked to the big four banks were so low, compared to the returns of not-for-profit and union-linked industry funds.
Senior counsel assisting, Michael Hodge, asked Elkins: “Is it fair to say Colonial and CBA were unhappy with the article?”
Elkins replied: “Yes.”
Hodge said one of the points the article made about CBA Super’s cash returns was about the difference in 12-month returns between the fund’s various cash options.
He said CBA’s internal analysis showed the “entire explanation” for the variance came down to fees.
He told the commission Colonial First State’s cash option had a 12-month return of 1.19%, its wholesale cash option had a return of 1.9%, and Group super had a return of 2.01%.
He then said the cash option had a noticeably lower return because it was being charged a 1.14% fee, including a trailing commission of 0.6%.
Hodge asked: “Is that, from the perspective of Colonial, the only explanation of the lower performance of Colonial First State cash within a first choice pension, that there’s a trailing commission?”
Elkins replied: “Yes, I believe so.”
Hodge wondered if the story in the Australian prompted Colonial and CBA executives to ask themselves why they were paying trailing commissions to brokers for their cash product.
Elkins said: “As I said yesterday, all of our arrangements are under review.”
“Trailing commissions” are controversial payments which banks have traditionally paid to financial advisers to encourage them to refer business.
The Future of Financial Advice laws banned trail commissions for new accounts, but the Productivity Commission believes at least 2% of accounts (about 636,000 members) are still subject to them.
They may cost members more than $214m a year.
The Productivity Commission warned in April, in a draft report on superannuation, that trail commissions can materially erode member balances, and high exit fees in some choice products create a barrier to members switching out of legacy accounts.
“Trailing commissions have already been banned in super, but where grandfathered commissions are still in place funds should be made to more clearly disclose the costs to members,” it said.
Australians pay over $30bn a year in fees on their superannuation (excluding insurance premiums).
Fees can have a substantial impact on members — for example, an increase in fees of just 0.5% can cost a typical full-time worker about 12% of their balance (or $100, 000) by the time they reach retirement.
Peter Haysey, the director of Catholic Super, also appeared at the commission on Wednesday.
Haysey was asked to explain a potential conflict of interest at the fund.
Catholic Super currently has $9.3bn under management, with 75,000 members with an average balance of $115,000.
The commission heard that between 2010 and 2015, Catholic Super (CSF) engaged the services of the Australian Family, a marketing communications company, to grow its membership.
Australian Family is constituted by Family PACT Services Pty Ltd and Paul Clancy Consulting Pty Ltd, and Paul Clancy is the chief executive of Australian Family.
The commission heard Paul’s brother, Robert Clancy, is CSF’s head of international relations, and Robert’s wife is a shareholder in Family PACT Services.
Since CSF was engaging the services of the Australian Family, the chief executive of CSF, Frank Pegan, was supposed to manage the relationship entirely on his own.
But the commission heard in 2010, Paul Clancy wrote an email to his brother Robert saying: “I’m suggesting that Catholic Super continue their sponsorship to almost formalize the platinum sponsor status I have provided for the past two years.”
Robert replied: “This all sounds good. Are you suggesting 30 to 40 thousand per year?”
Counsel assisting Albert Dinelli said there were numerous examples of email correspondence between the brothers which were “a breach of not only the conflict policy but the email and internet policy.”
Documents showed Catholic Super made payments worth $2m to Australian Family since January 2013, and possibly from before 2013.
The commission heard that Robert Clancy had recently been placed on leave, and the board of Catholic Super was investigating the matter.
Commissioner Kenneth Hayne asked: “Has the board formed any view about what it should do in response to the matter 15 yet?”
Haysey replied: “The board has not finalized that view.”