Commonwealth Bank reaped superannuation profits even when fund members’ balances fell
Australia’s biggest bank, the Commonwealth, reaped more than $1.4bn in profits from superannuation arm Colonial First State over four years that include periods when members of the funds it ran saw their balances shrink or stagnate.
Appearing at a parliamentary hearing in April, CBA’s deputy chief executive, David Cohen, told the Labor frontbencher Andrew Leigh that profits from CFS had “been steadily decreasing over the past 18 to 24 months” due to reductions in fees.
The bank this month provided parliament with profit figures for the financial years 2016 to 2020 that show profit after tax from CFS shrank from a peak of $336m in 2018 to a low of $174m last year.
Over the entire four-year period, CFS generated $1.42bn in profit after tax.
Data compiled by the Australian Prudential Regulation Authority shows that in 2020, members of the CFSrun Colonial First State FirstChoice Superannuation Trust saw their balances shrink by 2.7% last year.
Two other CFS funds, the Colonial First State Rollover & Superannuation Fund and the Colonial Super Retirement Fund, shrank by 0.5%.
This compares to average growth of 3.7% experienced in 2020 by growth funds, the most common investment option, according to superannuation research company Chant West.
While last year’s results include the impact of the pandemic, which crashed sharemarkets towards the end of the financial year, CFS funds have also performed poorly in other years.
In 2016, the Colonial Super Retirement Fund grew by 1.5% – only 0.5 percentage points above the inflation rate – and the Colonial First State FirstChoice Superannuation Trust managed growth of only 1.8%.
The average growth fund swelled by 7.5% in 2016, according to Chant West.
However, in 2018 members of the Colonial First State Rollover & Superannuation Fund enjoyed an unusually high return of 13.6%.
A CFS spokesperson said the returns of the FirstChoice fund were an average, because members were able to choose from more than 150 investment options, and individual members would have differing returns.
The fund’s overall performance in 2016 was also affected by poor stock market returns that year, they said.
The spokesperson said the Rollover fund’s outsize performance in 2018 was because it only had members who were in the workforce and tended to be heavily invested in listed stocks, which soared by up to 15% that year.
Members of CFS funds could expect “very strong returns” this year due to the surge in the share market since last year’s Covid crash, and the company has also been reducing its fees, the company said.
Sign up to receive the top stories from Guardian Australia every morning
“We have a strong record of reducing fees for members and in the past 24 months alone over 770,000 of our members have benefited from lower and simpler fees, resulting in aggregate savings for members of $215m a year.”
The spokesperson said fees for MySuper funds, a category that includes all the funds discussed, were reduced again in November, saving members an additional $17m a year.
Despite its continuing profitability, CFS has long been a problem for the CBA. In the early to mid-2010s it was the target of sustained media reporting about shoddy financial advice given by planners associated with it who worked for another part of the bank. It also featured at the 2018 banking royal commission.
The bank is in the process of selling 55% of CFS to US private equity group KKR for $1.7bn.
Leigh said “superannuation funds should put their members first”. “Alas, too many for-profit funds are producing fat fees for their owners and skinny returns for their members,” he said.
The Labor MP said the Morrison government’s attempts to reform the sector – which have already been narrowed after opposition from Barnaby Joyce and Craig Kelly and are now before a potentially hostile Senate – were misguided because they appeared to be aimed at not-for-profit industry funds rather than those run for commercial profit.
“The Liberals are running an ideological crusade against the non-profit sector,” Leigh said.
Because of Australia’s compulsory superannuation system, even poor quality funds have in the past enjoyed steady inflows from members.
However, following the banking royal commission, the financial services regulator Apra started to put poorly performing super funds under pressure to merge with funds that had better returns.
It had also pushed funds to reduce fees, which can be a major source of poor performance.
“All things being equal, the evidence suggests that larger funds are better placed to deliver stronger investment performance and lower fees,” the Apra deputy chair, Helen Rowell, said in a speech to super fund trustees in May.
She said she doubted funds with less than $30bn in them would be able to compete against “mega-funds” such as the country’s biggest, AustralianSuper, which hit $200bn in December.
“Smaller, underperforming funds would ideally consider merging with a larger, better performing partner rather than another small fund – especially one that is also underperforming.