The real challenges for trustees of large superannuation funds

There was presumably a collective sigh of relief from our largest financial institutions when Hayne decided not to recommend a ban on superannuation funds that make a profit (often called “retail” funds and offered by financial institutions as distinct from “industry funds” which were historically set up and backed by trade unions and are designed to return profits to members).

The Final Report does, however, spend considerable time highlighting the challenges some trustees face when it comes to acting in the best interests of members (a legal requirement) in the face of competing financial interests.

But that’s not what I find most interesting. What is even more fascinating is this: 

Why do we perpetuate the myth that it is ever possible for the trustee of a large fund to genuinely act in its members’ best interests?

People are different. They have different needs and therefore different “best interests”. Surely it follows, then, that acting in my best interests might not be acting in yours. How does this play out if we are both members of the same superannuation fund? How do superannuation funds with thousands or in some cases more than one million members balance their various interests in making any decision?

Let’s say our superannuation fund has thousands of members. The trustee is considering adding a new investment option that a number of members would value and use. However, other members are not interested in this new option and resent the fact that the fund is wasting money introducing it. Whose “best interests” are being served if it is introduced?

The same dilemma faces both industry and retail funds – in fact it faces any fund where there are a great many members to consider and their interests diverge. Which they will. People are different.

In practice, SMSFs are the only superannuation funds that genuinely have a hope of ensuring they routinely act in the members’ best interests. This is not because SMSF trustees are inherently more noble than trustees of large superannuation funds, it’s because the job is simpler when there are very few members and their interests are aligned.