IOOF put its own interests ahead of 29,000 of its superannuation members earlier this year when it decided to make fee reductions voluntary rather than automatic, the royal commission heard on Friday.
Counsel assisting Michael Hodge questioned IOOF’s general manager for distribution Mark Oliver and then later in the day chief executive Chris Kelaher.
Chief among Mr Hodge’s concerns was an issue raised by APRA about the dual role played by IOOF’s trustee, IIML, which acts as both the responsible entity (RE) and the registrable superannuation entity (RSE) for IOOF’s super products.
APRA has repeatedly recommended that the dual roles of IIML be separated in order to reduce the likelihood of conflicts of interest.
To demonstrate the point, Mr Hodge asked Mr Oliver about a board meeting of IIML held on 12 February 2018 about the re-pricing (and rebranding) of certain superannuation products.
Under the changes, members with balances of up to $250,000 who were paying a fee of 0.85 per cent would pay either 0.35 per cent or 0.70 per cent (depending on whether they moved to the ‘core’ product of the ‘full platform’ model).
An email sent by IOOF national product manager for superannuation Bruce Mason warned that re-pricing the entire backbook of the employer super fund would have “an $8 million per annum revenue impact”.
Mr Mason also noted that there are “approximately 40,000 members who have a grandfathered commission”.
And of the 29,000 members “who would be better off under the new pricing”, approximately 20,000 have a grandfathered commission, said Mr Mason in the email.
A director of IIML noted the existence of a conflict of interest in board papers, writing: “Interest of beneficiaries must be prioritised over interests of the trustee. Surely it is in their interest to have the lower pricing and in the trustee’s interest to keep them on the higher pricing.”
Mr Hodge asked Mr Oliver: “You recognise, don’t you, that conflict of interest. On the one hand, the interest of the beneficiaries, the members of the trust fund and having a lower pricing, and on the other hand, the interests of the trustee in ultimately making more profit that it can return to the group?”
Mr Oliver said the conflict of interest was recognised, noting that it was up to IOOF to ensure that “members who may benefit from the new pricing are made aware of that”.
Counsel assisting Hodge turned to a memo from IOOF senior management to the IIML board, which noted the “arbitrage risk” of moving super members to the new (lower) pricing.
“It can be seen that the arbitrage risk within [the super funds] is different from other re-prices due to grandfathered commissions and unengaged membership with lower account balances and a large number of members being only marginally better off,” said the memo.
Mr Oliver said it was expected by management that the number of members who would voluntarily move to the lower pricing would be “low”.
Part of the reason for that, he said, was that many members were “unengaged”.
But more importantly, the 20,000 advised members with grandfathered commissions were unlikely to be moved to the new pricing by their advisers, Mr Oliver said.
Those advisers would stand to lose their commissions (due to the FOFA rules implemented on 1 July 2013).
Mr Hodge suggested: “The assumption of past behaviour is that advisers who are receiving a grandfathered trail are unlikely to move their members to the new pricing (notwithstanding that they will be better off) where they won’t receive a grandfathered trail?”
“In our experience, products with grandfathered trails tend to take longer to be moved, yes,” said Mr Oliver.
This fact was not communicated to the board of IIML – in particular, the independent directors, he agreed.
The new pricing was eventually approved by the board in May 2018, with only the two independent directors voting and the rest of the board abstaining due to declared conflicts of interest.
Mr Oliver conceded under questioning that the lower pricing would not have been recommended to the board if there was an expectation that “all members would move to the new pricing”.
Summing up, Mr Hodge said: “So the difficulty then was this, was it: you couldn’t say to the directors of IIML, and in particular the independent directors, ‘It would be in the best interests of approximately 29,000 members to simply move them to the new pricing,’ rather than risking the possibility that advisers wanting to maintain their trail commissions and unadvised members who are [unengaged] will not benefit from the new pricing, because if you explain that to them they might act in the best interests of the members and that would reduce the profitability for IOOF and then it would never have wanted to introduce the new pricing in the first place?”
Mr Oliver responded: “I wouldn’t expect to have it put in those terms but an aggregate – if the assumptions made about the difference in price points that everybody moved then the price changes would simply not be sustainable and therefore not in the interest of all members.”
The public hearings continue.
You can follow all of the action at the royal commission on a live blog at ifa sister title, InvestorDaily: https://www.investordaily.com.au/superannuation/43410-royal-commission-superannuation-hearings
The IOOF CEO’s performance at the RC was interesting as was his understanding of trust law. He contends that reserves of a super fund do not belong to the members. His approach was petulant and if he was hoping to come across as standing up to the RC lawyers then he failed; he simply came across a someone who considers himself beyond being questioned. He should go quietly but as we know that is not the CEO playbook.
And he is correct..Reserves do not belong to the members but are used for the benefit of members under certain circumstances eg insurance, smoothing returns etc. The reserves are controlled by the super trust.
Yes they are controlled by the trustee as that is their role but they belong to the members as do all of the trusts assets.
The members balance belongs to the member. The trustee decides which members benefit from assets held in reserve, therefore they are not owned by the members otherwise members could make claim on the reserves as their assets when they leave the fund. Obviously they cannot so they are not the members assets. You are only entitled to what is yours and this proves that they are not the members assets.
You are right that the reserves do not belong to a particular member. If the fund is wound up though the reserves would be distributed to the existing members, they are not retained by the trustee. All assets ultimately belong to the members, this is what a trust is.
IOOF have just bought themselves a lot of problems LOL…I guess you cannot take away the gravy train from this big institutions.