When boards use related parties: outsourcing and superannuation fund performance

Abstract

Superannuation funds heavily outsource key fund functions to service providers who play a crucial role in superannuation fund operations and affecting Australians’ retirement savings. We examine the impact of related party service provider usage and trustee‐director affiliation on investment performance. We find that for‐profit funds significantly underperform when using related party service providers. The underperformance is more severe when the board is controlled by more affiliated trustee‐directors and belongs to a vertically integrated conglomerate group. Our results raise concerns about whether recent regulatory reforms increasing trustee‐directors’ duties effectively address the conflicts of interest inherent in related party service provider arrangements.

Director expertise and co‐option in industry superannuation funds?

“…Although the literature on superannuation funds is scant, there are several studies using small sample sizes that examine the effect of governance practices on superannuation fund performance and fees (Benson et al, 2011; Liu, 2014; Liu & Ooi, 2019; Nguyen et al, 2012; Nisbet, 2013; Tan & Cam, 2015). Some studies find that larger fund boards are associated with better fund performance (Benson et al, 2011) and charge higher fees (Tan & Cam, 2015).…”

“…They find that retail superannuation funds with a greater proportion of affiliated directors generate lower investment performance. In their additional tests, Liu and Ooi (2019) include several governance variables such as independent chairperson, board size and directors with investment experience; however, the variables have an insignificant association with investment performance.…”

“…Nguyen et al (2012) examine 52 corporate superannuation funds for one year (2010), while Nisbet (2013) uses a sample of 72 observations comprising retail and industry superannuation funds for two separate years (2009 and 2012). Similarly, Liu (2014) uses 100 observations (21 corporate, 46 industry, six public sector and 27 retail superannuation funds) for a single year (2006), and Liu and Ooi (2019) observe 101 superannuation funds between 2015 and 2016. This study builds on and significantly extends these prior studies using a benchmark‐adjusted ROA and draws on a larger dataset including both industry and retail superannuation funds (in additional tests) over a longer sample period of 11 years (2010–2020).…”

“…Following prior literature, we include five control variables to capture underlying fund characteristics (Liu, 2014; Liu & Ooi, 2016; 2019; Nguyen et al, 2012; Nisbet, 2013; Tan & Cam, 2015). First, the natural logarithm of total assets ( LnTA ) is included to control for fund size, as large superannuation funds may benefit from diversified investments through a wide range of asset classes and lower operating costs that are dispersed among larger assets (Cummings, 2016).…”

“…This research focuses on providing evidence on self-managed superannuation funds 10 and the behavioural aspects of Australian superannuation funds such as superannuation fund members' financial literacy, 11 members' behaviour 12 and executives' behaviour. 13 Although the literature on superannuation funds is scant, there are several studies using small sample sizes that examine the effect of governance practices on superannuation fund performance and fees (Benson et al, 2011;Liu, 2014;Liu & Ooi, 2019;Nguyen et al, 2012;Nisbet, 2013;Tan & Cam, 2015). Some studies find that larger fund boards are associated with better fund performance (Benson et al, 2011) and charge higher fees (Tan & Cam, 2015).…”