The Impact of Related-Party Outsourcing and Trustee Director Affiliation on Investment Performance of Superannuation Funds

Abstract

The heavy reliance of Australian superannuation funds on service providers enables these entities to play an important role in fund operations and have a significant influence on the costs and investment performance of superannuation funds. The use of service providers creates a nexus of financial intermediation with multiple layers of principle-agent relationships and potential agency problems between trustees and service providers. Taking advantage of the industry’s new disclosure regime, this paper examines the impact of related-party outsourcing and trustee director affiliation on the investment performance of Australian superannuation funds. We find that for-profit funds significantly underperform when using related-party service providers. The underperformance is more severe when trustee boards are controlled by affiliated trustee-directors, and belongs to a vertically integrated conglomerate group.