While a campaign against industry superannuation funds has been unfolding in the media and from the Coalition, a scandal far worse than anything conjured up by critics of industry super has been out in plain view for at least two years.

Tony Abbott launched an attack on industry superannuation funds in March, describing them as a “gravy train” for “venal union officials”. The Australian quickly fell into line and has run a series of critical articles and op-eds on industry super ever since. Usual suspects Judith Sloan and Henry Ergas have weighed in to attack industry superannuation funds; this week, Sloan explained her own personal nightmare of industry superannuation — having to be on a board of a fund with a gardener. The AFR has also chimed in with some critical coverage.

Specific proven instances of “sleaze” in industry super funds are thin on the ground; the argument, which is usually focused at union trustees and never the other half of industry fund trustees, those appointed by employers, seems to be more that union officials have no right acting as trustees for major investment vehicles; that they are automatically prone to engaging in special deals and dodgy, self-serving investments and cover up their levels of remuneration.

As I’ve previously noted, the problem with this campaign of vilification is that if union trustees are so wretched and corrupt, how come industry funds have outperformed retail funds for so long?

But the systemic superiority of industry funds in terms of returns for members — which is ignored by the business press as essentially irrelevant to their readership — isn’t the only area where there are significant differences between retail and industry super.

One of the key roles for all fund trustees is the management of outsourcing. Beyond audit functions, which are necessarily conducted independently, most super funds outsource significant elements of their activities to third-party providers, for activities such as administration, legal services, marketing and actuarial work. Outsourced services form a huge part of the costs of managing funds.

To whom do they outsource, and how do trustees ensure that they fulfil their responsibility to act in the best interests of members? In 2010, the Australian Prudential Regulatory Authority produced a working paper on the issue.

The authors of the paper — Kevin Liu, of the University of Sydney, and Bruce Arnold, of APRA — looked at more than 100 different funds and found that “a significant number of superannuation trustees enter into outsourcing contracts with related parties”. That is, they outsource to providers with whom they have links — they might part-own the provider, or be owned by the provider, or share ownership, or share directors.

When it came to the non-profit sector — industry funds, corporate and public sector funds — there was nothing to distinguish the cost of outsourced services provided to them by independent providers or related-party providers. It was a different story when it came to retail funds. When retail funds paid unrelated providers for services, they paid slightly more per member than non-profits, but as near as makes no difference — $189 per retail fund member, compared to $185 per non-profit fund member.

When it came to related parties, the same services cost retail funds $485 per member. That is, retail funds were paying related parties well over twice as much to provide the same services independent providers could provide them for.

“Outsourcing by retail funds does not appear to be intended to reduce members’ costs, but instead may constitute part of the revenue model for the retail superannuation product,” Liu and Arnold concluded.

But aren’t retail fund trustees, like not-for-profit trustees, supposed to act only in the interests of their members? Therein lies the problem: “the trustee of a retail fund,” Liu and Arnold note, “typically is a member of a financial-services group such as a bank or insurance holding company.”

For retail funds — an industry dominated by AMP and the Big Four banks — that means trustees often have extensive links with the related parties providing services, and are expected to ensure a steady flow of revenue to their bank or insurance company as “part of the revenue model”.

In late August, John Brogden’s Financial Services Council, the peak body for retail funds, commendably moved to address the issue of the conflict of interest for trustees in its draft Standard on Superannuation Governance Policy, to start next year. The new standard will require that a majority of trustees, and chairs, must be independent.

The only problem is, the FSC’s definition of “independent” allows independent directors of parent banks and insurance companies to be trustees for funds controlled by them, perpetuating the potential for conflict of interest.

“The FSC proposals in the draft Standard on Superannuation Governance Policy do not meet the standards of governance, transparency or accountability that the beneficiaries of superannuation funds demand,” UTS professor Tom Clarke said in advice obtained by Industry Super Network, the peak body for industry super funds. “The independence of directors under the proposals is not assured.”

“The reality is industry superannuation funds are cosseted sheltered workshops for union officials and representatives from employer associations intent on protecting their own interests while duping the members,” said Judith Sloan this week. “Is it really any coincidence members are voting with their feet?”

And indeed, according to APRA data, industry super funds, after strong member account growth through to 2009, have lost some members: from 11,551,000 in 2009 to 11,449,000 in 2011, or 0.8%. Retail funds member accounts also saw strong growth through until 2010. But in 2011, they fell from 16,797,000 to 15,063,000, or more than 10%.

Voting with their feet indeed.