Investment Magazine Oct18_Issue 154

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 154

OCTOBER 2018

The new rules of

ENGAGEMENT Vision Super chair GEOFF LAKE believes in diverse boards and is making a case for younger directors

CIO PROFILE

ROYAL COMMISSION

LIFE INSURANCE

TRADE WARS

FIRST STATE’S DAMIAN

INSURERS MUST

SUPERFRIEND ON

J.P. MORGAN’S ROD

GRAHAM ON INVESTING FOR

REINFORCE THE

REDUCING THE IMPACT

EDDINGTON ON GLOBAL

MEMBERS IN PENSION PHASE

VALUE OF COVER

OF MENTAL ILLNESS

TRADE UNCERTAINTY

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THIS ISSUE \

CONTENTS OCTOBER 2018

COVER STORY

06

CUSTODY MATTERS

NEW RULES OF ENGAGEMENT

Equip Super’s new model lets smaller funds keep their front-office presence, while outsourcing trusteeship.

Vision Super’s Geoff Lake believes in the power of diverse boards.

24

FEATURES

10 KANGAROO BONDS HAVE BOUNCE Australia’s low-interest-rate environment is attracting foreign borrowers.

12 ROYAL COMMISSION The industry will have much work on its hands following the inquiry. It can start by doing a better job of showing people why they need cover, Andrew Main writes.

18 EQUITIES SUMMIT Delegates heard the latest on China and the rest of Asia, FAANG stocks’ perilous future, and how style exposure affects risk and return.

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GROUP INSURANCE SUMMIT More than 300 industry professionals gathered in August to discuss how to provide more to members.

28 AIST ISA 2018 Rod Eddington, the chairman of J.P. Morgan’s Asia Pacific Advisory Council, discusses global trade tensions.

OPINION

23 LIFESKILLS Mental health and wellbeing training is essential for building empathy, SuperFriend chief Margo Lydon writes.

26 GOVERNANCE The consultation draft of the ASX Corporate Governance Council’s Principles has worthy aims.

CIO PROFILE

“The great opportunity we have as an investment function is that we feel like we have real scale in both accumulation and pension.”

DAMIAN GRAHAM | CIO | FIRST STATE SUPER

30 POLICY It’s time for profit-to-member super to go on the offensive AIST CEO Eva Scheerlinck says.

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\ FROM THE EDITOR

EDITORIAL EDITOR

Alice Uribe

ALICE URIBE / alice.uribe@conexusfinancial.com.au

DIRECTOR OF INSTITUTIONAL CONTENT

Amanda White HEAD OF DESIGN

Kelly Patterson

A LETTER from the editor

I

ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

Matt Fatches matt@mattfatches.com.au

HIGHS AND LOWS

CHIEF EXECUTIVE

Colin Tate

ADVERTISING

DON’T KNOW about you, but peaks and troughs defined my past month. I started it in sunny Queensland, grabbing some warmth in Cairns and attending the annual AIST Superannuation Investment Conference.

For an event attended by many of the industry’s most prominent and long-serving profit-to-member fund trustees and executives, there was a feeling of buoyancy in the air, after years of perceived criticism by other parts of the sector.

AIST opened the conference with chief executive Eva Scheerlinck’s scene-setting speech charting “a significant shift in the discourse”, so that industry funds would no longer need to defend their outperformance against retail bank competitors.

We have an edited version of her landmark speech on page 30 of this issue.

Legendary IFM Investors boss Garry Weaven, also speaking at AIST, spruiked a $95 billion bank debt opportunity for industry superannuation funds, where they could plug a funding gap left by looming lending restrictions.

In our regular CIO profile, on page 14, First State Super’s Damian Graham throws his support behind the plan, saying his fund has already made six direct loans.

But the hopeful mood the conference generated was shortlived, with the sixth round of the Royal Commission into Misconduct in the Banking, Superannuation

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and Financial Services Industry kicking off as I landed in alsosunny Melbourne to attend our own Equities Summit (there is coverage of this event on page 18).

This time at the royal commission, it was the life insurance sector’s turn to face incisive questioning from a range of steely minded counsel assisting.

Insurers dealing directly with customers admitted to ultracompetitive sales tactics, but group insurers also felt the heat.

Insurance and superannuation fund executives were grilled on matters ranging from privacy intrusions and bullying tactics to shockingly charging dead people premiums.

As Andrew Main writes in his assessment of the fortnight on page 12, insurers are going to have to go back to teaching people the soft skills required to explain to potential policyholders why their families will benefit from laying out hard-earned money for cover.

Also in this issue is Conexus Financial’s head of institutional content Amanda White’s interview with the chair of Vision Super Geoff Lake, who makes the case for getting younger directors on super boards.

As I write this, I am eagerly anticipating Commissioner Kenneth Hayne’s interim report, and wondering what highs and lows are ahead for the $2.7 trillion super sector.

Thanks for reading.

BUSINESS DEVELOPMENT MANAGER

Sean Finn

sean.finn@conexusfinancial.com.au (02) 9227 5715, 0434 787 235 BUSINESS DEVELOPMENT MANAGER

Karlee Samuels

karlee.samuels@conexusfinancial.com.au (02) 9227 5721, 0420 561 947 BUSINESS DEVELOPMENT MANAGER

Sean Scallan

sean.scallan@conexusfinancial.com.au (02) 9227 5719, 0422 843 155 SUBSCRIPTIONS

Caitlin Leitch

caitlin.leitch@conexusfinancial.com.au (02) 9227 5718 CLIENT RELATIONSHIP MANAGER (EVENTS)

Bree Napier

bree.napier@conexusfinancial.com.au (02) 9227 5705, 0451 946 311

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Vision Super chair GEOFF LAKE believes in diverse boards and is making a case for YOUNGER DIRECTORS.

By Amanda White

Q: VISION HAS BEEN A COMMUNIT Y SUPER FUND SINCE 1947, THAT’S 71 YEARS OF PROVIDING SUPERANNUATION. WHAT CAN YOU TAKE FROM THAT RICH HISTORY? A: Local government existed in Victoria before state government and Vision Super has been a key part of that. The tens of thousands of members in local government today, and the thousands over the years, have trusted Vision Super to look after their hard-earned savings.

We are strongly aligned and committed to the two key stakeholders we represent – local government and water authorities.

We are fortunate, particularly on the local government side, [that] we have close relationships. There are only 79 councils in Victoria so we can have a personal and detailed engagement and relationship with employers.

Vision is a $10 billion fund with less than $3 billion in defined benefit and the rest in accumulation. The defined benefit fund closed in the early 1990s but it will be another 10-15 years before the youngest retire.

Q: WHAT ARE THE FUND’S BIGGEST CHALLENGES? A: We have undergone tremendous change over the last four to five years.

A lot of that has come about from the appointment of Stephen Rowe as chief executive in the middle of 2013. He has cut a lot of costs, introduced efficiency and made the fund a leaner, more effectively administered organisation.

One challenge we have, which is the same one that most in the profit-tomembers sector have, is that it is inevitable there will be mergers and I want to make sure Vision doesn’t miss out on opportunities there.

We’ve been growing our member base

OCTOBER 2018

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THE NEW RULES OF

E N G A G E M E N T

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over the last few years, with most coming from outside our sector due to our marketing of a sustainable low-cost offering, Vision Personal. This now has 6700 members and close to $500 million and is the lowest-cost low-carbon product in the market.

This all came about from an innovative approach to marketing and gaining new members, because we can’t rely on [past means of] membership growth.

We used a lot of online advertising on Google and Facebook and [also advertised on] some bus shelters to attract members.

We are very enthusiastically seeking organic growth and, while we are not actively seeking a merger path, we are [also] open to the benefits of a merger.

This is a very different board and senior management team, and is unrecognisable to some of the low points of the past, including the failed merger with Equip Super.

Q: YOU WERE APPOINTED CHAIR OF THE BOARD IN APRIL 2018.

WHAT’S YOUR VISION FOR THE FUND (MIND THE PUN)?

A: I’m interested in Vision being better than any other fund in how we engage with members. For example, with regard to socially responsible investment, it’s better to make that decision based on interaction with members, rather than just on a board discussion. Many funds have chosen to divest from tobacco. That’s not the kind of decision you can just make around a board table, you have to engage with members and get a clear weight of opinion. We are far more sustainably focused because of feedback from members.

Q: WHAT ARE THE MOST IMPORTANT THINGS YOU HAVE LEARNT FROM WORKING WITH PREVIOUS FUND CHAIRS? A: There have been a few people chairing Vision since I’ve been a board member and they have all, in different ways, been good To be a good chair, you need a keen

OCTOBER 2018

[People] my age and younger must be on superannuation boards. The average age for many boards has a six or a five in front of it

respect for all stakeholders. What they want is total confidence and trust in what we’re doing so they don’t have to worry too much. We will hold the AGM this year for members and for the first time it will be webcast and at a venue in the CBD of Melbourne.

It will be the first time we conduct this meeting with an AGM-type feel. The whole board and senior management will be there and members [will be able to] raise whatever ideas they want to talk about.

It’s their money and their fund, we’re in

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the privileged position to make decisions based on their trust. Our role is enhanced by their involvement.

Q: HOW WOULD YOU DESCRIBE

YOUR LEADERSHIP ST YLE? A: I like meetings that add value and are not just rubber stamping. A super fund board is a board of generalists. I don’t like boards that say, ‘We have a lawyer, an accountant, a technology person.’ That’s rubbish. They can’t be the fountain of all knowledge to the board. Good boards need a good bullshit metre and need to figure out the best way to proceed with something and not be stuck in the detail of the particular endeavour.

I like diversity of age, gender, work experience, life experience, I like people asking questions and being part of collective decision-making. That’s the kind of board I like, one with enquiring minds and debate. It helps when people like and respect one another. At Vision, we respect the contribution and role that everyone brings, and we benefit as a result.

Q: AT ONLY 38 YEARS OF AGE, YOU MUST BE ONE OF THE YOUNGEST CHAIRS IN THE COUNTRY. HOW IS YOUR AGE A BENEFIT? A: I was 22 when I was elected mayor and 28 when I was around the Council of Australian Governments (COAG) table, so I’ve always been one of the younger participants in whatever I’ve been doing.

[People] my age and younger must be on superannuation boards. The average age for many boards has a six or a five in front of it but superannuation fund boards should be representative and that includes the demographic profile of members – it’s one aspect of diversity. Older people have a valuable contribution but you don’t need everyone on the board to be older.

Our board previously had only one member who was a woman, out of the eight total. Now we have four. Most of our members are women so it is totally unacceptable that a few years ago this was not [reflected] on our board. We set this is a priority.

[There is] still a way to go in gender diversity but cultural diversity is also a problem. If you look around at industry events, it is not representative of the streets we walk down. This needs improvement, especially for representative boards.

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Q: WHAT IS THE MOST IMPORTANT THING YOU ARE DISCUSSING AT THE BOARD TABLE THIS YEAR? A: The last few months have been dominated by talk around the royal commission. We have a continued focus on improving the business, reducing cost and improving performance.

One thing we are looking at is sustainability. We used to invest in a windfarm with a direct ownership but we recently sold that. We’re interested in a collective infrastructure vehicle focused on renewable energy and sustainability that fits in with our lost-cost and sustainability principles.

Q: LOW COST IS ONE TERM TO DESCRIBE THE FUND AND ONE OF YOUR INVESTMENT BELIEFS IS THAT PASSIVE MANAGEMENT SHOULD BE USED, WHERE AVAIL ABLE, FOR THE DEFAULT INVESTMENT POSITIONING. WHAT DO YOU THINK IS A REASONABLE MANAGEMENT EXPENSE RATIO FOR AN INVESTMENT PORTFOLIO OF YOUR SIZE? HOW ARE YOU NEGOTIATING TO GET THAT? A: The focus for the last four years has been improving our business and we have cut quite a bit of cost from our operations. We’ve saved $150 million in investment and administration expenses over five years. We now have operating costs of 25 basis points, compared with an average in the industry of 47 basis points, and investment costs of 73 basis points compared with an average of 87 basis points.

We are more passive than five years ago but are not a passive investment fund. We believe in active management but there has to be a clear basis for it in a sector where we can be confident of outperformance.

We have reduced the number of managers from 70 to 53, which still includes about 15 legacy private equity managers, so that has introduced some cost-efficiency.

Vision now has a very professional, well-built investment team. We didn’t have a CIO until Michael Wyrsch joined us from Frontier. Now, we believe we have the best CIO in the industry. I chaired the investment committee until becoming board chair a few months ago;

Michael is very humble, conscientious and hardworking and has a strong set of personal values.

He is very diligently focused on getting good investment performance for appropriate levels of risk for our members. Performance is a good story, too. We have been first quartile for one and three years. We have a very disciplined and methodological approach, with our investment beliefs framing the discussion.

Q: YOU ARE A FORMER MAYOR. WHAT IS YOUR VIEW OF WHETHER SUPER SHOULD BE ARM’S LENGTH FROM GOVERNMENT AND THE CONSTANT TINKERING IN THE SYSTEM? A: I feel frustrated at the way superannuation appears to be on the agenda at every budget to tackle whatever perceived issue in that moment.

There has also been a bit of an ideological overlay on that because of the idea of industry funds and unions. It’s been a shame. Superannuation needs stability and consistency. For people looking at retirement, there is a widespread fear or suspicion that the goalposts will be shifted. Everyone in government has a responsibility and potential to change that. Super is seen as something we should be proud of in Australia. We should respect the legacy by looking to build and develop further.

Q: YOU ARE A MEMBER OF THE BOARD OF THE AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES. WHAT CAN AIST AND OTHER INDUSTRY GROUPS DO TO BET TER REPRESENT THE VIEWS OF THE INDUSTRY? A: Industry Super Australia, AIST and the Association of Superannuation Funds of Australia don’t agree on everything but they do agree that super should be above the government fray and not be [managed] around short-term budget solutions. We should be setting objectives for super and having a process that defers more to experts on superannuation and retirement, rather than to politicians. [The] size of the superannuation industry [is] awesome, [and will be even greater] in the future; [the] contribution superannuation makes to jobs, projects and infrastructure needs to be highlighted.

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KANGAROO BONDS ARE bonds issued in the Australian market by offshore firms and denominated in Australian dollars.

Bonds deposited into the Australian market are held within Australia’s bond settlement facility, Austraclear, which is a wholly owned subsidiary of the Australian Securities Exchange.

FACILITATING K ANGAROO BOND ISSUERS Austraclear currently holds around $200 billion in kangaroo bonds. These types of bonds are attractive to offshore issuers, as they provide access to a capital market outside their own, which potentially reduces their borrowing costs and diversifies their investor base. Hedging the currency exposure back to their local currency can often be more efficient than borrowing in their own country or in other markets.

Blair Harrison is Austraclear’s senior manager for settlements and collateral.

“To issue a bond into Austraclear, you generally need to be an Australiandomiciled entity,” he says. “If you’re not, for example, if you are a kangaroo bond

THIS REPORT IS sponsored by AUSTRACLEAR

Australia’s bond settlement facility, Austraclear, is supporting many offshore borrowers attracted by Australia’s large capital pool as they hop into kangaroo bonds.

issuer, then you need to use an agent, and there are a number of different service providers in that market, including ASX’s own service, Austraclear Services (ACSL).”

ACSL acts as an agent for many offshore issuers enabling them to facilitate their issuance of securities in Aussie dollars as well as managing their Aussie dollar cash flows for settlement and coupon payments to investors. But Austraclear can also work with large, overseas custodians when clients have a strategic relationship with these providers, or when they wish to diversify their risk by working with multiple parties.

FOREIGN BORROWERS MAINTAIN APPETITE The biggest issuers of kangaroo bonds into Australia are predominantly supranationals, including the Asian Development Bank and the European Investment Bank. Issues also come from Japan, Canada and US corporates, such as Apple.

Putting the

in kangaroo bonds OCTOBER 2018

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“This gives the investor and the issuer certainty over the interest that will be paid or earned and also secures in the borrowing for a longer period at a fixed low rate,” he says.

INVESTIGATING THE TECH Harrison says that supranationals continue to borrow in the realm of $200 billion in the Australian market.

“We see that Canada, for example, is increasing, mostly from semi-governmental issuers such as the Canadian states and provinces,” he says. “Whereas the Japanese issues appear to be decreasing, which may be an indication that Japanese issuers are focused domestically, possibly because of the low interest rate environment in Japan.”

On the Japanese investor side, however, Harrison says there are still Japanese investors investing in Australian dollars.

“We can see the case where supranationals will issue bonds in Australia that end up with those Japanese investors,” he says.

“In this situation it’s a case of simple supply and demand.”

Harrison explains that if there’s an appetite for a Japanese investor to hold an Australian dollar bond, it is likely to be because they have a positive view of the Australian interest rate environment compared with others.

He adds Canada’s interest could be due to a variety of reasons. “Our economies are quite similar for one,” he says. “Also, we are both large countries and have similar political systems, and there are investments in Australia from Canada and vice versa.”

Harrison says when it comes to kangaroo bonds, although the issuer utilises Austraclear and predominately accesses the Australian market, some of the issuance ends up being held by investors offshore. “This is sometimes the case,” he says, “demonstrating that issuers that issue bonds into Austraclear can reach investors both onshore and offshore.”

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LOWER COSTS The number of foreign issuers is rising and one reason for this could be related to the efficiency of raising capital through Austraclear in Australia and in Australian dollars, rather than in other markets in other currencies, Harrison says.

“This could be an indication that bond issuers believe the Australian dollar is an efficient currency to borrow due to the current interest rate environment. But it might also mean that issuers can swap the bonds back into their own currency at an effective rate,” Harrison says. “And that would seem to be supported by the types of bonds we’re seeing.”

Harrison says for both kangaroo bonds and government debt, the length of the bond issuance, or the tenor, is becoming longer so issuers are borrowing at fixed rates for a longer period of time. “That is, instead of borrowing Australian dollars for three to five years, they are borrowing for 10 to 20 years at that rate,” he says.

He adds this situation suggests that offshore entities are taking a view on the affordability of borrowing money in Australia. “In particular, they are taking a view on our current interest rate environment compared to other markets, long-term,” he says. “The fact they are also borrowing more is another reflection of this favourable view of Australia’s interest rate environment.”

It’s also no surprise that most of these bonds are issued as fixed rate notes rather than floating rate notes, Harrison says.

Austraclear services over 800 participants and holds close to $2 trillion worth of securities, which includes around $550 billion on issuance by the Australian government. Austraclear settles on average more than $67 billion transactions per day via a link to the Reserve Bank Information and Transfer System (RITS) – Australia’s high-value settlement system used by banks and other approved institutions to settle their payment obligations.

An emerging trend in the settlements space involves Australian issuers and, in particular, the major banks issuing bonds in other markets, especially in US dollars.

“The volume of US dollar issuance from the major banks in recent years has outweighed the volume of Australian dollar issuances,” Harrison says. “There are a number of reasons for this, but this trend is a reason why Austraclear is considering diversifying to facilitate payments and bond issuance in other currencies. While assisting clients in raising offshore currencies in Australia, we can also provide our local customers with safe and secure infrastructure, governed by a stable and robust legal environment, to hold those securities onshore in Australia.”

Austraclear services a variety of different customer types, including institutions that hold bonds directly and also custodians who hold bonds in Austraclear for their clients. “The question is how we can better service custodians, intermediaries and end-investors in the future, particularly as we consider the move onto platforms that use distributed ledger-based technology,” Harrison says.

The Australian industry can benefit from the use of distributed ledger technology for equities settlement and Harrison says those efficiencies could also apply to securities such as bonds and other fixed-interest securities.

“The whole world is interested in ASX’s progress developing distributed ledger technology to replace our equity settlement system, and we are excited about the potential benefits for our customers and the market, too.”

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LIFE INSURANCE

after the

HORROR

STORIES The industry will have much to address following the royal commission. It can start by doing a better job of showing people why they need cover.

By Andrew Main

FROM THE DISASTROUS evidence at the Hayne royal commission hearings, you would begin to wonder how Australia’s life insurance industry is ever going to scrape itself off the floor to rebuild its reputation.

For instance, AMP has not only managed to get hammered for charging dead people for financial advice, it also copped a flogging for charging dead people for life insurance cover.

As Commissioner Kenneth Hayne noted in his usual dry style, “Charging premiums for life insurance to someone who is dead?

That’s the position, isn’t it?” And it was.

We learned that Allianz declined to do anything between the end of 2015 and this year about 120 specific errors and misleading statements on a supposedly refreshed website aimed squarely at holders of its insurance policies in areas such as car, home and life.

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It’s an absolutely lousy look, most particularly because in many cases insurance cover is a grudge purchase.

It was ClearView Wealth chief actuary Greg Martin who pointed that out in round six of the hearings, focusing on insurance. Martin noted of life insurance that, “People know they should do it, but it’s not something they willingly run off to do without usually a bit of motivation, oftentimes from family or friends or other people.”

That realistic assessment was swept away in the maelstrom created by the emergence, on the same day, of news that ClearView had fessed up in 2016 to having made between 300,000 and 303,000 cold calls in breach of the law, which prohibits hawking without first sending a preliminary Product Disclosure Statement.

WHAT THE INDUSTRY CAN DO So where does that leave the life companies? They can start by spiking any thoughts of direct selling, if they haven’t already. That apparently represents only a maximum of 5 per cent of sales, so they can learn to survive without that. But let’s try to pick our way through some basic principles to try to work out what the industry is going to have to do to reboot.

Michael Harrison, the chairman of dealer group Synchron, who not only used to be a life insurance adviser but also ran Zurich Life, believes it is going to be more important than ever for life cover to be sold by advisers who have a deep understanding of why people might need it.

“Over the last decade, the emphasis in the financial advice business changed, in that people started to believe they were financial planners and not life insurance

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advisers,” Harrison said. “Life insurance is the only instrument that transfers human risk from the people who don’t want it to those who do.”

Considering how often in recent years financial planners have been criticised for being ex-life insurance advisers, that’s quite a turnaround in perception he’s talking about. Perhaps the fact that the life industry has joined the financial advisory industry in the doghouse of public opinion means it’s not a bad moment for both industries to have a rethink.

“Morale in the industry is at an all-time low,” Harrison said. “Older advisers are telling everyone they want out. They don’t want to go though the educational process as now required and there are now more life insurance books for sale than I have seen in my entire career.”

He makes the point that however bad the life industry looks after being dragged through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and justifiably so, its sins have in many cases been based more on corporate negligence than outright dishonesty.

Harrison also reckons the demutualisation of so many life companies over the last two decades has been a major negative, taking away the reserve buffer provided by their statutory Number One fund that allowed them to hold premiums steady, in contrast to the post-demutualisation practice of handing surplus cash to shareholders who might well not be policyholders.

A consequence of those rising premiums has been that healthy people have let their policies lapse, Harrison says, leaving a cohort of sick policyholders who know enough about their declining health to hang onto their life and total and permanent disability cover.

“That is creating a real problem for insurance companies,” he notes with emphasis.

So what do we do? Nationalise the life industry? Harrison is quick to point out that such a move would be expensive.

“I made a submission to the Trowbridge Inquiry, which estimated that providing adult Australians with $500,000 of life cover each would cost another 3 per cent on top of the Medicare levy.

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“Plus, that might still leave families short if [they had] a lot of mortgage debt,” he adds. “Other people have estimated that families need $1.6 million to retire on and who’s going to make up the difference?”

BACK TO SOFT SKILLS He says the life industry is going to have to go back to teaching people the soft skills required to explain to potential policyholders why their families will benefit.

“If you go into a room and ask people who’d like to buy life insurance, you won’t see many hands go up,” Harrison says.

“But if you ask them if they’d like to make sure their family is financially looked after in case of illness or accident, you’ll get a very different response.

“I’m not saying we shouldn’t fix the industry and work to create a more secure, ethical and honourable culture, because we must.

“The industry does a great deal more good than harm.”

Col Fullagar, an industry veteran whose Integrity Resolutions business advocates for victims of claims difficulties in life insurance, says modern technology could quickly swing the balance of power back in favour of the policyholder.

“You could fix the industry virtually overnight if you had a kind of TripAdvisor equivalent for consumers to rate insurance companies,” Fullagar argues. “If you had a situation where licensees had to score 4 out of 5 for client service before their policy offerings were accepted on approved product lists, and also tied executive bonuses to a similar scoring system, that would change the focus overnight.

“Of course, there are people on the existing TripAdvisor site who distort the system by deliberately posting nasty reviews of restaurants and hotels but most consumers are smart enough to work their way through that sort of distraction.

“Giving some power back to the consumer will change insurer behaviour and, overall, it’s critical that the insurers focus seriously on the issues that the royal commission has laid bare.

“Somehow or other, the insurers have to get religion.”

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purpose Most of the industry is still just heading towards investing with scale for both accumulation and pension phase. First State Super is already there.

By Alice uribe

DAMIAN GRAHAM, THE CIO of First State Super, considers his position unique.

He is responsible for the management of $70 billion in accumulation assets but he also has dual oversight of $25 billion in retirement assets.

That second number is only set to grow as more Baby Boomers finish their working lives and prepare to enjoy the fruits of their labours. By some estimates, Boomers make up about 25 per cent of Australia’s population but own more than 50 per cent of the country’s private wealth.

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The assertion that the nation is on the verge of the biggest intergenerational wealth transfer in history is almost ubiquitous, with more than $3 trillion expected to move between Baby Boomers and those to whom they choose to pass their money within the next 20 or so years.

Graham, who joined First State Super in 2012 from banking behemoth Macquarie Group, admits the level of retirement assets makes his portfolio “a little bit unusual”.

“Even among very large funds in the marketplace, very few have anywhere

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approaching that sort of size of retirement assets,” he tells Investment Magazine.

“It really does create, for us, a unique opportunity and responsibility to continue to evolve in the way we’re investing for the retirement phase.”

When Graham joined First State Super, which was established in 1992 as a profitto-member fund open only to NSW publicsector employees and their families, he was responsible for its accumulation and pension assets and also for the investment assets, as a result of the acquisition of StatePlus in June 2016.

In August 2017, the investment teams of First State Super and StatePlus were combined to leverage greater size and expertise at managing assets in accumulation and pension phase, for both advised and self-directed members.

Graham says Sydney-based First State is a business that is now built around “retirement investing”.

In the accumulation phase, its default-style products are three-quarters growth assets such as equities. The fund also defines its property and infrastructure assets as “growth”.

Graham says there is also a “good component” of hedge fund-style investments, plus traditional defensive assets such as fixed income and cash.

CRITICAL MASS For the pension-style strategies, Graham says, the total assets end up being “broadly half defensive, and half growth”, and he is keenly aware of the sequencing risks associated with retiree cohorts.

“The great opportunity we have as an investment function is that we feel like we have real scale in both accumulation and pension. Whilst that’s the way the industry is heading, most funds don’t have critical mass in their pension assets,” he says.

“That makes us a little bit…different.

Historically, the First State portfolio itself has come from being…a little bit more of a vanilla-type portfolio, so quite a lot of assets in listed securities, to one [where] we’ve progressively been building up more unlisted securities over the last five years.”

First State has a 75-strong investment team, which Graham plans to expand, and uses Willis Towers Watson as its asset consultant. He adds that the fund also makes use of esteemed global consultants who specialise in pensions.

Dr Ashby Monk, one of the most influential academics in the institutional investing world and also the research director of the Stanford Global Projects Center, amongst other roles, is one such specialist with whom First State Super has consulted. Another is Gordon Clark, who has achieved a status similar to Monk’s and is now director of the Smith School of Enterprise and Environment at the

We’ve drawn our team from all sorts of backgrounds, certainly investment banks, fund managers, consultants, specialist advisers, academia.

OCTOBER 2018

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CIO PROFILE \

University of Oxford, where he is an adviser to companies on issues such as long-term environmental performance.

“These gentlemen have consulted to our fund over time to help us consider some of the challenges that face larger asset owners,” Graham says. “We feel like the system’s going to keep growing. We’re well placed to continue to grow as well.”

First State Super’s investment team is similarly academic.

“We’ve drawn our team from all sorts of backgrounds, certainly investment banks, fund managers, consultants, specialist advisers, academia,” he says. “We have some people who have come to us directly from finishing PhDs. We’ve built up a quant team in the last few years, we have certainly leveraged people coming out of academia.”

First State Super also uses the services of between 40 and 50 investment managers, a situation Graham says will remains stable, despite the fund’s increasing interest in investing in a range of unlisted assets.

“We have had a change of a few managers...but our expectation is we won’t get to a position of having all the money internally managed or externally managed,” he says.

Graham says when he joined from Macquarie he felt that the fund, and other funds, were “at arm’s-length” from investments, meaning there was less transparency around costs, which could “lead to less-positive outcomes”.

“I felt because super funds aren’t dealing directly with the market, they don’t get access to the information,” he says. “They don’t get access to the opportunities. They don’t really understand where all the costs are occurring through the value chain.

“Most super funds have traditionally been outsourcing in their investment management. With that process, you don’t have the day-to-day visibility of what’s happening in the investment markets.

You’re not having conversations with market participants the way you do if you’re dealing directly in securities.”

VANILL A NO MORE “We’ve certainly been building up strategies in equities, in the credit markets, in direct property, direct infrastructure, that have really availed us of much deeper information,” he says. “Also [this gives us] a much greater set of opportunities to be able to drive what we think are better portfolio opportunities, outcomes and scale benefits, through lower fees over the long term”.

After its inception in 1992, First State Super opened its doors to all Australian retirement savers. Its 2011 merger with Health Super made it one of the country’s largest super funds. It now manages money on behalf of 800,000 Australians.

Since 2012, a range of new investments have allowed the fund to move from what Graham terms more “vanilla assets” to unlisted or alternative assets in both its First State Super and StatePlus portfolios.

It has expanded its definition of real assets, which have traditionally been toll road or CBD office building exposures, as those types of assets have become more expensive.

“We’re trying to be quite flexible in our thinking around what we’re seeing and how we define real assets,” he says.

This has led to a range of newsworthy investments. A recent example was the fund’s successful bid to operate Victoria’s

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land titles and registry functions, in which First State paid $2.86 billion for a 40-year concession to operate parts of the state’s registry business.

First State made its first move into this burgeoning asset class in April 2017 as part of the Australian Registry Investments (ARI) consortium, which was the winning bidder for a 30-year concession to run New South Wales’ land registry business – the country’s largest.

“When you think about those, they’re not a traditional infrastructure asset like a toll road or a port; they really are somewhat unusual,” Graham says.

Other recent transactions First State has been involved in include backing the potential of the build-to-rent sector, partnering with property giant Lendlease to set up a US$1 billion ($1.4 billion) investment platform to fund developments across the US. Last year, First State Super also became one of the first pension funds in the country to secure a Qualified Foreign Institutional Investor (QFII) licence, allowing it to invest in Chinese stocks listed on mainland markets.

“Certainly, in the last 12 months or so of investing there, we feel it has proven so far, in the short term, to be a market with greater alpha opportunities than average, because of lower levels of efficiency,” Graham told Investment Magazine earlier this year. “We’ve seen very significant alpha for our listed A-shares exposure.”

Graham is also supportive of comments made recently by IFM Investors’ Garry Weaven, who said industry super funds could potentially partner with banks, which are facing pressure from looming lending restrictions emanating from regulatory change.

It is something he says could become a “prospective marketplace”.

“The changing global bank regime and the way that’s affecting the big four banks in Australia is something that we’re benefiting from...We’ve made six direct loans to date and we expect to continue,” he says.

And what of the possibility of a super fund owning 100 per cent of a business? Graham says, “There certainly is the potential over the longer term. We think it’s a great virtuous circle around us being able to invest in areas of the economy, communities where our workers live and retire.”

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Investment Magazine

EQUITIES SUMMIT 2018

Managing assets as a fiduciary comes with a complex range of responsibilities and commitments.

THIS YEAR, THE Investment Magazine Equities Summit was held at Crown Towers in Melbourne, and brought together asset owners, consultants and investment managers to collaborate and learn from a range of influential speakers, and also from one another.

Delegates heard the latest thinking relating to opportunities in China and other Asian markets, the potential for the dominant FAANG tech stocks to decline in importance, and how style exposure affects portfolio risk and return.

Here is a selection of coverage from the day.

Look at Asia from the bottom up: CFSGAM

By Rachel Alembakis

Asian markets are “glass half full” in terms of opportunities, economies and growth, but that hasn’t always translated into investment returns, said Richard Jones, director of First State Stewart Asia, part of Colonial First State Global Asset Management.

Jones told the delegates the historical evidence of growth in Asian economies has been strong but the return on investment has been less evident.

“Top down, no problem, no question, it’s historical and proven, but from the point of view of equity returns, perhaps a bit more difficult,” Jones said. “This is how we’ve felt much of the time in the last few years. It’s been a tough period, as we’ve heard again, from active managers. I’d say that over the last 12 months, it’s become considerably easier.

“We have all lived through the biggest bull markets in our lifetimes, but it sure

OCTOBER 2018

as hell hasn’t felt like it, I would say.

Tired and emotional, somewhat volatile, and increasingly conflicted…It has been, in my view, quite a miserable bull market. Previous bull markets seem to have been a lot more fun.”

Jones said that while previous panels at the conference had referred to China as the elephant in the room, from his perspective, investors were “in bed with an elephant”, as China’s share of the Asian economy has risen from 49 per cent a decade ago to 95 per cent today, and China’s contribution to global growth rates has been 50 per cent.

Overall, Asian investment continues to perform well, from Jones’s point of view.

“All of this noise, all of this barking [can scare you senseless and] keep you out of the marketplace. At the end of the day, the caravan rolls on, the sun comes up, life goes on, companies do what they do. Earnings growth is still there, it’s still double-digit; if you can in any way leverage the growth I’ve talked about, you should end up with a pretty decent result.”

FAANGs are no longer the good guys

By Rachel Alembakis

The dominance of tech giants in US markets should be analysed in the context of shifting populist politics in the US and increased regulation in Europe, along with other potential investment risks to the sector, Pendal Group senior investment analyst Paul Gyenge said.

Political and regulatory issues are beginning to bite FAANGs – a nickname for the tech sector’s five best-performing stocks: Facebook, Apple, Amazon, Netflix and Alphabet’s Google.

“At Pendal, we think it’s an increasing risk that the market is just coming to terms with and doesn’t really understand properly,” Gyenge said. “Given that valuations are also incredibly elevated, it also has the potential to have a significant impact on the market going forward.”

In terms of political risks, until recently, the FAANGs had a reputation for being “the good guys”. That attitude peaked during former US president Barack Obama’s tenure bit it has changed dramatically, Gyenge said.

“Fast-forward now to [Republican US President Donald] Trump, who actively tweets against Amazon on postal prices, taxes and [the Amazon-owned Washington Post newspaper] and the media and content issue,” he said. “For Trump, this makes complete political sense. His core base over the last few years has seen the full force of the impact of having to take Amazon warehouse jobs at minimum wage, or close to it, versus the high-paying tech jobs going to blue [Democratic-leaning] states. Now we’ve gotten to a point where the dynamic has reached a tipping point.”

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CONEXUS E VENTS \

Future Fund tips into emerging-market ventures

By Alice Uribe

Craig Thorburn, the director of emerging markets at the Future Fund, says private equity investments focused on venture and late-stage growth companies are proving to be highly attractive, with the sovereign wealth fund making plans to increase allocations across a number of steadily maturing managers.

Thorburn said much of the fund’s $19 billion private equity program was focused on China.

“Where China does stand up is in the

growth and venture space, so much of the 8 per cent of our private equity program, or 77 per cent of emerging markets exposure in private equity is around the venture and growth space,” he said. “For us, this is probably one of the most exciting areas in the emerging markets universe, and will continue to grow over the next five to seven years.”

In the emerging markets asset class, as of June 30, 2018, the Future Fund has allocated 66 per cent to listed equities, followed by a 16 per cent allocation to private equity, with China making up 38 per cent of its entire emerging markets exposure.

Thorburn said the Future Fund had a bias towards local managers over international managers with an “outpost”.

“But it takes time to build those relationships, understand the culture and the workings of the marketplace,” he said. “We’ve gone down the incubator or feeder type approach. We have a raft of managers...probably $30 million – $50 million in size. Over the next five to

seven years, as they grow and mature and get more experience, those managers will figure more prominently in our plans for China.

“You’d expect those cheque sizes to grow and hopefully the returns will be demonstrable in terms of having that greater impact when it comes to moving the needle in our portfolio allocation.”

Speaking on the same panel, Aberdeen Standard Investments senior investment manager Mark Gordon-James agreed that there were opportunities in mainland China on the back of China A-shares debut on the MSCI’s emerging markets benchmark in June.

“We don’t know what’s going to happen, but there is a very interesting opportunity set in mainland China that’s now been opened to foreign participation,” GordonJames said. “So having a [local] research team and fund management team that can delve into mainland China to do research is going to be very, very important for fund managers wanting to lead the pack in emerging markets.”

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\ SP ONSORED CONTENT THIS REPORT IS sponsored by J.P. Morgan

Fund manager operational risks under the spotlight Savvy asset owners are bolstering their operational due diligence on fund managers, J.P. Morgan.

MANAGING MARKET EXPOSURE, interest rates, and foreign currencies is par for the course for institutional investors.

The world’s best investors also recognise that managing operational risk is just as important.

“Every fund now has an operational due diligence (ODD) process,” according to Tony Kenna, head of funds services, Australia & New Zealand. “While the industry is finding it challenging and costly (given there is no risk premium attached to the undertaking), there’s no longer a discussion of ‘why’ but ‘how’.”

“It is important for asset owners to partner with organisations that are committed to supporting investors on this ongoing transformation journey,” Kenna says.

A thorough ODD process assesses how fund managers deal with risks related to: not being able to process transactions; errors regarding trade execution, settlement or valuation; compliance with relevant laws and regulations; and service provider issues or general disruptive events.

J.P. Morgan, which has a deep understanding of end-to-end risk and control frameworks, recently spoke to Telstra Super about its ODD approach.

TelstraSuper head of business intelligence and investment operations, Miles Mallick, said that not every manager passes its ODD screen.

“The vast majority pass but we have had occasions where we have told our investment team that the manager is

not investible due to certain issues,” Mallick says.

TelstraSuper ODD lead Martin McCabe says the fund has also had success changing fund managers’ operational practices for the better.

“There have been situations where we feel managers’ practices aren’t up to our standards so we’ve asked them to change. So far, managers on the whole have been quite receptive to that.”

TelstraSuper, with the assistance of ODD consultants, has already assessed alternative managers (hedge funds, private markets) and traditional asset classes.

‘‘

It is important for asset owners to partner with organisations that are committed to supporting investors on this ongoing transformation journey

Tony Kenna, J.P. Morgan

“It would be very difficult for us to visit all of these global managers and have face-to-face discussions on operational processes, risk culture, etc.” Mallick says. “We have found that consultants are best placed to conduct the reviews, given their resourcing and experience.”

However, the consultant’s ODD report is just a starting point for the fund, McCabe says.

“These assessments can be a rather qualitative landscape and we’re trying to add a quantitative framework,” he explains. “We have drawn up risk management parameters as part of the ODD framework to help keep it transparent so that as our investment team is assessing a potential manager it can also run them against the key ODD criteria.”

TelstraSuper applies a minimum standard to all managers but boutique managers are not necessarily expected to match the resources of larger organisations.

“Through experience, we’ve gained a good feel as to what industry best practices are within areas such as systems, processes, procedures, policies, third-party providers,” Mallick says.

“That differs from region-to-region and also asset class-to-asset class.”

The Australian Institute of Superannuation Trustees (AIST) has proposed a collaborative approach where managers pay for their own assessment to lower costs. While it raises an inherent conflict of interest, the proposal has found support.

McCabe says TelstraSuper supports the AIST proposal, which would save funds time and help drive a standardised ODD approach – but the fund would always do its own deeper dive.

“If we were using a report that the manager has paid for, we certainly wouldn’t use that as all of our ODD work and file that away,” he says.

“We would review that as a starting point and then ask our own consultants to do further independent analysis if we felt it appropriate.”

J.P. Morgan would like to thank TelstraSuper’s Miles Mallick and Martin McCabe for sharing their thoughts on ODD. For more information on how J.P. Morgan is working with the asset owner community, please visit: jpmorgan.com/is

The products and services described in this document are offered by JPMorgan Chase Bank, N.A. or its affiliates subject to applicable laws and regulations and service terms. Not all products and services are available in all locations. Eligibility for particular products and services will be determined by JPMorgan Chase Bank, N.A and/or its affiliates. © 2018 JPMorgan Chase & Co. All rights reserved.

OCTOBER 2018

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CUSTODY MAT TERS \

EQUIP SUPER WANTS TO BE YOUR TRUSTEE EQUIP has created a new model that lets smaller funds keep their distinctive front-office presence, while outsourcing trusteeship, administration, custody and investment operations.

By Rachel Alembakis

that couldn’t be replicated in a merger, so they’d drop out.”

There are 248 Australian Prudential Regulation Authority-regulated funds, a number the corporate regulator has made no secret of wanting to see reduced. In August last year, it wrote to the boards of the worst performers, saying they should make changes or they risked being shut down.

THE ONGOING PRESSURE for superannuation funds to merge, has prompted Equip Super to develop a way for smaller funds to outsource their back-office operations while still hanging onto their brand and member engagement functions.

The $15 billion profit-formembers fund has created the extended public offer (EPO) model in a bid to increase its investment and operational funds under management, hoping it will also appeal to other smaller funds wanting to keep their distinctive front office presence.

“Part of my job is to find new potential partners for Equip, which means mergers,” said John Farrington, Equip executive officer, growth and corporate development. “In the early days, one of the big problems with trying to find merger partners was that some funds had very unique things that they offer to their members

investmentmagazine.com.au

targeting members in a specific industry.

“They have a view that they can provide unique insight to those members because they’re used to dealing with that group and that members,” Farrington said. “However, they realise that with $2 billion, they can’t access the scale in investment and administration that larger funds can. Under the EPO model, they can keep their fund exactly as it is.”

Equip was not seeking to

We changed the structure of the trustee so that Equip Super Pty Ltd can be trustee of multiple funds The EPO model lets funds outsource trusteeship, administration, custody and investment operations. The funds retain responsibility for strategy, brand development and member and employer relations, under the control of a service company with its own board of directors, executive and staff.

“We changed the structure of the trustee so that Equip Super Pty Ltd can be trustee of multiple funds,” Farrington said.

This can be of assistance for sub-$5 billion funds

cut into the business of trustees for hire, and was not considering taking on start-up retail funds like recent entrants that focus heavily on their tech offering to younger workers, Farrington said.

“We are looking to get other potential corporate funds or smaller industry funds that

are looking for getting better access to scale,” he said.

“The newer funds that come in – they’re not scale plays as such, and there are not enough members. “ The EPO model launched in April of this year; thus far, Equip has not had any takers.

“But it’s been a fantastic talking point in our discussions with other funds,” Farrington said. “I suspect that part of it, and the reason that a lot of mergers don’t happen in the first place, is that funds don’t want to lose their influence.

EPO lets the fund retain its member-facing functions, but they don’t get to choose the fund manager, that’s been the single biggest thing.”

Equip could potentially take on as many as three partners, and Farrington said the fund could scale up to $35 billion in assets under management with its current governance and staff.

The fund has increased its risk management and governance resources, increasing those staff members for those tasks from three to nine.

“The whole industry is certainly looking at a bigger focus on risk management and governance,” Farrington said.

“It’s basically tripled in the last 12 months, and…the EPO puts another layer on top, because we have more stuff that’s outsourced as well. All the member servicing and member education would largely be done by the old trustee office, but there is a service level agreement that needs to be signed.”

CUSTODY MAT TERS IN A SSO CIATION WITH

OCTOBER 201 8

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IN YOUR MEMBERS’ MOMENT OF NEED, WE’RE HERE In 2017 alone, we paid over $1.3 billion in claims to both Group members and Retail clients. That’s over $5 million every working day.

ADV4063 05/2018

Because we’re here for your members when they need it.

aia.com.au

LIFESKILLS \

START EARLY, BE POSITIVE FOR MEMBER WELLBEING The less time injured workers miss from the job, the less strain on their mental health. The right kind of support goes a long way towards preventing extended absences.

MARGO LYDON CHIEF EXECUTIVE | SUPERFRIEND

THE LIFE INSURANCE and superannuation industries have a crucial role to play in reducing the financial and social impact of mental illness and supporting members’ wellbeing.

When employees are injured or become ill, it’s natural to think time off is what they need most; however, extended absences can be counterproductive. Employees dealing with health problems can experience the added

emotional strain from lost income and superannuation savings, and social isolation, if they are unable to return to work or need to be absent for extended periods.

Poor mental health is something that we all experience at different times, even in the absence of a mental illness. It can lead to reduced productivity and engagement, increased staff turnover and attrition costs, and the loss of valued staff expertise and skill.

Research from the American College of Occupational and Environmental Medicine indicates that injured workers recover faster and more fully if they maintain their usual working routines and stay in contact with their workplace wherever possible.

EARLY, POSITIVELY When an employer first becomes aware of an employee’s illness or injury, it is important to respond as quickly and as positively as possible, clearly indicating the level of support they will provide.

A 2017 Safe Work Australia study found that when the employer made contact early with staff affected by mental illness, 77 per cent of those employees remained in work, as opposed to 52 per cent among those who had no employer contact.

When employers positively responded to people experiencing mental illness, 79 per cent of employees stayed at work. This is a major jump from the mere 52 per cent of employees who remained at work after perceiving their employer’s response to be negative.

PL AN TOGETHER A Stay at Work (SAW) or Return to Work (RTW) plan formally lays out the assistance that will be provided to the employee and outlines a clear pathway for them to return to work or stay at work safely and productively.

The plan should be worked out collaboratively with the employee, based on the individual’s strengths. It will provide all-important support during these early stages.

ASK FOR HELP

Mental health and wellbeing training for the super industry is essential for building empathy investmentmagazine.com.au

Life insurers can be a valuable resource for managers or human resources professionals who want to provide the best possible support to an employee who is injured or ill.

For life insurers, most

employer engagement has traditionally occurred at the ‘on-claim’ stage. However, this is now shifting towards SAW and RTW support, with over 60 per cent of group life insurers working directly with employers to support RTW within a claim waiting period.

SuperFriend’s recently released resource Action Area 7: Engaging Employers in Stay at Work/Return to Work sets out strategies for life insurers in supporting employers during the often-challenging time when an employee is injured or ill.

TRAINING STAFF Mental health and wellbeing training for the super and insurance industry is essential for building empathy and skills to support people going through the claims process.

Funds and insurers will need to provide training and support for their own staff to better support members who find themselves in the stressful situation of being ill or injured without cover.

Both the superannuation and life insurance industries are going through major changes.

By working together, and better supporting their people with evidence-based training, they can make sure they look after the needs of those who matter most – members.

LIFESKILLS Lifeskills is a regular section in Investment Magazine.

Each month, we publish an independent column from an industry leader with insights into best practice in the group insurance sector. This page is produced with thanks to advertising support from AIA Australia.

OCTOBER 201 8

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2018 GROUP INSURANCE SUMMIT

highlights

Amid a tumultuous moment in the history of group life insurance in Australia, more than 300 industry professionals gathered in August to discuss how to provide more to members.

THE INSURANCE IN Superannuation Voluntary Code of Practice and proposed regulatory changes were high on the agenda at the event, held at the Four Seasons in Sydney. Industry leaders spoke of a need to better promote the value of the life insurance sector, to demonstrate how it has improved the wellbeing of members.

Here is some selected coverage of the sold-out event.

Life sector needs to ‘tell its story’

By Alice Uribe

The group life insurance industry’s struggle to effectively “tell its story” and promote the sector’s consumer focus prompted controversial Federal Budget proposals that might make insurance opt-in for superannuation fund members under 25 or those with low balances.

That is the view of senior executives in the life insurance and super industry who spoke on the closing panel at the recent Investment Magazine Group Insurance Summit in Sydney.

“If there is something we should learn – we actually have all said this – it’s that we haven’t done a good enough job of promoting the value of what we do,” said Damien Mu, the chief executive of AIA Australia. “So when these issues hit, we were left flat-footed, so this trust deficit has built because this has not been a rational debate.”

OCTOBER 2018

Much of the industry – including AustralianSuper, consumer group Choice, AIA, TAL and others – has opposed key elements of a set of Federal Budget proposals known as the Protecting Your Superannuation Package.

Of primary concern within the industry was the July 1, 2019, start date for implementation, because of the need for funds to renegotiate contracts with insurers.

Plans to make insurance opt-in for fund members under 25 and for those whose account balances are under $6000, and to cease cover for accounts that have been inactive for 13 months, could lead to higher premiums and also might disadvantage those needing cover, industry stakeholders said.

Matt Englund, head of workplace super at BT Financial Group, told the panel that BT Financial supported a “range of things” with regards to the proposals, and agreed with Mu that it is incumbent upon the industry to do a better job of promoting the good that it does.

“Why have those budget proposals come in the first place?” Englund asked. “[It’s] because we haven’t done a good enough job of engaging and telling our story. Insurance is story by story, member by member and claim by claim, and we haven’t done a good enough job of telling our story.”

Statistics from the Australian Prudential Regulation Authority show that the life insurance industry pays out about $8 billion in claims each year, with about $1 billion of that emanating from group insurance.

TAL chief executive Brett Clark said the budget proposals, along with the recent draft Productivity Commission report into the $2.7 trillion super sector had prompted the “biggest change that we’ve had to deal with for quite some time, at a policy level”.

“The final shape and size of that are uncertain and the final passage of that is uncertain,” Clark said. There are strong views in this room about where it needs to go and that creates some challenges in terms of setting direction for business.”

The chief executive of super fund giant Sunsuper, Scott Hartley, said group insurance was a “very good value mechanism for people to get life and TPD cover. But at the same time, be open and embrace the opportunity for change.

Clearly if we don’t do that, then we’ll lose potentially the right for insurance to exist within superannuation.”

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Reasons for delayed TPD claims surprise

By Ben Hurley

A totally and permanently disabled woman who had TPD insurance did not make a claim for four years because she thought it would erode her superannuation balance and jeopardise her eligibility for the disability pension, a group insurance executive told the Investment Magazine Group Insurance Summit at the Four Seasons, Sydney.

Trudy’s story emerged when Jenny Oliver, general manager for group insurance at TAL, began a research project surveying thousands of claimants to uncover why it was taking members an average of two years to lodge their TPD claims after they were disabled, and what insurers could do to help them get their money sooner.

Contrary to Oliver’s expectations, the survey found that out of six key possible reasons members delayed claiming, “I wasn’t aware my policy would cover my situation” and “I didn’t know how to claim” were the least common answers – at 26 per cent and 22 per cent of respondents, respectively.

At the top of the list was “I was not in the right frame of mind” at 46 per cent, followed by “I had other priorities at this

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time”, “I was planning on returning to work” and “there was a waiting period”, at 32 per cent, 28 per cent and 27 per cent, respectively.

“I had some preconceived ideas about why it was taking as long to claim as it was,” Oliver told the summit. “The research proved me wrong.”

When Oliver asked Trudy if anyone had questioned if she had TPD insurance at the time she became disabled, she replied that she had been asked, but she knew she was “good” because she had a life policy in her super.

When Oliver asked more questions to understand what she meant, it turned out Trudy thought her superannuation balance was her life insurance balance, and that this balance would pay for her funeral when she died.

She was also concerned that if she made a claim and it was rejected, she wouldn’t be able to claim the disability pension When Oliver asked more questions to understand what she meant, it turned out Trudy thought her superannuation balance was her life insurance balance, and that this balance would pay for her funeral when she died.

She was also concerned that if she made a claim and it was rejected, she wouldn’t be able to claim the disability pension.

“The barriers were immense and really quite emotional for her,” Oliver said.

Members who became disabled would often initially be focused on their health and recovery, Oliver said, while drawing on their own resources and their sick leave. Often, they were planning on returning to work and were not considering the prospect of total and permanent disablement, she said.

Later, rising financial pressure as their condition continued or deteriorated led them to begin the claims process.

“This was an interesting insight for me, because I know as an industry we’ve been spending a lot of time…making the claims process quicker,” Oliver said.

There are opportunities for insurers to look at the period before members claim, she said.

Key influencers in helping members make the decision to claim were healthcare professionals at 83 per cent, family and friends at 68 per cent, and the employer or employer’s HR department at 41 per cent.

Members’ accountants and lawyers were at the bottom of the list, at 12 per cent and 8 per cent, respectively.

“The people they trust are the ones, at the moment, whom we see as having the real opportunity to help suggest the claims process and suggest the opportunity there,” Oliver said.

Darren Wickham, general manager of group life product and pricing, investments and retirement incomes at TAL, said there was a range of misconceptions among claimants.

“There is still a misconception…among some lawyers and some advisers, that it’s better to delay…a TPD claim until you have had your workers compensation first,” Wickham said.

“Another potential factor is this misconception around Centrelink and the assets and income test, and there’s a concern that if you claim your benefit through superannuation that will jeopardise your disability support pension.”

This may have been the case in the past but the rules had moved on, Wickham said, while still recommending members get advice to clarify the details.

Insurers could consider contacting members proactively, informing them of their ability to claim, and supporting them through the process, Wickham said. Later this year, TAL will publish a study about using artificial intelligence to identify data patterns pointing to members who may be able to claim, he said.

OCTOBER 201 8

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GOVERNANCE

PRINCIPLES NEED REWRITE NOT RETHINK The latest consultation draft of the ASX Corporate Governance Council’s PRINCIPLES AND RECOMMENDATIONS could be more precise and better targeted but its aims are worthy.

SUSHEELA PERES DA COSTA HEAD OF ADVISORY | REGNAN

THE LATEST CONSULTATION draft of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations has generated a great deal of debate.

We’ve heard that the principles have been hijacked by special interests and that they don’t go far enough.

But in our view, we need to go back to first principles (pardon the pun) and remind ourselves what purpose these principles serve.

The ASX Corporate Governance Council was first convened in August 2002 in response to the Royal Commission into HIH Insurance and its demise, with principles following quickly in 2003.

In these, corporate governance itself was clearly defined as the system by which companies are directed and managed, and through which accountability to owners is achieved. Our observations were that many of these were

novel, even for experienced directors leading some of Australia’s largest listed companies.

The context today is very different. Any guidance document competes for attention with diverse demands and published standards from regulators, stock exchanges, financial sector initiatives and institutional investors themselves.

New research from the Responsible Investment Association of Australasia revealed that $866 billion in assets under management for Australians were invested under a responsible investment approach.

This means that companies today field requests for information from a wide range of shareholders, each with differing interests, priorities and expectations.

This is where a strong set of corporate governance principles can help.

This helps companies prioritise against competing demands. Less helpful are

crowdsourced laundry lists of features.

The consultation draft for the fourth edition of the Principles and Recommendations could be more precise and better targeted, which has probably contributed to the at-times heated debate; however, it is important that these flaws not be conflated with a lack of legitimacy for some of the ideas the publication seeks to express.

“Social licence to operate” is an unfortunate term for the entirely routine observation that organisations need to navigate the appropriate tension across many different interests – customers, lawmakers, employees, contractors and suppliers are among these.

For some of these stakeholders, some of the time, the relevant currency is trust, not cash (or other tangible assets). Referencing this concept within the principles acknowledges the challenges companies face in this balancing act.

If the level of detail in the principles seems in parts to stray from the intended purpose, this can be resolved through…judicious streamlining

OCTOBER 2018

It underscores to companies that shareholders recognise the value of their efforts to build, protect and grow this trust. Its inclusion among the principles is important to counter a common misapprehension that shareholder and stakeholder interests are necessarily at odds.

If the level of detail in the principles seems in parts to stray from the intended purpose, this can be resolved through clearer explanation, better-targeted expectations and judicious streamlining.

Clear distinctions between what is required of companies, what is recommended of them, and what is supporting material, for explanatory purposes, would greatly help.

The effectiveness of the principles relies on widespread acknowledgement of each recommendation’s rationale, not on reluctant compliance with things that seem like arbitrary rules.

As representatives on the ASX Corporate Governance Council, investors are poised to shape the final form of the fourth edition. They can support a document that presents a robust rationale for each recommendation it prioritises.

They can be selective in the disclosure called for, recognising that the scarce commodity for all of us in 2018 is not information but attention.

They can emphasise that diverse corporate governance arrangements can deliver the transparency, integrity and accountability that they seek.

They can also acknowledge that the principles are only a means for streamlining the communication of their expectations to listed companies. Many carrots and sticks, levers and guy ropes lie elsewhere in the investorcompany interface.

investmentmagazine.com.au

INVESTMENT MAGAZINE

FIDUCIARY INVESTORS SYMPOSIUM NOVEMBER 19-21, 2018 RACV HEALESVILLE VIC LIQUIDITY AND THE ALCHEMY OF RISK The Investment Magazine Fiduciary Investors Symposiums are designed to examine the management of fiduciary assets in both investment strategy and implementation, including the latest thinking relating to asset allocation, risk management, beta management and alpha generation.

OPENING PANEL | PRIVATE MARKETS AND PUBLIC MARKETS: A LOOK INTO THE FUTURE In this fireside chat, we will hear how the Future Fund: • ensures an organisational structure consistent with investment opportunities • stays nimble and efficient as part of a growing collaborative team • uses technology and risk insights to improve its investment process

DAVID GEORGE Deputy chief investment officer, public markets, Future Fund

WENDY NORRIS Deputy chief investment officer, private markets, Future Fund

REGISTER NOW

fiduciaryinvestors.com.au CONTACT

alex.proimos@conexusf inancial.com.au Ph 02 9221 1114

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MIND THE

tension The chairman of J.P. Morgan’s Asia Pacific Advisory Council, Rod Eddington, spoke to Investment Magazine about addressing escalating global trade tensions.

By Alice Uribe

Q: YOUR SESSION AT THE ASI 2018 SUPER INVESTMENT CONFERENCE IN AUGUST WAS CALLED “TRADE TALK”. HOW IMPORTANT A FACTOR IS TRADE IN THE CURRENT STATE OF MARKETS? A: Markets hate uncertainty and there’s significant uncertainty about what the future global trading regime is going to look like. It will affect economies, currencies and individual companies.

I think there’s no doubt that increased protectionism is bad for markets and consumers. It means higher prices for consumers and barriers to trade. There’s a much greater chance of that happening now than there has been over the last decade, because the American Government is no longer driving an open, global trading regime. And the Brexit outcome is still uncertain.

A trade dispute between America and China has enormous implications for us here in Australia. China is our biggest trading partner and the US is our most important strategic partner and has been since the Second World War. When two entities that are so pivotal to Australia’s wellbeing are disagreeing, we need to follow that dialogue very carefully and try to understand what it means for us.

OCTOBER 2018

Q: WE’ VE SEEN CENTRAL BANKS AROUND THE WORLD SUPPORT MARKETS FOR SO MANY YEARS FOLLOWING THE GFC THAT INVESTORS NOW SEEM TO TAKE UNCERTAINT Y IN THEIR STRIDE. PERHAPS A TRADE WAR IS THE SPARK THAT UNSEATS THAT OPTIMISM? A: What markets are currently telling us is that they think these issues are going to be resolved. They take the view that President Trump is, at heart, a dealmaker.

But there’s a broader point. The Chinese say that when bad news comes, it doesn’t come as a single soldier but as a whole battalion. If there’s uncertainty around global trade, it adds uncertainty to markets, so something else that has nothing to do with global trade could trigger a bigger market reaction.

Q: HOW CAN SUPER FUND CIOS NAVIGATE THESE ESCAL ATING TRADE TENSIONS? HOW WILL IT AFFECT THEIR INVESTMENTS IN AUSTRALIA AND GLOBALLY? A: When I have informal conversations with CIOs (wearing my J.P. Morgan hat) they’re trying to understand where the current trade uncertainty will end up – will it get resolved sensibly, practically,

and intelligently? And, in the meantime, what does it mean for their investment strategy?

Greater protectionism has so many implications for individual companies, currencies and debt instruments.

Q: WHAT ROLE DO YOU BELIEVE AUSTRALIAN SUPER FUNDS HAVE TO PL AY IN INFRASTRUCTURE INVESTMENT? A: I was chairman of Infrastructure Australia for the first six years after it was established, so I’ve seen the sector up close.

Some people were critical of the super funds.

They said there’s no capital for infrastructure projects. My observation was there’s plenty of capital for good infrastructure projects.

If governments want super funds – which are natural holders of infrastructure assets – to invest in infrastructure projects, they need to make sure those projects are structured appropriately.

There seems to be growing discontent in the community that infrastructure still isn’t coping with the demands of a growing population.

That’s right, but the brutal facts of life are that greenfield investments are treated with great caution by super funds because construction risk is a real issue – we’ve seen that with light rail in Sydney – and patronage risk is a real issue, too. Privatising existing assets, where the construction risk has passed and patronage is understood, is an easier thing to do. And our super funds have been very much involved.

Q: HOW CAN COLL ABORATION BETWEEN ASSET OWNERS, CORPORATE AUSTRALIA AND GOVERNMENT BE POSITIVE FOR AUSTRALIANS AND THEIR RETIREMENT OUTCOMES? A: Infrastructure provides good, stable returns over the long term, which makes it a natural fit for retirement incomes and superannuation money. But asset owners, corporate Australia and government each have to understand what the others want from that investment.

investmentmagazine.com.au

A VOLUNTEERING DAY YOU CAN PUT YOUR HEART INTO The Wayside Chapel invites you and your colleagues to spend a day in Kings Cross learning about life on the streets and lending a helping hand to the most vulnerable people in our community. Come to hear about lived experiences of homelessness, learn about local social issues, and cook and serve a lovingly prepared meal.

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POLICY

LET’S TAKE AN EVEN BIGGER SHARE Despite outperformance, profit-to-member super has been in a defensive position for longer than we all care to remember.

Now is our chance to press our advantage.

EVA SCHEERLINCK CHIEF EXECUTIVE | AUSTRALIAN INSTITUTE OF SUPERANNUATION TRUSTEES

WE HAVE HAD to defend our sector’s governance structure and the role of employer and employee representation on equal representation boards.

We have had to defend boards deciding whether or not independent directors are right for them, instead of having a governmentmandated board composition.

Almost unbelievably, we have also had to defend our outperformance of retail (mostly bank and insuranceowned) super funds. Our stats have been questioned as has our asset mix.

We’ve spent decades on the defensive – and continuously delivering results for our members.

This year – in fact the last four months – has brought a significant shift in the

discourse. The Productivity Commission affirmed our sector’s consistent outperformance and for once the message got through.

It was freely accepted as fact.

Then came the fifth round of hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The commission’s observations about superannuation – in a 230-page report released in August – had a strong focus on fund governance, yet there was no significant criticism of equal representation nor of the role of unions or employer

RETAIL ROAST Indeed, the royal commission proved to be a damning indictment of retail super funds. The commission concluded that it was open to findings that eight retail funds and related parties (almost the entire retail sector) might have engaged in more than 150 separate instances of misconduct. These ranged from fee gouging to crossselling members into more expensive options to purposely delaying member transfers into better value MySuper products.

The report noted that compensation due to members for fees for no service alone could top $1 billion. In contrast, the commission identified two instances of possible

There exists now a real opportunity, for us to capitalise on our outperformance…and take our market lead to a new level

groups. There was no mention of the need for independent directors. Instead, structural and governance issues in the retail sector were called out.

misconduct involving two not-for-profit funds.

That’s why few were surprised when government conceded defeat on its

governance legislation requiring one-third independent directors on profit-to-member super fund boards and an independent chair. And last month, the government abandoned raising the retirement age to 70. So many of the things we have been staunchly defending seem, at least for now, to be safe.

NOW’S OUR CHANCE We are not, however, complacent.

The royal commission has signalled it will consider recommending a range of radical reforms to superannuation in its final report, due next February.

It has also posed a number of important questions concerning retail funds but also profit-to-member funds. AIST will carefully examine these questions and any recommendations the commission makes that relate to our sector.

With regard to governance, the counsel’s closing submission asks whether there are structures in the retail sector that raise inherent obstacles to trustees being able to meet their fiduciary duties. AIST’s answer to this is a resounding yes.

Retail trustees, with their directors (including independent directors) apparently more focused on returning profits to shareholders, were unable to protect members from fee gouging and other misconduct.

And we have seen that the regulators were unable to stop bad behaviour.

There exists now a real opportunity for us to capitalise on our outperformance and our governance structure that puts members first, to take our market lead to a new level.

This is an edited version of the opening address at AIST’s recent super investment conference in Cairns.

OCTOBER 2018

investmentmagazine.com.au

UPCOMING EVENTS

GOVERNANCE ideas exchange

Thursday, 25 October 2018 In a year when superannuation fund governance is facing more scrutiny than at any other time in its 25 year history, AIST’s Governance Ideas Exchange is not to be missed.

Hot topics to be addressed by industry leaders and experts include: • Royal Commission update: The key outcomes you need to be across • Culture: Why it matters and how to get it right • Information overload: getting the most out of your board meetings

Visit aist.asn.au/ideas-exchange-governance for more information and to register

Join us at Super's night-of-nights Wednesday, 5th December

Visit aist.asn.au/awards for more information and to register

FEAL & PIMCO Institute Scholarship 2019 FEAL is currently inviting applications for the FEAL & PIMCO Institute Scholarship. The scholarship opportunity is designed to help fund executives enhance their skills and knowledge, inspire new ideas, deliver keen insight and support their on-going professional development.

Made possible with the support of PIMCO, this scholarship provides a unique opportunity for participants to attend the exclusive PIMCO Institute, learn from leading academics and network with colleagues from around the globe. The three-day seminar emphasises content consistent with advanced academic study and incorporates a dynamic, team-based portfolio simulation exercise.

3 - DAY S E M I N A R 11 - 13 June 2019 Newport Beach, California

Applications close at 5pm (AEDST) Friday, 16 November 2018 TO PI C S I N C LU D E:

> Portfolio Management Simulation Exercise > Outlook for Global Financial Policy and Capital Markets > Credit Markets and Capital Structure > Evolution of Derivative Instruments > Equity Portfolio Construction

S U P PORT E D BY

> > > > > >

Critical Issues in Asset Allocation Emerging Markets: Issues and Opportunities Understanding Factor-Based Risk Metrics Managing Inflation Exposure Role of Alternatives and Absolute Return Investing State of the Housing Market

For more information contact FEAL on (02) 9261 5155 or visit:

www.feal.asn.au