APRA’s heatmaps have not discouraged innovative investment decisions: Rowell

LGIAsuper reduces allocation towards property, bonds and global equity

BY JASSMYN GOH

LGIAsuper has reduced its exposure to property, traditional bonds and international shares while increasing its allocation to infrastructure, cash, and Australian shares in a bid to increase risk-adjusted returns.

The superannuation fund said the changes took effect on 1 November and had introduced new asset class private capital to target higher-returning investments, as well as altering the mix of its alternative investments.

LGIAsuper chief investment officer, Troy Rieck, said the new allocations would provide greater transparency to members on their investments, provide more flexibility to invest, and better position members’ savings in the new investment environment.

“We are focusing on assets where we expect higher risk-adjusted returns to support our members in building their retirement balances and generating the income they need in retirement,” he said.

“Placing more emphasis on generating sustainable income from our diversified portfolios makes sense in a world when capital gains will be harder to generate.

“We are also working the assets harder, increasing the flexibility of the investment program and cutting investment fees, as every dollar we save in fees flows straight to members.”

Rieck said the reduction of property and international shares reflected market conditions and aimed to protect members from continued volatility.

He noted that the fund expected better returns from infrastructure in the coming years compared to property and would add to its portfolio over time.

“Current valuations also suggested rebalancing our share market portfolio in favour of domestic assets at the expense of our global portfolio, after a long period of being overweight in global shares,” he said.

“We keep the interests of our members at the heart of everything we do, and our focus on solid, long-term growth in a diversified portfolio enables us to respond to opportunities to ensure that our members can plan for their future in times of both prosperity and volatility.”

APRA’s heatmaps have not discouraged innovative investment decisions: Rowell

The Australian Prudential Regulation Authority’s (APRA’s) superannuation performance heatmaps will not and has not discouraged trustees to make innovative investment decisions, the authority believes.

Speaking at the Financial Services Council’s (FSC’s) investment conference, APRA deputy chair, Helen Rowell said the heatmaps had not driven a material shift in investment strategies nor had it led to a shift to wholesale indices.

“We don’t see it as having driven material shift in investment strategies so far. We haven’t seen the shift to wholesale index hugging that people said that would happen as a result and nor do we think that should happen,” Rowell said.

“At the end of the day the measures are risk based, they are meant to assess the performance against the strategy that the trustee has selected for their members and so trustees still have that flexibility to make those decisions about the risk return outcomes for the appropriate members and shape their strategy accordingly and make those key decision on how they implement that in terms of liquid and illiquid, or passive versus active strategies.

“If those strategies aren’t delivering value and outcomes relative to the cost and risks taken then it suggests there’s a need to revisit and a change to the strategies are needed.”

Rowell said while APRA was surprised at the “noise” that was created when the authority announced its heatmaps, it had “seen good things” so far.

“The industry has responded really well and most of the industry has turned its minds to actually improving outcomes in investment space, reducing fees etc. When we did the update in June 2020 we were able to show that more than 40% had received a fee reduction in their MySuper product and that proportion has continued increased and you’ll see more change when we continue to release the update in December,” she said.

“We’ve also seen shifts in investment governance and implementation with a view to improving outcomes. For example, funds moving out of higher cost investment strategies and options where those weren’t adding value. We felt that the heatmaps were a game changer in terms of industry transparency and getting a better sharper focus on lifting member outcomes and that has been realised in our view.”

Commenting on concerns regarding benchmark hugging as a result of the Government’s Your Future, Your Super investment performance test, Rowell said she did not see a tension or trade-off between balancing obligations for members and having investment strategies that had good outcomes however it was measure and irrespective of its benchmark.

“The question fundamentally is what is the right investment strategy for your members? And whether it’s APRA’s heatmap or the government’s measures the trustees continue to have flexibility to set the strategy they think is right in terms of risk return outcomes for their members,” she said.

“Then they need to implement that in a way and monitor the delivery of that to make sure they’re delivering the value and outcomes they expect. If they’re not meeting those benchmarks or not delivering value for the strategy that you’ve implemented then you have to ask the question on whether this is the right strategy and if not, change it.”

Geared Aussie equity super funds best over five years

BY JASSMYN GOH

SUPERANNUATION funds focused on geared Australian equities have performed the best over the last five years to 30 September, 2020, with an average return of 55.66%, according to data.

According to FE Analytics, when it came to super funds focused on a specific equity class, geared Australian equities was followed by small/mid cap Australian equities (52.01%), Asia Pacific ex Japan (50.16%), global equities (45.21%), and global hedged equities (45.05%).

On the other end of the scale, it was global property that performed the worst at 7.36% followed by Australian property at 23.59%, and infrastructure equities at 27.7%.

While the Australian geared equity sector had performed the best over the five years to 30 September, 2020, it still had not recovered losses induced by the COVID-19 pandemic.

At its peak, the sector returned 125.9% since 30 September, 2015, to 20 February, 2020. However, the sector was currently still down 31.1% since the February peak.

The top five performing geared Australian equity funds in the sector were all CFS funds.

The top performers were Commonwealth Select Personal Supa - Colonial First State Wholesale Geared Share at 119.27%, CFS FC PSup Colonial First State Wholesale Geared Share at 99.41%, CFS Colonial First State Geared Share Select at 97.27%, CFS Geared Share ROSCO at 90.55%, and CFS FC Psup Colonial First State Geared Share at 89.52%.

The top five holdings for the Colonial First State Wholesale Geared Share were CSL, BHP Group, Commonwealth Bank of Australia, Woolworths Group, and National Australia Bank.

None of the top-performing funds had recovered losses from the sell-off earlier this year induced by the coronavirus pandemic.

The Commonwealth Select Personal Supa Colonial First State Wholesale Geared Share is still down 24.53% from its peak on 20 February, 2020 at 190.54%.

On the other end, it was two Perpetual funds that were the bottom performers.

Perpetual WF Super Perpetual Geared Australian returned 9.32%, followed by Perpetual Select Super Geared Australian Share Investment Option (18.56%), CFS FC Psup FirstChoice Geared Australian Share (33.29%), AMP FLS and CS Future Directions Geared Australian Share (34.15%) and AMP Flexible Super Super Future Directions Geared Australian Share (37.36%).

Significant superannuation lessons from McVeigh v Rest lawsuit

BY MIKE TAYLOR

There are significant implications for superannuation fund trustees, their executives and the relationships between superannuation funds and their investment fund managers flowing from the recent settlement reached between Rest and its member and ecologist, Mark McVeigh.

That is the assessment of legal firm, Mills Oakley which argues that because the case was settled it has not succeeded in establishing a legal precedent it has nonetheless established a standard against which other superannuation funds will be measured.

Mills Oakley partner, Mark Bland, has written that while the lack of a court determination is an issue, the settlement appears to have ensured the active of management of climate change risks by superannuation funds.

This case promised the first judicial consideration of the disclosure and conduct of obligations of superannuation trustees as they relate to managing climate change risk.

A judgement would have provided certainty for trustees who are operating in a highly uncertain environment. The requirement for action on climate change risk by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) is at variance with the views expressed by members of Government. Also, the strongest voices for addressing climate change risk at each of ASIC and APRA will have departed by the end this year.

“While settlement is, in one sense, a lost opportunity for certainty, it has the direct impact of setting the $60 billion in Rest on a course where climate change risks are actively managed. It also sets a standard against which other funds can expect to be measured by their members,” he wrote.

“The claim was also based on conduct prior to July 2018, so any judgement may have been highly fact specific and related to expectations at that time, which have shifted considerably. While the commitments made by Rest do not appear to be directly enforceable, the mechanism of a press release amounts to a representation that, if Rest were to depart from privately, would result in misleading or deceptive conduct.”

Bland wrote that funds that are lagging in the management of environmental, social, and governance (ESG) related risks will be carefully considering what steps they will need to take to avoid being the next target of such an action and to ensure they don’t see members exit the fund in favour of funds that are actively managing climate change risk.

“Funds should be careful, however, in rushing to make commitments in response to member pressure. Not only could the failure to keep to promises cause significant reputational damage, it would also likely amount to misleading or deceptive conduct,” he said.

Asia Pacific ex Japan super funds best at navigating COVID-19

BY JASSMYN GOH

Superannuation funds focused on Asia Pacific ex Japan equities were the clear winners in navigating through the COVID-19 pandemic as the sector average return was 9.49%.

According to FE Analytics, when it came to super funds focused on a specific equity class, the Asia Pacific ex Japan sector was the only sector to make a return since the start of the year to 30 September, 2020.

The second-best performing sector was the Australia small/mid cap equity sector at a loss of 0.37%, followed by global equities (-1.82%), global hedged equities (-3.76%), and alternative (-4.83%).

At the other end of the scale it was the Australian equity geared sector at a loss of 22.26%, followed by global property (-17.18%), infrastructure equity (-11.26%), Australian equity (-8.99%), and emerging market equity (-7.48%).

The top-performing Asia Pacific ex Japan super fund was MLC MK Super Fundamentals Platinum Asia at 15.25%.

This was followed by ANZ ASA BT wholesale Asian Share Manager at 15.07%, ANZ Smart Choice Super Platinum Asia at 14.83%, OnePath OA Frontier Personal Super Platinum Asia at 14.82%, and CFS FC W PersonalSuper Platinum Wholesale Asia at 14.52%.

Only two funds did not make a return – AMP SignatureSuper Future Direction Asian share (-1.02%) and AMP Flex LifetimeSuper and CustomSuper Future Directions Asian Share (-1.57%).

According to the Platinum Asia fund’s latest factsheet, the fund’s largest geographic weighting was to China at 44.9%, followed by Korea at 10.2%, India at 9.2%, Hong Kong at 8.2%, and Taiwan at 7.3%.

Consumer discretionary was the fund’s largest industry exposure at 26.3%, followed by information technology at 22.6%, financials at 11.1%, communication services at 10.1%, and real estate 5.5%.

For the month of September, Platinum said the key drivers of the fund’s performance was due to large holdings in Taiwan Semiconductor Manufacturing and Samsung.

“We expect Chinese-US tensions to persist, and that there will be winners from this ongoing tension and industrial displacement,” it said.

“In our view Samsung is a potential beneficiary, given the US-led effort to block Huawei’s sales of 5G network equipment.”

Industry superannuation funds canvass three-way financial advice fee split

BY MIKE TAYLOR

Industry superannuation funds are asking whether it is possible to split advice fees into three components, one of which is intrafund advice.

In a discussion paper forming part of Industry Funds Service (IFS) submission to the Australian Securities and Investments Commission’s (ASIC’s) current advice within superannuation project, the industry funds body has openly canvassed whether it is possible to split statement of advice (SOA) fees into three components.

It listed those three components as “(part intra-fund, part fee deduction from account, and part payable directly by the member)?”

In asking the question, the IFS document has argued that “a full retirement plan may involve advice on investment choice (covered by intra-fund), contributions and pension recommendations, including Centrelink, that we charge the member via a deduction from their account, and a non-super investment recommendation which the member needs to pay from their own funds, for example”.

“What is the expectation of a fund to accurately cost their advice in order to set their advice fees?” It asked. “Further, for advice that goes beyond intra-fund, how is it to be determined what the costs of those elements are in achieving cost recovery?”

The IFS document has pointed to areas where the organisation there needs to be more regulatory guidance and clarification and specifically asks whether retirement advice can be provided as intra-fund advice.

“This is where we see the biggest contention from the broader advice industry, and the widest variance of interpretation amongst super fund,” it said. “Some funds provide near full retirement planning advice under its ‘intra-fund offering’ and remain silent on advice relating to other products or a spouse. Other funds do not provide retirement advice in any form on the basis that it isn’t simple and cannot include strategies for a non-member spouse.”

The IFS paper also asked whether the charging rules have such a significant impact on how advisers are licensed, and hence which members needs are addressed and stated that: “More fundamental is whether the use of limited licensing to align to intrafund charging rules is creating challenges for advice models and advisers i.e. the scope of needs rarely falls neatly into one charging bucket. The limited adviser needs to assess whether the member sufficiently understands the impact of only receiving limited advice and then determine if it’s appropriate to proceed with giving it.

“This is a growing conflict for limited licensed advisers who often need to operate at the limits of what they are allowed to do, yet are qualified and capable of solving for more.

“Further the member’s expectations are for them to address their superannuation and retirement needs. Limited super licensing is not something that a consumer should be expected to understand. Instead advisers should be licensed to solve for super and retirement and scope up and down as required.”

Wage boost promises were not kept in 2014 when SG froze

BY JASSMYN GOH

The wage boost promise, when the superannuation guarantee (SG) was frozen in 2014, never materialised and workers were not compensated for their lost super, according to an enterprise bargaining agreement (EBA) analysis.

The analysis of 8,370 EBAs conducted by Industry Super Australia (ISA), found that while thousands of agreements were in place when the SG freeze was announced, most employers saw little need to renegotiate them to pass on the lost super as higher wages.

ISA noted that politicians were again claiming that cutting next year’s legislated 0.5% SG rise would lead to higher wages.

“The economic downturn makes wage rises far less likely now and most economists now concede that Australian workers are not going to receive any real wage growth over the coming years – making the super rate increase the only pay rise on offer for most workers,” ISA said.

“A worker on the cusp of retirement has already lost about $100,000 from previous super guarantee delays, further pauses will compound the losses.

“It is unfair that some politicians – who receive more than 15% super contributions – are once again cruelly asking workers to sacrifice their chance for security and dignity in retirement for nothing in return.”

The rate was scheduled to rise to 10% in 2015, and 0.5% each year after until it reached 12% in 2019. ISA said the delay could cost the average full-time worker in their 30s, $45,000 at retirement.

“The pay cut persisted for years, once those agreements expired the new deals did not include catch up wage increases to compensate for the lost super,” ISA said.

“In agreements certified after the super rate was cut, wage growth fell from 3.33% before the cut to 3.27%. This shows employers pocketed the lost super and workers’ total remuneration also went backwards.

“This paper confirms what Australians already knew, that most employers do not voluntarily return the loss of mandatory super payments as wages and the 2014 super freeze left workers worse off.”

Superannuation investment performance test a ‘blunt single-issue measure’

Superannuation funds that fail the Government’s proposed investment performance test will be unable to turn their eight-year performance around in one year and will be “very messy for all concerned”, according to Rice Warner.

In an analysis, the research house said underperforming funds would have to set up different structures to accommodate new members and this would be “very messy”. It said this suggested that the Government appeared to hope that these funds would exit the industry.

It noted that there were many ways funds would deviate from the new benchmark or encounter issues such as: • Most market indices are cap-weighted whereas funds should seek industries which will grow in future rather than those that grew in the past. Similarly if a fund wishes to avoid areas of the market which it considers to be over-valued, then it needs to be able to stay the course if they miss out temporarily from these shares becoming even more over-valued; • Funds can use derivatives to change their exposure – and this will alter their returns; • Funds can seek franking credits to maximise after-tax returns. They will participate in off-market buy-backs as these provide strong after-tax returns; • Funds investing in infrastructure will be measured against a benchmark which could be quite different from their holdings; • Lifestage products have multiple asset allocations. Each will be measured separately – and theoretically a fund could find itself underperforming in one area. Sorry, you can’t join our default for people under age 30 this year, but why not join the 30 to 45 group instead! • Some funds will revert to bland indexed investments thus avoiding the chance of underperformance – but forgoing the opportunities for higher performance from unlisted investments; • While we know that past performance is no guide to the future, funds cannot change the first six years on the forthcoming eight-year test. Even if a fund totally revamps its strategic asset allocation, moves some classes to passive and brings some funds in-house to cut costs, it will still have this past performance within its measured returns; and • Some funds have had poor returns (after fees) and they will have no option but to wind up. They will not be able to recover in two years when 75% of their return will still be poor. This applies even though new members will not receive the past performance. They could start again but are more likely to merge with a high-performing fund (even a very small one) and SFT into that option to preserve the good performance. The analysis also said that while strategic asset allocation was one of the largest contributors to investment performance, it was not being measured. It was possible, Rice Warner said, for a fund investing in volatile assets to provide a sound return and deliver on member targets but fail the benchmark test in some period.

“Conversely, a fund could invest entirely in cash and not be at risk of measured underperformance. Yet, it would deliver a poor retirement outcome. This is an extreme example of some unintended consequences, and the reality is that few members would choose this option, but it shows how the new process could distort behaviour,” it said.

Some funds could also fail on investment performance yet do well in other areas such as retirement or life insurance. This meant that the test was a “blunt single-issue measure and there does not appear to be any leeway for tolerance”.

“The over-arching effect of the proposed measures would likely be to pressure funds to forgo opportunities for long-term outperformance to mitigate the risks of underperformance against a nominated benchmark,” it said.

Rice Warner said it was likely many funds would become passive on Australian shares and, in time, prices would be set by the trading activities of foreign investments, the retail investors and self-managed super funds.

“The new system will lead to changed behaviour. We hope funds stay the course and continue to seek alpha in unlisted asset classes. However, they will have to watch the benchmarks carefully and might use derivatives to protect against any major deviation from the fund’s own assets,” it said.

Link’s McMurtrie rebuts takeover consortium’s claims

BY MIKE TAYLOR

Link Administration outgoing managing director, John McMurtrie, has defended the company against suggestions that it has lost ground in the superannuation administration market through the loss of mandates.

Addressing the company’s annual general meeting, McMurtrie pointed to suggestions contained in a private equity-led takeover bid that the loss of mandates had weighed on the company.

He noted that the issues raised by the consortium included $800,000 of lost contract accounts including TWU Super, Care Super, Austsafe and Kinetic Super and reduced client accounts resulting from Protecting Your Super (PYS) and early release super (ERS).

As well, he pointed to the Government’s recently announced Budget initiative Your Future, Your Super which would see the stapling of existing super accounts to an individual member to prevent account duplication.

“While we recognise that these have had an impact on the financial results, I would add the following additional context,” McMurtrie said. “In the past 18 months we have resigned 15 clients on long-term contracts including AustralianSuper, Rest, and HESTA.”

“Together these clients represents approximately 6.3 million members and over 70% total annual contracted revenue earned in Australia.”

McMurtrie said the financial impacts of PYS and ERS had been highlighted in all the company’s results presentations and were well understood.

“By the time we enter the next financial year, we expect the majority of this immediate financial impact to be behind us. Conversely, we anticipate that the recent volume of regulatory change and increased regulatory oversight will create further opportunities for us, as we are able to offer superannuation funds a high-quality outcome underpinned by our leading technology, scale and breadth of service,” he said.

Contributions and asset allocation need personalisation: Russell Investments

BY JASSMYN GOH

Optimising contributions and asset allocation can help close the retirement gap in Australia, according to Russell Investments.

During a virtual roundtable, Russell Investments managing director, Jodie Hampshire, said personalising contributions and asset allocation would improve superannuation members’ chances of reaching retirement goals as currently most super funds were using a one size fits all approach which was not ideal.

The investment firm said accurately optimising voluntary contributions depended on the personal circumstances of each investor and the retirement income they were trying to achieve.

Its ‘Making Super Personal’ whitepaper said engagement from members was needed to obtain information to personalise contributions.

“By focusing individuals on the retirement lifestyle they would like to achieve (rather than complex investment decisions), the entry into superannuation can be significantly simplified and much more engaging,” it said.

On optimising asset allocation, Hampshire said that most Australians were defaulted into super options that significantly compromised their returns.

The whitepaper said the one size fits all approach ignored other personal information that could improve asset allocation, such as the super account balance, contributions, and the individual’s retirement income goal.

“Shifting from ‘one size fits many’ to ‘mass personalisation’ of investment strategy is a real ‘free lunch’. It provides a benefit without an associated trade off. It does that by removing the compromises in the current one-to-many approaches,” the paper said.

“By optimising asset allocation (removing the compromises of one size fits many approaches), our analysis shows more than two-thirds of those analysed would have higher projected retirement incomes, with some incomes increasing by over 30%.”

ASIC explains no action position on super advice

The Australian Securities and Investments Commission (ASIC) has revealed it did not take action against superannuation funds which it identified as having delivered defective advice but, instead, contacted them and asked them to fix the problem and then confirm they had done so.

Answers provided by ASIC to a key Parliamentary Committee have revealed the regulator has not and does not intend taking action with respect to the advice.

Answering questions on notice from NSW backbencher, Jason Falinski, ASIC stated: “ASIC has not taken enforcement action against any specific funds as a result of the advice review findings and it does not plan to do so.

“For the files where there was an indication that the member was at risk of suffering financial or non-financial detriment, we contacted the advice licensee of the advice provider requesting them to review the advice and where required, remediate those affected members. We asked advice licensees to confirm that they had undertaken the appropriate steps and to provide us with an update on the outcome.”

ASIC referenced its financial advice by superannuation funds project which it said included a review of personal advice provided to 233 members of 21 industry, retail, corporate and public sector superannuation funds.

“In the review we assessed 32 files recording advice that was provided under an intrafund arrangement, 68 files recording advice that was scaled/limited in scope but not provided under an intra-fund arrangement and 133 files recording advice that was comprehensive in scope,” it said.

“The findings from the advice review identified the need for improvement in the advice provided to members of superannuation funds. For most files, that did not demonstrate full compliance with the best interests and related obligations, this was due to procedural, disclosure or record keeping deficiencies.

“However, the file did not indicate that the member was at risk of suffering detriment as a result of the advice. For a smaller number of files (36) that did not demonstrate compliance with the best interest duty and related obligations, there was an indication that the member was at risk of suffering detriment as a result of the advice.”

It said it was with respect to those instances of advice that it had “not taken enforcement action against any specific funds as a result of the advice review findings and it does not plan to do so”.