Volume 12 Issue 04
Fund mergers Johnson Winter & Slattery
Super & property settlements HopgoodGanim
THE ADVOCATE Debra Mika, Aware Super
Class actions Published by
Budget 2020-21 Equity portfolio evolution
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Contents
www.fssuper.com.au Volume 12 Issue 04 | 2020
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COVER STORY
THE ADVOCATE Debra Mika, chief of staff, Aware Super
18 NEWS HIGHLIGHTS
FEATURES
CLUB PLUS CHANGES INSURANCE FEES
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The $3 billion industry fund for club workers has announced significant changes to its insurance
That formula Alex Dunnin
offering with group insurer OnePath.
STAKE TAKES ON MILLENNIAL SUPERANNUATION
05
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Stake has announced its plans to take on the super industry to give younger investors a simple, low cost way to have their own self-managed super fund.
MLC SUPER OVERHAULS FEES
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Class actions and super Sean Cookson
MLC Super introduced a number of management and administration fee changes for a broad
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range of products that took effect in November.
ONEPATH WINS NEW MANDATE
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OnePath has won a group insurance mandate for a well-known football association, replacing
Budget 2020-21 and super
incumbent insurer Resolution Life.
AWARE IN-HOUSES FUND ADMIN
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Aware Super is implementing a new suite of technology products that will allow it to in-source member experience, including administration, so far done by Mercer.
FS Super
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THE JOURNAL OF SUPERANNUATION MANAGEMENT•
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Contents
www.fssuper.com.au Volume 12 Issue 04 | 2020
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Welcome note
THAT FORMULA
Alex Dunnin, executive director, research and compliance, Rainmaker Information
The formula for underformance will compare the overall performance of MySuper products against a weighted average of asset-class indices.
Published by a Rainmaker Information company. A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editors Karren Vergara karren.vergara@financialstandard.com.au Graphic Design & Production Samantha Sherry samantha.sherry@financialstandard.com.au Shauna Milani shauna.milani@financialstandard.com.au Technical Services Elizabeth Thomas elizabeth.thomas@financialstandard.com.au Advertising Stephanie Antonis stephanie.antonis@financialstandard.com.au Director of Media & Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Director of Research & Compliance Alex Dunnin alex.dunnin@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au
FS Super
The Journal of Superannuation Management ISSN 1833-9573 All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Super are not necessarily those of Financial Standard or Rainmaker Information. Financial Standard is a Rawinmaker Information company. ABN 57 604 552 874
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THE JOURNAL OF SUPERANNUATION MANAGEMENT•
News
VALE SUSAN RYAN AUSTRALIANSUPER OPTIONS DOWNGRADED
News
FAT CAT SUPER FUND LIST REVEALED PUBLIC SERVANTS CAUGHT IN SG BUNGLE
News
CFS TAKES BEST CUSTOMER SERVICE NOD VFMC HIRES NEW CIO
News
RUSSELL INVESTMENTS LAUNCHES GOALTRACKER NEW C-SUITE TO LEAD MTAA SUPER AND TASPLAN
News
BT SHUTTERS WEALTH CONNECT BUSSQ CHIEF TO EXIT
News
VANGUARD TO CULL INSTO MANDATES, PIVOTS TO RETAIL SUPER AMP CAPITAL LOSES ANOTHER MANDATE
News
LGIASUPER ALTERS ADMIN FEES, ASSET ALLOCATIONS BANK UNDERPAYS STAFF SUPER TOTALING $11M
FS Super
Why? The #1 question when portfolios don’t deliver as expected. THE RISK REPORT has answers. New analysis of 200+ institutional portfolios reveals 6 common drivers of unexpected results. Download the full report at northerntrust.com/theriskreport
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White papers
www.fssuper.com.au Volume 12 Issue 04 | 2020
WHITE PAPERS
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Administration & Management
SUPERANNUATION FUND MERGERS By Simon Haddy, Johnson Winter & Slattery
With mounting pressure from the regulator and the burden of admin costs, super funds are merging more often than before. At least 28 have taken the step since 2014.
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Administration & Management
COMPLAINTS HANDLING: A BOARD RESPONSIBILITY By Mark Standen, MinterEllison
ASIC has released updated internal dispute resolution guidance clarifying new enforceable standards and requirements.
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Ethics & Governance
WALK THE TALK: ON ENGAGEMENT AND PROXY VOTING By Bjorn De Smedt, ISS
Exercising shareholder voting rights and engaging with executives are primary mechanisms for investors to influence investee companies.
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Ethics & Governance
ESG COMPLIANCE DURING A PANDEMIC By Christine Covington, Corrs Chambers Westgarth
COVID-19 has justifiably absorbed management and board attention, but environmental and other activist groups have not shifted their focus during the lockdown.
SUPERANNUATION, PROPERTY SETTLEMENTS AND COVID-19
By Alison Ross and Leeann Murphy, HopgoodGanim
Couples engaged in property settlement negotiations prior to COVID-19 have a difficult choice: should negotiations be suspended until the crisis ends or should property settlement matters continue?
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Investment
EQUITY PORTFOLIO EVOLUTION
By Raewyn Williams and Joshua Mckenzie, Parametric
All sectors of the superannuation industry agree that successful equity investing entails some short-term pain to enjoy long-term gain.
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Investment
STARING DOWN THE BARREL OF AN UNCERTAIN FUTURE By Mark Lewis, BNP Paribas Asset Management
A few months is a long time in oil markets, evidenced by the tumultuous nature of 2020.
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Investment
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THE ROAD AHEAD: SECONDARIES MARKETS IN 2020-21 By Sean Cote, Allens
We will see a number of drivers influencing both sell-side and buy-side demand in the secondaries market.
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FS Super
Welcome note
www.fssuper.com.au Volume 12 Issue 04 | 2020
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Alex Dunnin executive director, research & compliance Rainmaker Information
That formula former Commonwealth minister for super once told A me that you can tell a lot about an industry by the things it complains about. Industry representatives have every right to advocate for their members. Just don’t confuse this advocacy that is defence of industry participants’ business interests with what will help the end consumer or fund members. The latest example of this is the reaction to the Your Future, Your Super package of reforms announced in the 2020-21 budget (see page 16). Like all reforms, most of the measures make sense and will likely be widely supported. But not all. Trouble happens when industry advocates take the bait and start producing endless policy papers criticising the measures without proposing much that is better. Stirring the chooks this time is the methodology formula Treasury says APRA will use to benchmark MySuper product performance. It must be said, however, that their idea to publish such a formula was glorious. Never before have I seen mathematical symbols such as ∏, } and ∑ together with super and subscripts in a budget document before. While the formula looks terrifying, for anybody unlucky enough to not have been a student in my maths classes when I was a school teacher 30 years ago, all it’s trying to say is that APRA will compare the overall performance of MySuper products against a weighted average of asset-class indices. These indices will make allowance for estimates of fees and taxes. It will no doubt be a massive transition for APRA, to go from esoteric prudential regulator to passing judgement and declare which should be kicked off the island. While the performance test is extraordinarily interventionist, I wager that millions of members would be gobsmacked to learn that super funds have never before had to pass one. Not how the formula works, but why we’ve only now got one.
Which means that the more super funds, or more correctly, their advocates, complain about the specifics of the formula, which index should be used and over what time period, the more it vindicates why this performance test is necessary. Rainmaker is taking such a hard line on this for one simple reason: super funds, on average, are bad at running investment options. Two-thirds of Aussie equities investment options failed to match or beat their asset class benchmark over three or five years. For international equities, the underperformance rate was 97%. For property it was 50% and cash it was 10%. As for fixed interest, you don’t want to know. Sure, Australia’s super funds have better success mixing asset classes. But within asset classes, all I can say is that while many are called, few are chosen. No wonder more funds are switching to self-management. None of this should surprise to trustees. But if it does, it vindicates why the regulator had no choice but to become more proactive. It goes without saying that if super fund investment managers can’t consistently beat their benchmarks then funds should switch to indexing, perhaps using whitelabelled ETFs. Or they should just shut down non-performing investment options. Either that or expect to be hauled before the Federal Court should a fund member launch another test case (see page 12), this time challenging how their fund’s investment menu was created and vetted. Such a case could literally tear apart some super fund business models. fs
The quote
But within the asset classes, all I can say is that while many are called, few are chosen.
Alex Dunnin executive director, research & compliance Rainmaker Information
FS Super
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News
www.fssuper.com.au Volume 12 Issue 04 | 2020
Remembering Susan Ryan
Club Plus changes fees
Jamie Williamson
T
Elizabeth McArthur
The $3 billion industry fund for club workers has announced significant changes to its insurance offering with group insurer OnePath. From 1 January 2021, members will see premiums on death, total and permanent disability and income protection cover reduce. Club Plus is also removing the insurance administration charge for insured members. The reductions are different for each age group. For example, those aged 31-45 will go from paying $1.95 a week to $1.70 on death cover, from 81 cents to 67 cents for TPD cover and from $2.76 to $2.37 a week for death and TPD. Those between 46 and 55 will next year pay $2.06 a week for combined death and TPD, down from $2.42. “The events of the past year have placed great strain on the insurance market. By working closely with our insurer, OnePath, we're pleased we could keep insurance costs down as much as possible while keeping the strengths of the product in place,” Club Plus chief executive Stefan Strano said. “We will continue to work with OnePath on ways to deliver the best possible product and service for our members.” Members with insurance will also see default waiting periods for short term income protection extended from 21 days to 30 days. The lump sum insured amount for short term income protection is reducing from 90% of salary plus super guarantee (SG) to 80% of salary plus SG. The fund said the changes to short term income protection waiting periods and sum insured amounts were made as part of the efforts to reduce premiums. fs
The quote
Her legacy includes improvements in the lives and financial well-being of millions of Australians.
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he former politician and superannuation industry veteran passed away on September 27. The superannuation industry is mourning the death of Ryan, former Association of Superannuation Funds of Australia chief executive and Australian Institute of Superannuation Trustees president, who passed away suddenly. Ryan is being remembered as one of the great minds behind the modern superannuation system, as well as a great politician, feminist and champion of women. Ryan contributed significantly to the super industry over the years, leading ASFA from 1993 to 1997, and served as AIST president for seven years to 2007. She was also a member of the Australian Council of Superannuation Investors for six years and a member of the ASX Corporate Governance Council from 2003 to 2007. Ryan also held the role of independent chair at IAG & NRMA Superannuation Plan until 2011.
Prior to her time in superannuation, and largely what she is best known for, Ryan enjoyed a successful career in politics as a key member of the Hawke government and the first woman to hold a cabinet post in a Labor government. Over the years, Ryan also served as Minister for Education and Youth Affairs, Minister Assisting the Prime Minister on the Status of Women and Special Minister of State. It was during this time that Ryan fought to end sex discrimination, sponsoring the Sex Discrimination Act, which was passed in 1984, and the Affirmative Action Act 1986. A steadfast advocate of equal opportunity, in 2011 Ryan was appointed Australia’s first Age Discrimination Commissioner – a title she held for five years, in addition to that of Disability Discrimination Commissioner. In a statement, ASFA chair Michael Easson said: “Her legacy includes improvements in the lives and financial well-being of millions of Australians. But she would hate anyone to be complacent. There's more to be done.” fs
Morningstar downgrades AustralianSuper options Kanika Sood
Morningstar’s ratings for AustralianSuper options saw nearly 86% of the total $180 billion slide to the lowest analyst grade of “bronze”. The super fund’s $135 billion balanced option, $13.5 billion high growth option and $7 billion stable option moved to bronze in an October 21 review by Morningstar director Tim Wong. The downgrades come as Morningstar puts its new ratings framework to work. Locally, Vanguard’s popular multi-asset funds slid from gold to bronze. Morningstar also recently downgraded Sunsuper options from silver to bronze. In AustralianSuper’s review, Wong noted its strong senior investment
team, fee negotiating skills and wellconsidered asset allocation. However, he also pointed to the turnover in internal investment teams (with investors leaving for other superannuation funds or investment managers), illiquid assets and capacity in Australian equities. “Our enhanced ratings approach emphasises benchmark-relative performance, and we are mindful that few multisector strategies have excelled against this marker. That said, AustralianSuper’s differentiated and relatively inexpensive portfolio remains worthy of attention,” Wong wrote. Morningstar switched to a new rating methodology on 1 November 2019 (gold, silver, bronze, neutral or negative). fs
FS Super
News
www.fssuper.com.au Volume 12 Issue 04 | 2020
Super fund execs accused of quasi-insider trading
RETIREMENT
Elizabeth McArthur
L Noonan retires Long-serving chair of Media Super Gerard Noonan retired from the post on September 24 but remains as a member representative on the board. Susan Heaney, former deputy chair of Media Super, stepped into the position of chair having joined the board in September 2013. Noonan, a former editor of the Australian Financial Review, was originally appointed chair in 2008 after the merger of two industry funds Print Super and JUST Super. He also served as president of both the Australian Council of Superannuation Investors and the Australian Institute of Superannuation Trustees and was a board member of the Federal Government’s advisory body, Innovation Australia. Noonan will remain on the board as a director for the present and be part of the oversight of the fund's plans to consider a merger with Cbus. The two funds are expected to make a call by the end of 2020. Heaney is the former president of industry body, Printing Industry Association of Australia, and is currently managing director of Heaneys Performers in Print. She also sits on the $6 billion fund’s audit and risk committee, and remuneration and nominations committee. "I'm looking forward greatly to taking on the role and working with fellow directors to continue the evolution of the fund," Heaney said. fs
FS Super
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The quote
This seems to me to be quasi-insider trading if it was to occur.
iberal MP Tim Wilson has accused executives at super funds of switching options during recent market volatility, in behaviour he likened to insider trading. During questioning of ASIC and APRA at the Standing Committee on Economics, Wilson suggested that some people working at super funds – perhaps privy to market sensitive information – moved money between options to benefit from the highs and lows of the ASX and the revaluation of unlisted assets. “Earlier this year there was a bottoming out of the ASX as a result of COVID-19, then there was a delayed period, in many cases, where super funds had unlisted assets for revaluation and that enabled people to move about money within funds based on knowledge or inside information to potentially profit,” Wilson said. “This seems to me to be quasi-insider trading if it was to occur.” CareSuper responded that investment choices of individuals are treated with confidence and that the fund has
a comprehensive conflicts management policy. Staff members that are aware of sensitive information are subject to blackout periods and cannot switch options until the information is also available to members. “I believe this is UniSuper, who have admitted that one member who is also an executive of the fund had one or more switch requests processed during the high and low periods of their fund to a total value of $445,368,” Wilson said. Wilson said AustralianSuper had six trustees, one fund manager and 78 staff move money during the period. A spokesperson for AustralianSuper confirmed that none of these transactions were against the funds’ policies and that it has the strictest policies on people having access to sensitive information and switching. NGS Super had three trustees make major transactions during the time and Rest had trustees move more than $1 million and an employee transact $465,999 between options. Cbus declined to provide the information Wilson requested. fs
Fintech takes on super with new hire Eliza Bavin
Stake has announced its plans to take on the super industry to give younger investors a simple, low cost way to have their own self-managed super fund (SMSF), naming a head of product. Stake announced the appointment of Kris Kitto as head of product for superannuation. Prior to taking the role, Kitto worked as an SMSF specialist at Intello. He has also worked as director at Superfund Partners and general manager of Superfund Wholesale. Most recently, he had been building a new SMSF offering for the next generation of Australian investors. He will now join Stake to build that offering under its master brand. “Self-managed super doesn’t need to be a stuffy domain for the wealthy and
mature cohort. As Aussies grab a hold of their financial health, it's time they had some transparency and choice around the 9.5% they contribute to super each month. What we’re building at Stake will give them that,” Kitto said. The hire comes as Stake takes the next step towards taking on the super industry, targeting the younger generation to gain access to the SMSF space. It said the move will enable more Australians to have direct access to their super and the ability to invest it, on their own terms. “Australia’s superannuation space is still slow, cumbersome and antiquated, so we’re looking forward to building something that will challenge and redefine the space,” Stake chief executive Matt Leibowitz said. fs
THE JOURNAL OF SUPERANNUATION MANAGEMENT•
News
www.fssuper.com.au Volume 12 Issue 04 | 2020
AMP and OnePath top Fat Cat super funds list
FE ES
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MLC Super overhauls fees MLC Super introduced a number of management and administration fee changes for a broad range of products that took effect this month. On November 1, management fees were reduced and commissions removed in the Access Pre Select Fund. Also on this date, commissions ceased in group insurance arrangements in MLC Wrap Super, MLC Wrap Investments, MLC Wrap Super Series 2 and MLC Wrap Investments Series 2. On November 2, MLC MasterKey Investment Service administration fees reduced for the MLC Cash Fund by 0.26% p.a. All other investment options’ admin fees reduced by 0.41% p.a. The same reductions applied to the MLC MasterKey Unit Trust. For example, administration fees for MLC MasterKey Investment Service for the MLC Vanguard Australian Share Index Fund also dropped from 1.13% p.a. to 0.72% p.a. All other investment options' admin fees reduced from 1.35% to 0.94% p.a. Across the two MasterKey products, investors can expect monthly rebates paid into their account except for the cash fund. Among the many changes in the MLC MasterKey Unit Trust, the management fee for MLC Cash Fund went from 1.06% p.a. to 0.80% p.a. On 23 November 2020, the number of family members that clients can link to their account will increase from four to six. fs
Karren Vergara
R The numbers
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The number of AMP products in this year's Fat Cat list.
etail superannuation funds provided by AMP and OnePath continue to charge high fees and deliver poor returns for members, the latest Fat Cat report shows. For the sixth year in a row, AMP continued to dominate robo-adviser Stockspot’s Fat Cat list, which assessed 600 products offered by 100 of the largest super funds. After accounting for performance net of fees for the last five years, 12 of AMP’s products appeared in this year’s worst-performing or “Fat Cat” list, followed by OnePath and Macquarie, which had 11 and five products named respectively. In the “Fit Cat” category or the best-performing funds, UniSuper (7), IOOF (5) and AustralianSuper (4) rated highly in terms of the best value for money and performance. Among the balanced funds, AMP Capital’s Dynamic Markets (-2.2% p.a.) was the only product in the red. OnePath’s OptiMix Conservative (1.7% p.a.), Zurich’s Capital Sta-
ble (1.9% p.a.), OnePath’s Balanced (2.2% p.a.) and MLC Inflation Plus Portfolios’ Moderate Portfolio 2 (2.4%) were the worst performers on a per annum basis. The best balanced funds were: WA Local Government’s Sustainable Future (6.9% p.a.), Australian Super Conservative Balanced (6.2% p.a.), IOOF’s MultiMix Moderate (5.7% p.a.) and Public Sector Super’s Income Focused (5.7% p.a.). In the aggressive growth funds category, which invest in at least 80% of growth assets like shares and property, AMP Capital’s Premium Growth (0.6% p.a.) topped the Fat Cat list, followed by six OnePath products, such as Select Leaders and OptiMix Balanced, which returned between 1.4% p.a. and 2.9% p.a. The best aggressive growth funds were: Prime Super’s Alternatives (9% p.a.), Unisuper’s Sustainable High Growth (9% p.a.) and High Growth (8.7% p.a.), Cbus’ High Growth and Hostplus’ Shares Plus (8% p.a.). fs
Public servants caught in SG bungle A government agency has botched superannuation benefit payments spanning a decade, affecting more than 56,000 employees who are owed tens and millions of dollars. The Northern Territory government owes about $39.5 million in superannuation contributions to the majority of current and past workers affected, according to its FY20 financial report. About 415 employees have been overpaid an estimated $7.1 million. The NT government flagged the bungle in December 2019 as a result of misinterpreting tax legislation and coding errors. The issues came to light after the Australian Taxation Office published advice relating to the application of superannuation guarantee (SG) to recreation leave loading, which then prompted the Department of Corporate and Information Services to review superannuation payments that ultimately led to the errors. News outlet for the public sector The Mandarin at
THE JOURNAL OF SUPERANNUATION MANAGEMENT•
the time estimated that about $30 million was owed, comprising $20 million in underpayments and $10 million worth of interest. Between January and June 2020, an audit was conducted to investigate the matter. Auditor-General for the Northern Territory Julie Crisp recently tabled the findings in parliament and blamed the lack of oversight for the errors. She wrote: “It is evident from the number of errors identified during this audit that since 2009, there has been no person/position in the Northern Territory government with responsibility for ensuring superannuation guarantee amounts have been paid correctly across the Northern Territory Public Sector in accordance with superannuation legislation.” “No-one that I or my Authorised Auditors have spoken to have stated that they were specifically responsible for ensuring superannuation was being paid in accordance with applicable legislation.” fs
FS Super
News
www.fssuper.com.au Volume 12 Issue 04 | 2020
New CIO for VFMC
CFS scores best customer service recognition
Kanika Sood
Karren Vergara
The chief investment officer of the $43 billion State Super has left the role to join the Victoria Funds Management Corporation. Gary Gabriel joined the VFMC investment team on October 26 as its head of the portfolio management. He will lead the group responsible for portfolio strategy and asset allocation, investment risk and implementing VFMC client portfolios. Gabriel reports to VFMC chief investment officer Russell Clarke. In his most recent role, Gabriel was the chief investment officer of New South Wales’ $43 billion State Super, which acts as the trustee for the State Authorities Superannuation Scheme (SASS), State Superannuation Scheme (SSS) and Police Superannuation Scheme (PSS). “[He was] responsible for the investment and actuarial teams and determining and executing the fund’s investment strategies, which currently total around $43 billion. This included developing investment policies and objectives, setting asset allocation, implementing and monitoring the fund’s investment arrangements,” a VFMC spokesperson said. His previous roles include head of private markets at Future Fund, head of investment strategy and private markets at UniSuper, general manager of portfolio strategy and risk at HESTA and Asia Pacific managing director for Wilshire Associates. He has over 25 years of experience in institutional investment, including investment strategy, portfolio construction, risk management, and investment management across global listed and unlisted asset classes. fs
C
FS Super
The quote
Among superannuation customers who felt understood, 60% plan to stay with the brand.
olonial First State has taken the top spot in a comprehensive member satisfaction and experience survey, bumping off AustralianSuper from the top. CFS has regained the top spot in the Forrester Research’s 2020 Australia Superannuation Customer Experience Index for its ability to provide members “effective, easy and emotionally positive experiences”. Sunsuper came in second, followed by BT Financial Group’s super offering and industry fund Rest. AustralianSuper dropped to number five in the Australia CX Index. Superannuation offerings from MLC and AMP took the sixth and seventh spots respectively. Forrester Research, a US market research firm, surveyed more than 2800 members of the seven super funds at the thick of the pandemic from May to July. The research firm took a deep dive in finding out how super funds earn loyalty by delivering quality experiences, particularly during a turbulent
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period and just as members jumped on the early release scheme. It assessed several categories like communication, and the emotional well-being of customers. Customer service, in terms of how a super fund handles issues, is deemed as the most important driver. Apart from the highly positive experience members highlighted, CFS also exceeded industry averages in terms of customer service, website and mobile app, investments and advisers, and communication. While AustralianSuper’s ranking plummeted, its score did not drop significantly, rather its competitors made large gains over the super fund in 2020. AustralianSuper still outperformed its peers in areas like communication, the report said. Sunsuper held onto second place thanks to improved scores in its customer service and website and mobile app capabilities. “Among superannuation customers who felt understood, 60% plan to stay with the brand, 60% will advocate for the brand and 61% plan to spend more with the brand,” the research found. fs
OnePath takes over group insurance mandate OnePath has won a group insurance mandate for a well-known football association, replacing Resolution Life. The AFL Players Association (AFLPA), which represents male, female and past player members, has appointed Zurich-owned OnePath to take over from 1 December 2020. “This arrangement is an extension of our partnership with the AFL Players Association, through our community program, Tackle Your Feelings,” Zurich said in a statement. Head injuries, such as concussions, are common in Australian football. Zurich said more research on the long-term impacts
of concussion is coming to the fore. “But core to our promise as an insurer is to provide coverage that’s appropriate to the needs of our customer segments, and to provide support in any way possible at claim time. Cover for concussion is important for this group and we are proud to offer it in this case.” Shaun Smith, a former AFL player, recently won a $1.4 million payout from his insurer MLC as a result of a serious concussion during his career. In May, the AFLPA extended its 20-year-long partnership with AMP to provide superannuation for over 3500 past and present AFL players. fs
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News
www.fssuper.com.au Volume 12 Issue 04 | 2020
Aware Super in-houses fund administration Kanika Sood
Northern Trust wins mandate Karren Vergara
Northern Trust was awarded a $19.8 billion pension fund mandate by a leading retailer, replacing a longstanding partnership with State Street. Marks & Spencer’s Pension Trust appointed Northern Trust to provide asset servicing solutions, such as custody, financial reporting and analytics, to the M&S Pension Scheme, a defined benefit pension scheme of which M&SPT is trustee. The scheme has about £11 billion in assets, making it one of the top 25 largest corporate pension funds in the UK. Northern Trust will also provide fund administration and analytics for M&SPT’s private market portfolio, as well as transparency over its environmental social and governance (ESG) risk exposures through its ESG Insights service. The scheme became a signatory to the United Nations Principles for Responsible Investment (UNPRI) in 2010. M&SPT head and chief investment officer Simon Lee said: “We require an asset servicing provider able to support the requirements of our broad, complex portfolio of investments and adapt to the scheme’s requirements as we progress through the de-risking journey. By appointing Northern Trust, we knew we were selecting a team and institution with the track record, technical expertise and long-term commitment to do that.” fs
A The quote
Aware Super plans to reduce its operating costs over time and pass on those savings to members through lower fees.
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ware Super is implementing a new suite of technology products that will allow it to in-source member experience, including administration, so far done by Mercer. The transition will take 18-24 months, with in-house administration likely to start in mid-2022. The fund signed a long-term contract with Bravura, for an initial term of seven years. It will use set of Bravura products, underpinned by Sonata Alta including a dedicated support team. Other Bravura products that the fund will use include AdviceOS, Babel SuperStream messaging and member and adviser digital offerings. “After a rigorous selection process, Aware Super selected Bravura as its technology partner for this key initiative. We look forward to working closely with Bravura to deliver exceptional outcomes for our members,” Aware Super chief executive Deanne Stewart said. Member experience includes fund administration, and communication and engagement with members – which will all be done in-house after the switch.
Aware already has a telephone contact centre in Melbourne while Mercer has provided certain communication services to some Aware Super members and employers, a spokesperson for the fund said. The fund said it has been running three separate administration systems (across a mix of insourced, outsourced and hybrid operating models) after integration of StatePlus and merger with VicSuper. “By reducing complexity and leveraging the latest technology, Aware Super plans to reduce its operating costs over time and pass on those savings to members through lower fees,” the fund said. Aware will use them for superannuation, income stream, unit trust and advice offerings. Bravura will also provide a dedicated Sonata Alta support team. Bravura Solutions chief executive officer Tony Klim said: “We are delighted to provide Bravura's world-class technology to Aware Super. Sonata Alta and Bravura's ecosystem of products are ideally suited to providing Aware Super unprecedented control, flexibility and a highly personalised member experience at scale to support their members for and in retirement.” fs
ACSRF underpaid SG to staff Eliza Bavin
Australian Catholic Superannuation and Retirement Fund underpaid SG to staff for about eight and a half years after the Australian Taxation Office updated its guidance, meaning the fund should have included annual leave loading payments paid in November each year in the base for calculating SG. However it did not do so. The error in calculation meant 165 current and former ACSRF staff was underpaid a total of $76,921 between October 2009 and March 2018, the fund confirmed in a statement to Financial Standard. The fund said it has paid annual leave loading SG since November 2018
and updated its payroll to avoid future occurrences. ACSRF sent the $76,921 (plus $46,821 in interest) to the ATO. The roughly $123,743 total bill was funded out of its staff salary budget, the fund said. Former staff of the fund this month received letters signed by its head of people and culture Sandy Rimagmos, alerting them of the SG shortfall remediation to their accounts, with a 10% p.a. interest on net shortfall as stipulated by the ATO. According to the letter, ACSRF enlisted KPMG to conduct a review of the payroll data up to 31 March 2018. fs
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MTAA Super and Tasplan reveal executive lineup Karren Vergara
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GoalTracker launches Elizabeth McArthur
Russell Investments has launched a new personalised super product, GoalTracker, replacing its MySuper offering as it eyes mandates from other funds. Managing director for Australia Jodie Hampshire said GoalTracker offers the kind of personalisation people might be used to from companies like Netflix, Spotify and Amazon – where algorithms predict what consumers may like by assessing what they have consumed in the past. GoalTracker members will select the type of lifestyle they want in retirement – from modest to comfortable to aspirational. Russell has visualised these lifestyles with things like travel destinations and the type of car they might drive or where they might be able to shop, depending on their level of retirement income. Members are even prompted to select how often they might like to dine out in retirement. Then GoalTracker determines how much income an individual would need in retirement to achieve those goals. Once the desired retirement income has been set, GoalTracker develops an asset mix and investment strategy to meet those goals. Hampshire said Australia’s defined contribution super system means the average person only has a modest government pension to fall back on in retirement if they do not save enough – unlike overseas where many companies and government agencies have defined benefit pensions funds. fs
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The numbers
$22bn
Expected combined assets of MTAA and Tasplan post-merger.
TAA Super and Tasplan have unveiled the new executive team that will steer the newly-merged entity into the future. The merger will officially take place on 1 April 2021 and create a $22 billion super fund. Ross Barry has been named chief investment officer. He moved from First State Super where he was head of systematic and impact investing. Incumbent MTAA Super chief Leeanne Turner will spearhead the merged super fund as chief executive as announced late last year. The rest of the c-suite is: chief operations officer Kathleen Crawford; chief strategy officer Ningning Lyons; chief of people and culture Robyn Judd; chief of governance, risk and compliance Amy Ward; and chief finance officer Grace Angeles. Current MTAA Super executive manager of investments Phil Brown assisted with the handover before stepping down in mid-October after 15 years of service.
The following will also depart from MTAA Super: deputy chief executive and executive manager of finance Michael Sykes; executive manager of operations Chris Porter; and executive manager of marketing for communications, education and advice Michael Irving. Tasplan chief executive Wayne Davy flagged last year he will leave the organisation after leading the Hobart-based super fund for five years. Chief operations officer and deputy chief executive Nick Connor, who was in the role for four years, will also depart. Tasplan’s executive manager of strategy Keryn Welch, chief risk officer Greg Hanigan, and acting chief investment officer Dave Stuart will also pursue other opportunities. More MTAA Super and Tasplan executives will exit once the merger is complete, the funds said in a joint statement. The combined fund’s corporate and trustee functions will be based in Canberra, with satellite offices in Tasmania and other locations. Administration services will be based in Hobart. fs
AustralianSuper dodges advertising scrutiny AustralianSuper is under heat for not divulging details of its $11 million marketing expense and how effective that has been in acquiring new members. Chief executive Ian Silk faced the Standing Committee on Economics chaired by MP Tim Wilson, staying mum about how the super fund with 2.3 million members spent its advertising and marketing budget in FY20. Silk said that he does not know what proportion of members came from employers defaulting workers into the fund and how many actively joined the fund after he was asked on several instances by the committee. The committee raised the issue of whether the fund’s $11 million
marketing spend was justified given the AustralianSuper couldn’t provide a breakdown of the conversion rate. Silk said providing details would be “detrimental to fund members” given that the industry is very competitive. Marketing and advertising activity, he said, has been “successful” as more than 400,000 new members joined last year. The biggest employer clients associated with AustralianSuper are facilities services company Spotless and labour hire companies. In divulging details of the $180 billion super fund’s marketing campaign, Silk was afraid competitors might learn from it, attract AustralianSuper members and consequently reduce the size of the fund. fs
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News
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BT cuts Wealth Connect, reduces fees Ally Selby
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BUSSQ chief to exit Karren Vergara
The $5 billion superannuation fund’s chief is stepping down at the end of 2020. BUSSQ chief executive Linda Vickers is retiring from the role and will be succeeded by chief operating officer Damian Wills. Vickers has been with the super fund for more than 20 years. BUSSQ appointed her as its first employer relations consultant; she rose up the ranks to become chief operating officer and the fund’s chief executive in August 2016. BUSSQ chair Paula Masters said: “Linda leaves BUSSQ in strong shape, and well-placed to build on its record of above average returns for members over the medium to longer term.” Under her watch, the industry super fund has returned members an average of 9.76% per annum since inception and currently has 83,000 members. “Since Linda joined BUSSQ as employer services manager in 1998 she has helped steer the group through the Y2K scare, the dot.com crash, the September 11 terror attacks, a global financial crisis and now the COVID-19 pandemic,” Masters said. Wills takes the reins from 1 January 2021. He has been chief operating officer since October 2016. Masters congratulated Wills, who she describes as having a long track record in the superannuation industry and has proven to the board that he has the leadership and strategic vision to guide BUSSQ into what is a complex but exciting future. fs
The quote
The Wealth Connect model in its current form is longer required.
T has proposed changes to its Wealth Connect business as Westpac continues to review its wealth businesses. It also reduced fees for some super members. BT’s Wealth Connect team provides general financial product advice and deals in life insurance, managed funds and managed investment schemes; platforms, wraps and portfolio services; retirement savings accounts; superannuation; cash accounts and term deposits; securities and structured alternative investments. In an internal memo presented to staff in mid-October and obtained by Financial Standard, BT announced the “Wealth Connect model in its current form is longer required”. In response to reduced client demand, the wealth giant announced general advice will no longer be delivered by Wealth Connect and its team of 50, and will instead transition to its customer relations team. Additionally, 34 wealth consultant roles across super retention, direct
wealth and platform engagement are also being made redundant. Separately, most BT Super members paid less admin fees and insurance premiums (except those with a balance less than $17,000 who saw a rise in admin fees) on October 1. Most members will pay a lower standard administration fee on their BT Super and BT Super for Life products. Those with more than $17,647 in their super will pay a lower standard admin fee, but those with less than $17,647 (and more than $4000) will pay more in admin fees. For example, members with a balance of $10,000 will pay $13 per annum more than they previously did. Those in the BT Lifestage investment option with an account balance of $50,000 currently pay $628 per annum in fees and costs, from 1 October 2020 that decreased to $573 per annum. On larger balances the saving is greater, members with $100,000 saved $140 a year and members with $250,000 saved $395 a year. fs
Rest climate change case dismissed Elizabeth McArthur
The Federal Court case brought by Mark McVeigh against Rest was dismissed. McVeigh and Rest have been ordered to each bear their own legal costs. McVeigh did not seek financial compensation from his super fund, instead asking Rest to make certain commitments to tackling climate change and to recognise its role in mitigating climate change as an investor. It seems Rest agreed with all of McVeigh's requests, making a trial unnecessary. In a statement, Rest acknowledged that climate change could lead to catastrophic economic and social consequences and is an important concern of its members. The fund also acknowledged that climate change is a direct, material and current financial risk. "Rest
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agrees with Mr McVeigh to continue to develop its management processes for dealing with the financial risks of climate change on behalf of its members," the fund said. It committed to achieving net zero carbon emissions by 2050 and to a series of other actions in relation to climate change, all of which the fund said McVeigh acknowledges and supports. This included measuring and reporting climaterelated outcomes in line with the Task Force on Climate-related Financial Disclosures and encouraging investee companies to do the same, and publicly disclosing the fund's portfolio holdings. McVeigh said the settlement gives him and Rest's members the reassurance that their retirement savings will be invested responsibly in the face of the climate crisis. fs
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Vanguard to cull several insto mandates
REPORT
Kanika Sood
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Super slips world ranking Australia’s pension system has fallen short of its world-class status, according to Mercer, which rated the $3 trillion superannuation industry a ‘B’. The Mercer CFA Institute Global Pension Index ranked Australia fourth out of 39 countries in its annual study, trailing behind the Netherlands and Denmark, which received high distinctions, and Israel, which placed third. Australia’s score decreased from 75.3 in 2019 to 74.2 this year, earning an overall B grade, meaning that while the pension system has many good features, it has areas for improvement that differentiates it from an A-grade system. (Mercer also attributed the drop in rankings primarily to a reduction in the net replacement rates published by the OECD.) Within the sustainability and integrity sub-indices, Australia ranked third and sixth respectively. Australia could improve its ranking in a number of ways, the research suggested, starting by increasing the pension age and requiring members take benefits as an income stream. Moderating the assets test on the means-tested Age Pension to increase the net replacement rate for average income earners, and raising the household saving and reducing the level of household debt, are other suggestions. The onset of the global pandemic has several immediate effects, leading to significant devaluation of asset values in the first quarter of 2020. fs
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The quote
This is an ambitious plan and it requires us to focus our long-term efforts on opportunities that enable us to better serve direct investors and their advisers.
he investment giant will focus on its in-house super offering and retail businesses, and turn its back from mandates with 12 local institutional investors. Vanguard will discontinue special mandates but will still operate in its pooled funds. “This is an ambitious plan and it requires us to focus our long-term efforts on opportunities that enable us to better serve direct investors and their advisers. As a result, Vanguard has taken the business decision to no longer offer Segregated Mandate Accounts (SMA) or customised solutions as an investment vehicle to institutional investors in Australia and New Zealand,” a spokesperson said. “Vanguard will continue to offer pooled fund solutions to institutional clients and will work closely with our existing institutional SMA clients to ensure a smooth transition program is put in place and find the best possible solution to their existing mandates.” It signals a pivot away from lower-fee
business lines such as institutional mandates to relatively higher-fee offerings. The latter include its activelymanaged unlisted funds launched in September 2019, and the November 2019 announcement of plans for a superannuation offering and April 2020 launch of a portal for direct investors. Vanguard was the second largest investment manager in Australia (behind State Street) with $140 billion in assets under management at March end. At June end, it had about $153 billion in Australian-sourced assets. In super, Vanguard manages money for at least three funds, including AustralianSuper (until this December) and State Super (until 2023). The AustralianSuper and State Super mandates totaled about $1 billion, Rainmaker data shows. In November 2019, it revealed plans to launch its own superannuation offering, saying both direct members and advisers would be involved in the product's distribution – though it did not comment on its launch timeline. fs
AMP Capital loses another mandate Elizabeth McArthur
A third superannuation fund has terminated its mandate with AMP Capital to manage to its ethical investment option. ESSSuper, the $30 billion government fund for the emergency services, terminated AMP Capital Ethical Leaders Balanced Fund as the sole manager of its Ethically Minded investment option. The move was effective from 15 September 2020. Legalsuper and QSuper have also recently axed AMP Capital from being the sole manager of each fund’s socially responsible investment option. Legalsuper chief executive Andrew Proebstl said the fund’s decision to terminate the agreement was due to concerns about investment performance
and because of recent reports about cultural issues at AMP Capital. In July, AMP took the AMP Capital Ethical Leaders Balanced Fund off its own investment menus for AMP super members. In March, the fund had just under $1 billion in funds under management. A performance update from June says the fund size is now around $595 million. The AMP Capital Ethical Leaders Balanced Fund charges a 1.15% per annum management fee and had returned 4.7% net of fees on a five year basis at June 30. Kristen Le Mesurier was portfolio manager for the fund, but she resigned in August for a new role. Darren Beesley and Fiona Manning were appointed co-portfolio managers of the Ethical Leaders Balanced Fund range in her place. fs
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News
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LGIAsuper alters admin fees, asset allocations
Listed bank underpays SG The Bank of Queensland has failed to pay several workers their superannuation benefits, in a failure that could potentially blow out to $11 million in back payments. The bank has already accounted for $2.4 million of superannuation owed to employees that has been forwarded to the Australian Taxation Office. BOQ told the ASX that it made an additional $8.6 million provision as the matter is still under investigation and “further work to be done to determine the full impact.” BOQ uncovered irregularities after an internal review of its superannuation payment process. It identified other potential issues that affect workers covered under an enterprise agreement. Employees covered under the 2010, 2014 and 2018 enterprise agreements are potentially impacted. BOQ said it will ensure employees are “remediated fully as a matter of priority as it completes a broader external wage analysis and review for enterprise agreement employees.” It has advised the Fair Work Ombudsman and the Financial Services Union of the errors, and engaged external third parties to assist with the analysis and remediation process. The FSU raised concerns with the bank about unpaid superannuation nearly two ago. While that issue was resolved, the bank failed to follow through and properly audit its payroll at the time. FSU national secretary Julia Angrisano said 750 workers have been under paid as BOQ failed to pay workers their correct base rates, overtime, penalty rates and full superannuation entitlements. fs
Karren Vergara
T
The numbers
$52
New annual admin fees for LGIAsuper members.
he $13 billion superannuation fund has cut administration fees and made changes to its investment strategy, which included reducing exposure to property and global shares and introducing a new asset class. As of November 1, LGIAsuper reduced its exposure to property, traditional bonds and international shares, and increased allocations to infrastructure, cash and Australian shares. Also part of its strategic asset allocation, LGIAsuper is introducing a new asset class called “private capital”, which will target higher-returning investments, and alter the mix of its alternative investments. LGIAsuper chief investment officer Troy Rieck said lower allocations to property and international shares reflected market conditions and aimed to protect members from likely, continued volatility. “We expect better returns from infrastructure investments in coming years compared to property and will be adding to our portfolio over time,” he said. “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.” LGIAsuper scored amber ratings for the performance of its MySuper Lifecycle Under 75 product in APRA’s first iteration of the MySuper heatmap, released late last year. Over a five-year period, LGIAsuper delivered net investment returns of 7.69% per year, but pitted against APRA’s benchmark, the product underperformed by 0.46% p.a., while the 75 Plus product underperformed by 0.44% per annum. Also in November, members paid less administration fees – from $1.50 per week or $78 per year to $1 week or $52 per year. Chief executive Kate Farrar flagged the fee changes in mid-2019, shortly after it partnered with global business process specialist Tech Mahindra as its back-office administrative platform provider. “We introduced a weekly fee in July 2019, at the same time as we reduced our variable administration fee, to make our structure for administration costs fairer for members,” she said. fs
MIESF chief executive to retire Jamie Williamson
The long-serving chief executive of Meat Industry Employees’ Superannuation Fund (MIESF) has announced his intention to retire. Bill McRobert will depart MIESF in March of next year. The decision brings to an end 13 years of leadership for McRobert, who took over in November 2007. MIESF chair Chris White described McRobert as the driving force behind the fund’s competitive “investment performance, very low costs and personalised service to members” despite challenges facing smaller super funds. “The fact that MIESF, while focused on providing straightforward MySuper benefits to meatworkers at minimal cost and at lower investment risk, has also been able to produce top tier investment performance,
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is a tribute to Bill’s skill and dedication,” White said. “On behalf of the board, staff and members, I thank Bill for his committed service and wish him well for the future.” Also commenting, McRobert said: “I am very pleased to have maintained the ethos of one of the longest established industrial superannuation funds.” “By retaining simple benefits, we have been able to operate as one of the lowest cost super funds in Australia. And our MySuper investment returns over one, three and five years ended 30 June 2020 are each in the top three of MySuper investment returns of all funds over those periods.” Rainmaker data shows MIESF, established in 1981, is home to about 18,000 members and has $877 million in funds under management. fs
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Sean Cookson vice president and managing director, APAC Financial Recovery Technologies
Class actions and super ustralia is the second most active A jurisdiction in the world for securities class actions, but millions of dollars are being left unclaimed by asset owners because of a lack of procedure around the litigation process. Leaving money on the table shouldn’t be the outcome for members, or underlying investors. For an asset owner, knowing if there are funds available to be returned as a result of a class action can be almost impossible without dedicated resources, for many reasons. Cross referencing share ownership history against ongoing class actions – that may have commenced years ago – is not something many funds or investment managers have the bandwidth to do, and unlike corporate actions the information required to research class action activity is splintered across many jurisdictions, organisations and entities. Firms are also challenged with being aware of potential actions. Often, the communication to notify investors of a potential shareholder action, is addressed to someone who left the firm many years before. However, that doesn’t mean that opportunities to recover funds that are available should be ignored just because the process is perceived to be complex. Ensuring all eligible funds are returned to an asset owner is part of the fiduciary duty of those entrusted with managing other people’s money. Fiduciary duty is invoked in many ways, whether in arguments around fossil fuel investment, climate action, or whether capital should be deployed on social projects that may have a great social outcome but ultimately return a
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lower investment than other options. Many of those lead to complex and multi-faceted discussions around the purpose of capital, and whether investing for member outcomes means excluding lower returning options in favour of higher yielding investments that may be more likely to cause frustration with members. In the wake of AMP’s reputational collapse, the threat of class actions against the Victorian state government, and ongoing actions against BHP and Treasury Wines, class actions have an even higher profile now than ever before. At the same time, the federal government is attempting to relax or permanently dilute continuous disclosure arrangements. Investors and the superannuation industry should be concerned about these encroachments on their rights. One super fund that clearly views the class action mechanism as important to their business and to member outcomes is HESTA. At present, HESTA has 21 class actions in the pipeline, including against Westpac, CBA, and an alleged foreign exchange cartel including UBS, Royal Bank of Scotland, JP Morgan, Citibank and Barclays. The Westpac issue is likely to be around a $1.5 billion penalty. For super funds, the actions are not simply about ensuring good governance of the businesses they invest in, but about returning money to the fund that it is entitled to through damages. Earlier this year, evidence at a parliamentary hearing into litigation funding showed that funds participate in class actions with two objectives in mind: to
The quote
The actions are not simply about ensuring good governance of the businesses they invest in, but about returning money to the fund that it is entitled to through damages.
recover losses, and to increase accountability of companies which it views as a fundamental part of its role as an active investor. Class actions are a process that enables shareholders to recoup their losses and to also spur increased governance in the company, leading to enhanced director independence, audit firm rotation, and insider trading controls. This is key – superannuation funds, by holding businesses to account through shareholder litigation, actually contribute to a more transparent financial system where the businesses themselves are less able to make vast profits while retail investors and fund members are left carrying the risk and losses. The super funds and institutional investors can help everyone – retail investors, mum and dad investors, and other managers – by ensuring listed entities operate in a transparent way – and therefore maintain transparency in the financial system. If continuous disclosure requirements are abolished, and at the same time superannuation funds and institutional investors fail to participate in actions against non-compliant businesses, the entire financial system is compromised. Nobody wins, and the curtain comes down again on corporate activity, keeping a company’s decisions – and its responsibilities – away from Australian eyes. fs
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Budget 2020-21
www.fssuper.com.au Volume 12 Issue 04 | 2020
Federal budget 2020-21 and super Superannuation was again in the firing line as new reforms left the industry bracing for more red tape. ederal Treasurer Josh Frydenberg F delivered the delayed budget on October 6, taking a leaf out of the 2018 Productivity Commission’s recommendations that proposed several reforms to the nearly $3 trillion super industry. Frydenberg unveiled four major changes: stapling, YourSuper comparison tool, an underperformance test, and accountability and transparency obligations. Any MySuper products that fail a new APRA-administered annual test twice in a row will not be allowed to receive any new members until they improve their performance. The prudential regulator will conduct benchmarking tests on the net investment performance of MySuper products. The products that have underperformed over two consecutive annual tests prohibited from receiving new members until a further annual test that shows they are no longer underperforming. Frydenberg argued that $100 billion was left in poor-performing products spread across three million accounts.
The measure will kick into action from 1 July 2021 with MySuper and then extend to all “trustee-directed” accumulation products outside of MySuper from 1 July 2022. “The new performance framework will now be the primary method for measuring underperformance in the superannuation sector and the APRA Heatmaps and the annual member outcomes self-assessment under existing law will be amended accordingly,” the government said, adding it puts a Productivity Commission recommendation into motion. Over time, other investment options which are made available by the trustee will also be subjected to annual performance tests. It will be calculated over an eightyear period, to account for longer-term returns. It will use after-fees and aftertax performance, and will take individual asset allocation in performance. “Products that underperform their net investment return benchmark by 0.5 percentage points per year over an eight-year period will be classified as
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The numbers
$100bn
Members’ money held in underperforming super funds.
underperforming. For MySuper products that were in place from 1 July 2014, their first performance test will be based on seven years of performance data. On an ongoing basis the test will apply over an eight year period.” Underperforming funds will have to inform their members by 1 October 2021. They will also have to provide them the YourSuper tool, where they will be listed as underperformers until they improve. The government is planning to fund this by increasing the levies paid by regulated financial institutions. Overall, it said it will provide $159.6 million over four years from FY21 to implement the reforms to superannuation. The ATO will develop a YourSuper portal to allow a new employee to pick their superannuation product from a list of MySuper products. Existing superannuation ac-
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Budget 2020-21
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counts will be "stapled" to member accounts to avoid mushrooming of duplicate accounts. This has been panned by Industry Super Australia in the past, which said it may encourage errant behavior from funds as they look to attract first-time super entrants, and will potentially worsen the problem for people currently in an underperforming fund. Lastly, superannuation trustees will be forced to act in the best financial interests of members and be more transparent in how they spend members’ money. The budget did not extend the early release of superannuation (ERS) scheme past 31 December 2020.
Many black holes in budget: Industry There were several missed opportunities in the federal government's 2021 budget, according to industry leaders in the industry. HESTA chief executive Debby Blakey said the budget directed many stimulus measures towards male-dominated industries and will do little to address entrenched social and gender inequality holding back the economy. “It’s particularly disappointing that the government did not look at childcare reform to broaden access to affordable, high-quality early education as this is one of the most effective ways to support the economic recovery and improve women’s workforce participation,” she said. Blakey said the proposals are a step in the right direction to help Australians – particular younger Australians – build their retirement savings and to make an informed choice about their superannuation fund. The $57 billion super fund’s members are aged 30 or younger and recognises that many are in the early stages of their working
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The quote
Superannuation account stapling means no more duplicate fees and duplicate insurance, creating a huge saving for people over their lifetimes. Xavier O’Halloran
lives and facing particular challenges as a result of this pandemic. Blakey added that measures like the JobMaker Hiring Credit and JobTrainer are critical to support the long-term financial security for young people and would welcome an extension of such incentives. The Association of Superannuation Funds of Australia is suggesting an alternative one-off test to weed out underperforming default funds in place of the government's recent proposals. ASFA's Lifting the Bar proposal will examine MySuper products and use APRA's annual Member Outcomes Assessment to determine whether a product is considered to be underperforming. The first stage measures fees and costs against a benchmark of 130 basis points (one standard deviation from the average MySuper fee). If the fees and costs exceed 130 basis points, the product would proceed to the next stage. Stage two assesses net investment returns and benchmarks funds in the bottom quartile of risk-adjusted returns that fail the first stage. An underperforming product will get the opportunity to state its case to APRA and explain why its MySuper authorisation should be retained. If it is unsuccessful, the MySuper authorisation will be revoked. ASFA chief executive Martin Fahy said Australia does not suffer from a shortage of good funds. It is imperative that any measures that are designed to address underperformance do not reduce competition, distort investment decisions or damage the nation building role of superannuation, he said. Australian Institute of Superannuation Trustees chief executive Eva Scheerlinck was a little more cautious in her response to the budget. “We will need to see the stapling scheme in more detail, but we do have a number of concerns. There is the danger of people being missold or stapled to an underperforming fund outside the default system. It is also a concern that there may be individuals who find themselves uninsurable because they are stapled to a fund whose insurance does not cover
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their occupation,” Scheerlinck said. Industry Super Australia expressed concern the government’s “stapling” initiative could see members tied to underperforming funds for life. “Stapling the money to a member would remove multiple accounts quicker and more effectively weed out underperformers. Underperformance is the biggest cost drain on member savings and dud funds need to be removed no matter what type of fund they are,” ISA chief executive Bernie Dean said. “With the government’s early release of super scheme sending millions of members accounts backwards every dollar in saved fees and improved returns is desperately needed and will ensure members get the maximum benefit of the legislated SG increase.” Super Consumers Australia was more positive about the reforms, with director Xavier O’Halloran saying the changes would likely leave people better off in retirement. “Superannuation account stapling means no more duplicate fees and duplicate insurance, creating a huge saving for people over their lifetimes,” O’Halloran said. “The government has rightly recognised that for stapling to work the system needs to support people to find good performing funds for their retirement savings. We look forward to working with the government as it develops the proposed YourSuper comparison tool to inform consumer decision making.” He also welcomed annual performance tests as a means to weed out poor performers, but cautioned that work needs to be done to make sure existing members are not disadvantaged. Financial Services Council chief executive Sally Loane said: “The government has risen to the challenge created by the current economic downturn and has announced targeted stimulus that will help businesses recover and create jobs. Importantly, consumers will be protected by comprehensive reforms to the default superannuation system, which will eliminate the scourge of multiple accounts and fees.” fs
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Cover story
www.fssuper.com.au Volume 12 Issue 04 | 2020
THE ADVOCATE Debra Mika, Aware Super
When employees and organisations align for a common vision and purpose, it can make a meaningful difference. Debra Mika tells Karren Vergara how that happens at Aware Super.
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hen the 2019/20 bushfires ravaged the country, destroying over 3000 homes and 17 million hectares of land roughly twoand-a-half times the size of Tasmania, Aware Super chief of staff Debra Mika’s response in coordinating organisationwide efforts was to prioritise, first and foremost, the safety of staff. This meant enabling them to take time out to ensure their property was safe and providing generous volunteering provisions. Not only did Mika rally support for frontline members, she coordinated fundraising efforts across the organisation, and engaged with the education sector and education department to see how the superannuation fund could do its part. “Some schools asked for musical instruments to be donated, so we conducted a drive among staff,” she says. Just as the bushfires were tamed, and without so much as taking a breather, Australia was upended by COVID-19. Mika, once again, had to formulate a practical and workable solution to curb the disruption, as well as how best to emerge stronger from the pandemic. The role of chief of staff has different remits for many organisations. Apart from high-level ad-hoc responsibilities, the post for Mika means having direct responsibility for corporate affairs, policy and advocacy, and internal communications. It’s also ensuring that chief executive Deanne Stewart and the executive team function effectively. “As an example, one of the important parts of my role is ensuring the executives are having the right conversations at the right time, so we are focused on executing the strategy and resolving issues in the organisation effectively using the constrained time that we have,” she says. Even with a full workload, senior leaders somehow managed to find the time to advocate and raise awareness on several issues that are important to their member base. More than two thirds of Aware Super members are women working in education, health, police force, emergency services and the public sector. “We see through our members the systematic disadvantage that women face just because of the way women’s experiences are different to men’s. We deal with that internally and externally,” Mika says. “We have an aspirational program of growth and focused on uplifting how we serve our members.” Internally, Aware undertakes immense groundwork to address how any type of gender imbalance manifests. It regularly conducts gender pay gap analysis and acts on it straight away; pays SG on the paid and unpaid portion of parental leave for up to 12 months; conducts diversity and inclusion programs that includes unconscious-bias training; and provides domesticviolence leave. “We have been a Workplace Gender Equality Agency employer of choice for gender equality for the last four years. Deanne is a Pay Equity Ambassador,” Mika explains. The range and breadth of initiatives consequently sets a strong foundation for Aware to engage with companies and advocate for change externally.
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“We joined the 40-40 initiative, which aims to have boards and executives that represent 40% men, 40% women and 20% of either gender on ASX200 companies by 2030,” she adds. The daughter of farmers, Mika grew up near Hamilton, Victoria, close to the South Australian border. At 18, she moved to Melbourne and studied science at Melbourne University, majoring in meteorology and mathematics. After graduating, she missed out on a role at the Bureau of Meteorology, which at the time had just three positions to fill. “By chance I went into technology roles in the life insurance industry and worked my way up, from computer operating to programming and project management,” she says. Mika spent several years based in Hong Kong, working for Colonial Mutual leading technology initiatives. Upon her return to Australia in 1997, she entered the superannuation industry, working for Superpartners, UniSuper and briefly as a consultant. She joined Health Super 10 years ago, which served the Victorian health and community services industries. She was brought in as a consultant at the time Health Super was contemplating a merger with First State Super and helped with that process. “While I was working on the Health Super merger and working full time, I was looking after my twins, who were in year nine at the time and I was completing my MBA,” she says. She held a variety of roles across the organisation that gave her insight into all aspects of fund operations: fund administration; service centre insourcing; products and strategy, and policy. In April 2019, First State Super and VicSuper flagged their intentions to merge, based on common values and a shared history in the public sector. First State Super and VicSuper began as public sector funds and eventually opened to the public; VicSuper in 2000 and First State Super in 2006. In mid-July of this year, the two super funds officially combined, with Stewart spearheading the newly merged entity, Aware Super, into the future. Aware manages an asset pool of $130 billion for over 1 million members, making it the nation’s second biggest super fund next to the $180 billion AustralianSuper. “We have the ability to bring investment capabilities in-house, as well as administration over the next few years. Scale has driven our fees down. VicSuper members saw fees reduce by 30%.” For 12 months, Mika focused her efforts on the merger until last July, when she became chief of staff. At the time of publication, Aware has confirmed that it is on track to merge with the $4 billion WA Super with 55,000 members on December 3. Former First State Super deputy chief executive Graeme Arnott was looking after the WA Super merger until he left on July 31. It is currently under the care of former VicSuper chief executive Michael Dundon, who took over as executive lead. Post-merger, Aware’s total assets under management will reach about $134 billion. Outside of work, Mika champions the right for women to access affordable housing. She chairs the Women's Property Initiatives, a not-for-profit housing organisation she’s supported since 2013, which helps create new beginnings for women facing homelessness by providing permanent and affordable homes and access to support networks.
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“In the private rental market, only one in a hundred private rental properties are affordable for a single mother who is on government benefits,” she notes, pointing to statistics relating to women WPI supports. WPI helps set up women so that they pay don’t more than 30% of their household income on rent. Through this initiative, Mika has seen disenfranchised women come out the other side: they’re able to go to university, start businesses, send their children to school and even buy their own home. “About 82% of single parents are women and 60% of those are low-income earners. Two thirds that approach homelessness services are women and half of those are escaping family violence,” Mika says. In addition to her work with WPI, Mika sees the rate of homelessness for women increasing much faster than the rate for men. “Women at the age of 55 and over are also at risk and it can happen to anyone, particularly when family violence and severe financial impact is involved,” she says. One in 200 Australians are homeless, according to the Homelessness Australia. Aware’s work in this sector centres on providing new or refurbished rental accommodation at 80% of the market rate, targeting essential workers like nurses, teachers, emergency services, aged care and childcare providers. It has invested $250 million thus far in affordable-housing projects and plans to increase this to $400 million in 2020. “Essential workers struggle to find quality, secure affordable housing near to where they work and Aware Super wants to be part of the solution,” she says.
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This year’s federal budget delivered a blow to homelessness services, slashing $41.3 million of funding from July next year. On a brighter note, the Victorian government recently pledged a record $5.3 billion to deliver affordable and social housing over the next four years. About 9300 new social-housing homes will be built and 1100 old public-housing units will be replaced, helping Aboriginal Victorians, pensioners, those with a disability, family-violence victims and single-parent families find their feet. Such startling statistics exposes a system in dire need of fixing. It is perhaps what fuels Mika and Aware to do the work that they do: to move the needle on Australia’s growing homelessness problem and shut the gender pay and superannuation gap. Aware has relentlessly called for removing the $450 per month threshold that prevents many casual workers receiving super. Abolishing this would equate to 220,000 women with $125 million in superannuation. It is also pushing for super to be paid on parental leave, couples to combine their super, and to mandate paid domestic-violence leave. “It is important to work with organisations that are aligned with your own values. I am extremely fortunate to have that with Aware Super and other organisations I have worked for, UniSuper being another one,” she says. Mika credits some outstanding leaders in the industry she has worked with who show “integrity, respect and genuine care”. In advising the younger generation she has mentored at Aware and others in her own time, Mika urges them to be clear about their vision and goals and where they want to go. “Early in your career taking those three things as touchstones – integrity, respect and care for people – will serve you well,” she says. fs
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Administration & Management:
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Superannuation fund mergers
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By Simon Haddy, Johnson Winter & Slattery
Superannuation, property settlements and COVID-19
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By Alison Ross and Leeann Murphy, HopgoodGanim
Complaints handling: A board responsibility By Mark Standen, MinterEllison
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: A number of superannuation fund trustees are navigating the complexities of a merger under a successor fund transfer, with the pressure to merge heightened by regulatory change and the impact of the pandemic. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
Superannuation fund mergers Is it time for a merger?
O Simon Haddy
n 1 July 2020, First State Super and VicSuper merged to become Australia’s second largest superannuation fund, managing $125 billion in savings on behalf of more than 1.1 million members across the education, health and public service industries. Further, First State Super also announced that it will merge with WA Super later this year, resulting in almost $130 billion in combined assets under management. With mounting pressure from the regulator and the burden of administrative costs, superannuation funds are making the decision to merge more often than before; at least 28 have taken the step since 2014. COVID-19 has placed additional pressure on superannuation funds to merge as a result of poor liquidity and asset prices, increasing unemployment (hence no super contributions) and the fast tracking of super withdrawals on compassionate grounds. Long lasting effects may include declining returns, reduced portfolios and membership bases. As members whose jobs have been affected by the pandemic seek assistance from their super fund, the higher the administration costs associated with this. To undergo a merger through the common process known as a ‘successor fund transfer’ (SFT), a super fund trustee must turn its mind to several key considerations.
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This paper aims to assist super fund trustees to navigate the pitfalls of a merger under an SFT, with the pressures to merge heightened by COVID-19 being hard to ignore.
Pressure to merge Since December 2019, APRA has produced a new performance appraisal system—heatmaps—designed to place pressure on those super funds that it has deemed to be underperforming. APRA has flagged that this mechanism will extend over time to insurance and choice products. Assistant Minister for Superannuation, Jane Hume, said in 2019 that funds with less than $1 billion should be considering their future. There are approximately 93 or so funds in this category. It is predicted that funds will merge rather than be shamed, and potentially litigated, by APRA.
Key considerations What is the most suitable type of merger for the super fund? It has been a fairly standard procedure for super funds to consolidate with other super funds by way of transferring member benefits in a fund either by member consent or, if the transfer is to a ‘successor fund’, by way of an SFT.1 However, as Equipsuper and Catholic Super demonstrated in 2019, super funds can also consolidate through an ‘extended public offer’ (EPO) process (which was used to establish a joint
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venture between the two separate super funds). An SFT is the direct transfer of a fund’s members (and respective benefits and assets) without member consent to an alternate fund on the basis that the member will have ‘equivalent rights’ in the successor fund. It typically takes nine to 18 months to complete. APRA must be notified as soon as practicable after the trustee makes the decision to engage in an SFT. Alternatively, the EPO process is a licence granted by APRA which allows a superannuation trustee to be the trustee of both non-public and public funds (that is, if a superannuation trustee can be the trustee of multiple funds). An EPO can also be used as a preparatory stage, consolidating the trustee and administrative bodies, while keeping the funds separate, until such time as they are able to merge under an SFT. This means that worrisome assets may not mean the death of the joint venture, as they can rectify any issues with assets, while combining administrative forces. This paper focuses on SFTs, as it is the more common mode of transfer.
Authorisation to undertake an SFT While the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) allow for SFTs, terms of the super fund’s trust deed must be looked at for any relevant power to do so. This power is not necessarily found in all trust deeds— the Federal Court recently found that a super fund purporting to undertake an SFT did not have the power to undertake this in its trust deed.2 If a super fund does not have the power to undertake an SFT, the trustee may seek an order from the court to amend the trust deed in order to do so.3 Courts have authorised trust deeds being varied to allow for the trustee to have the power to make SFTs in limited circumstances where it is:4 • a decision by the trustee to terminate the trust (including on a merger) and transfer to a successor fund which benefits the members of the trust • a decision by the trustee to terminate a product within the trust and transfer to a successor fund which benefits the members holding that product • a decision by the trustee to transfer to a successor fund which benefits the members falling within a group for which the trustee determines it is unable to provide competitive benefits at a competitive cost compared to a competitor fund that qualifies as a successor fund; or • a decision by the trustee to transfer to a successor fund which benefits the employer-sponsored members who are employees of a participating employer which has changed or decided to change the fund to which it makes super contributions from the trust to a competitor fund that qualifies as a successor fund. Courts have considered that these powers should be conditional on duties consistent with the general superannuation trustee duties; for example, exercising a
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trustee power such that one subset of members does not suffer a significant detriment compared to another, and providing notice and an explanation of the transfer.
Due diligence Like any merger, a transferring super fund will have to undertake thorough due diligence on the receiving fund, and vice versa, prior to signing a deal. If they do not, they risk a failure of post-merger integration. Trustees must ensure that they are realistic about time frames and leave sufficient time to deal with the issues listed below, which may have high stakes consequences if not dealt with appropriately. Key considerations include: • the rights of members • identifying differences between asset allocations in the respective funds’ investment options and, more broadly, differences in investment choices which may be indicative of wider cultural and operational inconsistencies • the transferability of assets between the funds • valuation of assets • uncalled capital commitments • legacy rights or obligations relating to specific assets; for example co-investment or most favoured nation rights • change of control triggers, transfer restrictions or other asset-level consequences arising from the merger.
Disclosure Like in any transaction, trustees will provide warranties in respect of the assets being transferred and such SFT agreements may require full disclosure of any underperforming assets. A super fund trustee has a number of duties, including: • the duty to exercise the requisite degree of care, skill and diligence • to act in the best interests of the beneficiaries of the super funds • to give priority to the interests of the beneficiaries in the event of a conflict of interest. As part of complying with these duties, a transferring trustee may need to make a receiving trustee aware of any issues to enable them to act in the best interests of members. Although the trustee does not have an obligation to seek the consent of its members in order to undertake an SFT, APRA has an expectation that both the transferring and receiving fund will disclose their intention to undertake an SFT and keep their members informed about a decision to conduct an SFT.5 Further, following the SFT, a super fund will have to provide a significant event notice to each member (see below). Together, the transferor and transferee will have to apply to have the SFT approved by APRA.
‘Equivalence of members’ rights’ The SIS Regulations do not impose a positive obligation on a trustee to consider an SFT, but instead impose re-
Simon Haddy, Johnson Winter & Slattery Simon Haddy is a partner and corporate lawyer with expertise in the infrastructure, utilities and real asset sectors. He advises owners, operators and investors on strategic transactions, including public and private M&A, privatisations, equity investment, joint ventures and funds management.
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Like any merger, a transferring super fund will have to undertake thorough due diligence on the receiving fund, and vice versa, prior to signing a deal.
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strictions or conditions which, unless satisfied, prohibit a trustee from undertaking an SFT.6 For a receiving super fund to be considered a successor fund, it must satisfy two requirements under the SIS Regulations: first, the fund must confer equivalent rights to the transferring fund and second, the trustee of the new fund must have agreed that the new fund will confer equivalent rights.7 Accordingly, an equivalency of rights analysis is necessary to determine whether a prospective super fund meets the statutory test of a ‘successor fund’ and that, essentially, no member is worse off from the merger. A trustee owes a fiduciary duty to exercise its transfer power in the interest of the members of the super fund.8 A superannuation trustee has a general obligation to act in the best interests of beneficiaries at all times. APRA’s position is that the equivalency of rights analysis should be undertaken on a ‘bundle of rights’ basis, rather than a line-by-line approach. It considers that equivalent rights means the rights acquired are to be equivalent, not equal. It has stated that: “... while the SIS Regulations require that equivalent rights be assessed on the basis of the member, APRA considers that it would be open to a [fund] to consider equivalent rights based on groups of members with common rights.’9
will be its chair. This was an issue that unravelled the Catholic Super and Australian Catholic Superannuation’s proposed merger in 2017. Similarly, Energy Super and Equipsuper’s proposed merger in 2016 when one trustee refused to have union representatives on the board of the merged fund. b) Insurance benefits, and whether the members will receive the same benefits post SFT. In considering this, super fund trustees will have to decide whether insurance policies will be transferred to the receiving fund. Trustees will also have to consider how to deal with: • outstanding claims • records and data. c) All the technical details related to transitioning investment portfolios, adjusting governance processes, outsourcing to third parties and reporting and communication issues should be addressed. d) Following the completion of the SFT, a trustee must provide a significant event notice to members that reasonably enables them to understand the nature and effect of the change or event. e) Regulatory implications at an asset level. Trustees should ensure that the aggregation of assets complies with Australian competition laws and any requisite regulatory disclosures are filed with the relevant authorities.
Post-merger issues
When the fund does not merge
Once a detailed due diligence and equivalency of rights analysis has occurred, key considerations for merging super fund trustees should be: a) Who will be on the board of the merged fund and who
If a super fund does not merge, it risks not being able to keep up with the mammoths of the industry that will reach an unprecedented size in the coming years, making them some of the largest funds globally.
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Super funds that have merged are achieving greater scale in funds under management; economies of scale across Australia’s superannuation sector have helped create savings of $4.5 billion over the past 13 years.10 Both ASIC and APRA have highlighted their intention to use their powers to litigate persistently underperforming funds. APRA has stated that, “in some instances, acting in the best interests of members will require underperforming funds to merge or exit the industry”. This means that: • ASIC can apply to the court if a trustee is not acting efficiently, honestly and fairly; a breach of which carries civil penalties. Civil penalties include pecuniary penalties, or a disqualification order. APRA can: • issue a direction where it has prudential concerns, including to removing or appointment of a responsible officer • apply to the court for breach of the ‘best interests’ covenant, which now carries civil and criminal penalties • apply for the disqualification of underperforming super fund directors, for any such period as the court sees fit. However, it is yet to be seen whether the courts will agree with APRA, or if APRA’s standards for trustees will be considered too onerous. While the Australian landscape is home to some mega-large super funds, there are also many funds managing assets below billions of dollars; these funds may soon have trouble competing, leaving them no choice but to be swallowed up by larger funds. fs Notes 1. Superannuation Industry (Supervision) Regulations 1994, reg 6.29. 2. APRA v Kelaher [2019] FCA 1521 at [867]. 3. Trustee Act 1936 (SA) s 59C, Trustee Act 1958 (Vic) s 63, Trustee Act 1925 (NSW), s 81(1); Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121. 4. Retail Employees Superannuation Pty Ltd v Pain (2016) 115 ACSR 1. 5. APRA SPG 227 Successor Fund Transfers and Wind-ups, 2017. 6. APRA v Kelaher [2019] FCA 1521 at [827]. 7. SIS Regulations, reg 1.03. 8. SIS Act, s 52(2)(c); Cowan v Scargill [1985] 1 Ch 270. 9. APRA SPG 227 Successor Fund Transfers and Wind-ups, 2017. 10.Productivity Commission, 2018.
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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What is a requirement that must be met for a successor fund transfer (SFT) to be undertaken? a) Fund members must have the opportunity to vote on the merger b) Members must have equivalent rights in the successor fund c) Fund members must sign a form to consent to the merger d) Members must have exactly equal rights in the merged fund 2. Which of the following must trustees consider in their due diligence process? a) Valuation of fund assets b) Transferability of assets between funds c) Legacy obligations relating to specific assets d) All of the above 3. Which statement best describes an SFT? a) A transfer of members once they have consented to a merger b) An extended public offer process c) A direct transfer of members without member consent d) A joint venture approved by the majority of members 4. When must APRA be notified of a trustee’s intention to engage in an SFT? a) As soon as practicable after the trustee makes the decision b) Within 12 months of the SFT being initiated c) Within 30 days of the SFT being confirmed d) No later than 60 days after the trustees begin an SFT 5. APRA’s heatmap appraisal system will extend over time to choice products and insurance. a) True b) False 6. The only way in which superannuation funds can merge is through a successor fund transfer. a) True
b) False
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: With superannuation funds experiencing significant fluctuation in asset values, couples who are engaged in property settlement negotiations need to consider carefully the timing of any super splitting agreements. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
Superannuation, property settlements and COVID-19
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Alison Ross and Leeann Murphy
ouples engaged in property settlement negotiations or court proceedings prior to the COVID-19 crisis currently face a difficult choice: should the negotiations be suspended until the crisis ends or should negotiations and property settlement matters continue? While the value of all assets and liabilities need to be considered, superannuation is an area that has seen considerable volatility. For many people, other than equity in the family home, superannuation is their most important ‘asset’. Accordingly, while the value of all items of property in a particular matter need to be considered carefully over coming months in the midst of the current turmoil, this discussion centres on the treatment of superannuation and, in particular, accumulation funds. Currently, the volatility of the share market has directly impacted the value of many superannuation funds. Many funds have significant exposure to shares held on various share markets and, accordingly, the balance of a member’s entitlement will increase and decrease in value in accordance with changes in the share market. Many superannuation funds have experienced significant fluctuations in the value of their investments since COVID-19 hit headlines. Now, more than ever, it is prudent for individuals to obtain financial advice about how to manage their superannuation interests during property settlement negotiations.
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While each case is different, some of the factors that may need to be considered in the context of property settlement negotiations, and to approach each party’s superannuation entitlements, will include: • how close are they to retirement age? • has the value of the fund impacted their expectations about when they will retire? • do they intend to withdraw all or part of their superannuation in the next few years and, if so, for what purpose? • what proportion of the asset pool is superannuation? • how can a property settlement be structured to ensure that spouses share any low or high-risk assets equitably? The main options available in every property settlement case dealing with superannuation include: • parties may decide to retain their respective superannuation accounts • one or both of the superannuation accounts could be split to adjust each party’s superannuation holdings. Superannuation splitting orders can be made either by: • nominating a ‘base amount’ to be transferred • nominating a ‘percentage’ of a particular interest to be transferred, or • using a formula which may incorporate the value of the superannuation and other matrimonial assets (although formulas can only be used in superannuation agreements and not orders of the court).
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Alison Ross, HopgoodGanim
Valuing superannuation Before deciding how to deal with superannuation upon property settlement, it is necessary to have an up-to-date valuation. Most super funds allow members to access information about the value of their superannuation in real-time by facilitating on-line access by members to their account. This may be an accurate way to value accumulation funds; however if either spouse holds defined benefit funds or their superannuation is in the payment or pension phase, they should contact the superannuation fund for a formal valuation. In the case of a self-managed fund, an accountant can provide advice about the most accurate way of determining the value of the fund for the purposes of property settlement.
Retaining superannuation The decision of whether to retain superannuation or to split some or all of it will depend on many factors. While parties should always seek independent financial advice in relation to their superannuation entitlements, parties may consider retaining their respective superannuation accounts in a number of circumstances, including: • where the parties are similar ages and have similar balances and retaining their respective superan-
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nuation interests equitably shares the risk associated with superannuation currently • where the parties are both young and can adopt a long-term strategy in relation to superannuation where they can control their investment strategy with a view to increasing the value by the time they retire • where a party may intend to retire in the very near future and are proposing to withdraw funds for a necessary purpose, such as re-housing after separation • the superannuation entitlement is not a significant proportion of the overall property pool • a party is prepared to take a risk on the future performance of the fund. However, particularly if there is a disparity between parties’ respective entitlements to superannuation, a party may prefer to reduce the amount that they retain by way of superannuation having regard to the current circumstances including where: • the superannuation comprises a significant proportion of the asset pool and, in comparison to the rest of the asset pool, the superannuation interest carries higher risk due to the current volatility of the share market; or • it may be some time until the parties intend to retire and it is appropriate to share the risk of superannuation interests between spouses while also sharing the lower risk assets.
Alison Ross is a partner of the law firm's family and relationship law practice. She specialises in complex property and other financial matters arising from relationship breakdowns.
Leeann Murphy, HopgoodGanim Leeann Murphy is a special counsel within the law firm's family and relationship law practice where she advises clients on both matrimonial and de facto property settlements.
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While these are some general factors, as noted, parties should ensure that they take appropriate financial advice specific to their situation.
investments it is entirely possible that the value of a base amount may be adjusted down, and parties should exercise caution to ensure they achieve the intended result.
Splitting superannuation
A percentage split
If parties agree or the court orders a superannuation split, the next consideration is how to give effect to that superannuation split. Again, each case must be considered as against its particular facts. However, dealing with accumulation funds will usually include a consideration of the following options.
Where couples decide to specify a percentage that will apply to the superannuation split, the impact of the investment performance of the fund on the operative date will be shared between the parties. In times of high volatility, this method may produce a more equitable outcome, as compared with a split with a nominated base amount.
A nominated base amount
A formula
Where couples decide to specify an amount that will apply to the superannuation split, this is known as the ‘base amount’. Where a base amount is specified, parties are generally entitled to that amount plus an increase or less a decrease, reflected in the investment performance of that particular superannuation fund from the operative date until the superannuation split is finalised. The operative date of the superannuation split will be specified in the order or agreement and is generally the fourth business day after the date upon which the superannuation order or agreement is served upon the trustee of the super fund. The benefit of a nominated base amount is that the parties know, subject to changes in the value of the fund between the operative date and the date that the superannuation split is given effect to, what amount will be split. However, what is not known is the proportion that the base amount may comprise as against the total value of the superannuation interest, if the value of that interest fluctuates significantly. Accordingly, there can be uncertainty as to the value of a superannuation split where the there is a significant change in the investment performance of the relevant superannuation fund in a short period of time.
Subject to the circumstances of each case, couples may decide, for varying reasons, to include a superannuation split in their property settlement with the amount to be determined by way of a formula. There are a number of reasons why this might be appropriate, including: • if the relevant superannuation account/s are subject to significant daily fluctuations or both parties have superannuation and it is agreed to split superannuation overall in a particular manner, a formula may be appropriate to ensure an equitable division of assets and liabilities on a particular date; or • if a non-superannuation asset (such as real estate) is being sold and the sale price is unknown at the time the terms of the property settlement are agreed and the parties have decided that each party is entitled to either a particular amount or particular percentage by way of settlement. In the current circumstances where the volatility of the market is impacting the value of superannuation on a daily basis, incorporating a formula into a superannuation agreement may be a sensible approach to adopt. Superannuation splits determined in accordance with a formula can only be documented in a superannuation agreement.
Example For example, if an agreement has been reached between the parties on 1 February 2020 that the wife is to receive a base amount of $50,000, by the time the order is made and the trustee puts the superannuation into effect on, say 15 March 2020, the interest being split may have decreased in value so that the base amount is adjusted to only $45,000. Of course, if the fund increases in value over the same period of time, the base amount will be increased.
Before agreeing to this approach, it is necessary to consider the volatility of the investments underlying the value of the fund. That will vary on a case-by-case basis and will depend on the broader market. Historically, most base amounts are adjusted upwards. However, presently, where there is volatility in the value of
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Formalising the superannuation split
It is necessary to obtain the approval of the trustee of the relevant fund to the terms of the superannuation splitting order or agreement—this is known as providing procedural fairness. Each fund has slightly different requirements and, in order to ensure that the property settlement the spouses have reached with each other in relation to superannuation is binding and enforceable, the parties or their legal advisers should provide procedural fairness by providing a draft order or draft agreement to the trustee for approval, prior to the agreement being signed or prior to the court making the order. When parties do not get what they bargained for
In circumstances where spouses have not understood or appreciated the impact of the use of base amount split or a percentage split and have the unfortunate situation of
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a superannuation fund reducing substantially in value between the date the terms of the agreement is reached and the operative date, and the outcome is contrary to what was intended, parties should obtain legal advice. In some exceptional circumstances, it is possible to make an application to set aside an order. However, a change in the value of the superannuation interest between the date of the agreement and the operative date in the current circumstances will, in all likelihood, not form a sufficient basis to set aside an order or agreement particularly where parties are now alive, or should be alive, to likely changes to values in the current economic climate. fs
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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What is the usual operative date of a superannuation split, as specified in the order? a) One month after the date on which the order is served on the trustee b) Usually 28 days after the date on which the order is served on the trustee c) Generally the fourth business day after the date on which the order is served on the trustee d) Usually two months from the date on which the order is served on the trustee 2. Super splitting orders can be made in which of the following ways? a) Using a formula b) Nominating a base amount c) Nominating a percentage d) All of the above 3. In terms of super splitting, ‘providing procedural fairness’ refers to which of the following? a) Notifying APRA of the terms of the super splitting agreement b) Obtaining approval of the terms of the order from the fund trustee c) Notifying the ATO of the intention to make a super splitting order d) Notifying super fund beneficiaries of the super splitting order 4. Which of the following factors need to be considered in property settlement negotiations? a) How soon the parties intend to withdraw all/part of their super b) How close to retirement the parties are c) The proportion of the asset pool that is superannuation d) All of the above 5. Superannuation splits determined in accordance with a formula can only be documented in a superannuation agreement. a) True b) False 6. It is not possible to make a super splitting order if one or both spouses are in a defined benefit fund. a) True
b) False
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: ASIC’s updated internal dispute resolution guidance (RG 271) includes standards and requirements that are enforceable obligations, making it clear that accountability for complaints handling rests with boards, executives and front-line staff. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
Complaints handling: A board responsibility ASIC’s updated complaints-handling guidance
F Mark Standen
ollowing consultation, the Australian Securities and Investments Commission (ASIC) has released updated internal dispute resolution guidance for financial firms (Regulatory Guide 271 Internal Dispute Resolution (RG 271)) and registered a legislative instrument (ASIC Corporations, Credit and Superannuation (Internal Dispute Resolution) Instrument 2020/98), clarifying new enforceable standards and requirements for internal dispute resolution (IDR) procedures. Among other things, the guidance: • adopts a new broader definition of complaints and amends the definition of small business • stipulates shorter maximum timeframes for responding to IDR complaints • outlines requirements for the content of the complaint responses • provides guidance on the identification and management of systemic issues (including the role of boards and ‘front line’ staff in this process). Certain standards and requirements in the guidance (eg. the maximum time frames for providing an IDR response) are enforceable
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through obligations under section 912A of the Corporations Act 2001 and section 47 of the National Consumer Credit Protection Act 2009. ASIC has highlighted these in the guidance. RG 271 will apply to complaints received by financial firms on or after 5 October 2021. Until that date, Regulatory Guide 165 Licensing: Internal and external dispute resolution (RG 165) continues to apply. The revised guidance and accompanying legislative instrument are intended to ‘drive fair and timely complaint outcomes for consumers and sharpen industry’s focus on systemic issues’. ASIC has also released a report, ASIC Report 665 Response to submissions on CP 311 Internal dispute resolution: update to RG 165, outlining the key issues raised during the consultation on proposed changes to existing guidance and its response to these issues.
An opportunity for financial firms? Announcing the release of the updated guidance, ASIC deputy chair Karen Chester suggested that strengthening complaints handling processes, oversight and reporting will not only help firms to build trust, but support them in staying connected to customers’ experience. Chester said:
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“Complaints handling is the first step in the dispute resolution framework and plays a critical role for firms to restore consumer trust when things have gone wrong. A financial firm’s approach to complaints handling is a meaningful measure of how it treats its customers and listens to their voice … Better IDR not only benefits consumers and small business, it arms the boards of financial firms with rich and real time data on the customer experience and whether their needs are being met or not.”
A snapshot of some key changes The revised RG 271 includes a number of standards and requirements that are enforceable obligations, as well as other guidance to assist financial firms to comply with their legal obligations. Enforceable obligations are clearly marked in the guidance. Changes to the definitions of ‘a complaint’ and ‘small business’
The guide provides a broader definition of what constitutes a complaint, and states that financial firms are required to deal with complaints under their IDR processes. The guide adopts the definition of ‘complaint’ set out in AS/NZS 10002:2014: “[An expression] of dissatisfaction made to or about an organisation, related to its products, services, staff or the handling of a complaint, where a response or resolution is explicitly or implicitly expected or legally required.” The guidance makes clear that firms are expected not to seek to avoid dealing with complaints that meet this broader definition by categorising them under another category of communication, eg. as an inquiry. In particular, the guidance states that firms should not seek to exclude complaints from the IDR process because they are: delivered verbally; or on the basis that the firm considers that the communication ‘does not have merit’; or because a ‘goodwill payment is made to the complainant to resolve the matter without any admission of error’. When is a response implicitly or explicitly expected? The guide states that: “A response or resolution is ‘explicitly expected’ if a consumer clearly requests it. It is ‘implicitly expected’ if the consumer raises the expression of dissatisfaction in a way that implies the consumer reasonably expects the firm to respond and/or take specific action. A consumer or small business is not required to expressly state the word ‘complaint’ or ‘dispute’, or put their complaint in writing, to trigger a financial firm’s obligation to deal with a matter according to our IDR requirements.” Examples of what constitutes a complaint The guide includes a list of expressions of dissatisfaction that are complaints within the meaning of the guide. The list includes (among other examples) posts on a social media channel or account ‘owned or controlled by the financial firm that is the subject of the post, where the
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author is both identifiable and contactable’ (where the post meets the definition of complaint in the guidance). The guide also provides two examples of communications that would fall outside the definition. ASIC states that the guidance is not intended to capture: employment-related complaints raised by financial firm staff; or comments made about a firm where a response is not expected, eg. through feedback surveys; or through ‘reports intended solely to bring a matter to a financial firm’s attention’, eg. notification that a firm’s ATM is damaged. Concerns raised about the expanded definition In its response to the consultation, ASIC states that the most significant change to the existing definition was the inclusion of complaints ‘about’ an organisation, and comments that a number of submissions raised concerns that the broadening of the definition in this way would ‘capture public complaints, such as those in letters to the editor or complaints made during protests’. In response, ASIC states that, “In our view, letters to the editor or complaints made during protests are unlikely to be covered by this expanded definition. In RG 271 we note that we interpret the words ‘or about an organisation’ in the definition to cover expressions of dissatisfaction made via social media: see RG 271.28. We do not require these words to be read any more broadly than this”. Ensuring small business can access AFCA and IDR
The guidance aligns the definition of small business with the Australian Financial Complaints Authority’s (AFCA) definition, which broadly defines a small business as a business with less than 100 employees. The guidance states that: “ ... any IDR process for financial service providers must be able to deal, at a minimum, with complaints made by ‘retail clients’, as defined by s 761G of the Corporations Act and its related regulations.” “The AFCA Rules define ‘small business’ as a business that had less than 100 employees at the time of the act or omission by the financial firm that gave rise to the complaint: see Section E.1 of the AFCA Rules. A small business includes a primary producer, if that primary producer is also a small business. The guidance aligns the definition of small business with AFCA’s definition, which defines a small business as a ‘primary producer or other business with less than 100 employees’.” ASIC states that the purpose of the change is to ensure that all small businesses that are entitled to access AFCA are also entitled to IDR. The proposal was broadly supported by both industry and consumer groups.
Shorter response time frames Section C of the guidance sets out the time frames for: a. when financial firms should acknowledge a complaint
Mark Standen, MinterEllison Mark Standen is a partner and the head of the law firm's corporate HQ advisory area. He trains clients on directors’ duties and governance issues, especially as they affect banks, insurers and other regulated financial institutions. This paper is co-authored by Kate Hilder, a consultant at MinterEllison.
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The quote
Revised RG 271 includes standards and requirements that are enforceable obligations, as well as other guidance to assist financial firms to comply with their legal obligations.
b. the maximum time frame to provide an IDR response and the information that should be included in a response c. the circumstances in which a firm does not need to provide an IDR response within the maximum time frame. Acknowledgement of a complaint
ASIC expects firms to provide acknowledgement of a complaint verbally or in writing (email, post or social media channels) within 24 hours (or one business day) of receiving it, or as soon as practicable. This is not an enforceable requirement. Maximum time frames for a response
The guidance specifies different maximum time frames for firms to provide a response to a complaint according to the type and complexity of the complaint. The guidance summarises the time frames for responding to various forms of complaint. These are enforceable requirements. Broadly speaking, the time frame for providing a response to superannuation-related complaints (excluding complaints about death benefit distributions) has been shortened from 90 calendar days to 45 calendar days. The deadline for providing a response to complaints about death benefit distributions remains unchanged at 90 days. ASIC comments that the reduction in the time to respond to complaints was generally supported in submissions to the consultation. The time frame for providing a response to (almost all) other complaints has been shortened from 45 calendar days to 30 calendar days. Submissions from industry generally opposed this change, while submissions from consumer groups universally supported it. ASIC explains that it considers that a 45-day time frame is no longer acceptable for a number of reasons, including that based on ASIC’s observations from IDR on-site visits, the vast majority of total complaints were resolved in less than 30 calendar days. Customer advocate The total time to respond to the complaint includes both the IDR process and the customer advocate review. The guide makes clear that the maximum time frames for providing a response apply to all IDR processes including internal appeals, escalation mechanisms and any customer advocate review. The guidance states that: “If a complainant chooses to escalate their complaint to the customer advocate, the total time spent dealing with the complaint must not exceed the relevant maximum IDR timeframe set out at Table 2. The total time includes both the IDR process and the customer advocate review.” ASIC’s response to the consultation explains that this clarification was included because ASIC considers ‘that the underlying intention of the dispute resolution framework is that an unresolved complaint will make a timely transition from IDR to AFCA. We are concerned that
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the customer advocate model will undermine this intention by creating a delay between the two steps’. Having said this, ASIC does not suggest that the customer advocate has no role to play. ASIC’s response acknowledges the significant investments in their customer advocate function that the banking sector has made, and calls on firms to retain but re-focus these resources on: a. increasing the underlying performance/quality of IDR systems b. improving the identification/handling of systemic issues c. supporting vulnerable customers d. assisting in consumer centric culture change within their firms. ASIC adds that it ‘strongly support[s] the establishment of effective feedback loops between customer advocates and the relevant business units. To be effective, customer advocates need the right degree of organisational support and appropriate reporting lines’. Exceptions The guidance specifies the circumstances in which firms are not required to provide a response within the maximum IDR time frame and outlines requirements for notifying complainants of the delay (IDR delay notification requirements) where this is the case. Broadly speaking, financial firms may take longer than 30 calendar days (and 45 calendar days for superannuation complaints) to respond where there is ‘no reasonable opportunity for the financial firm to provide the IDR response within the relevant maximum IDR time frame’ because: a. the resolution of the individual complaint is particularly complex; and/or b. circumstances beyond the financial firm’s control are causing complaint management delays. In its response to the consultation, ASIC states that it considers that these ‘categories provide an appropriate safeguard for when financial firms reasonably need more time to resolve a consumer complaint’. The response to submissions document makes clear that ASIC does not accept that complaints related to a particular kind of product/serve should always be considered complex. ‘Even the most complex products or services will give rise to some complaints that are simple; financial firms should respond to these complaints as quickly as possible and certainly within IDR time frames’, ASIC states. Complaints resolved within five days of receipt Where a complaint is resolved within five days, firms are not required to provide an IDR response provided that the firm has: a. resolved the complaint to the complainant’s satisfaction; or b. provided an explanation and/or apology ‘when the firm can take no further action to reasonably address the complaint’.
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Managing systemic issues
Concerns raised about the role of front line staff
The guide includes enforceable requirements for boards, executives and front line staff around how systemic issues should be managed, and makes clear that setting the accountabilities for complaints handling and the management of systemic issues is a board responsibility. The guide states that: • “Boards must set clear accountabilities for complaints handling functions, including the management of systemic issues identified through consumer complaints. • Reports to the board/executive committees ‘must include metrics and analysis of consumer complaints including about systemic issues identified through those complaints’. • Firms are also required to ‘encourage and enable staff to escalate possible systemic issues they identify from individual complaints; regularly analyse complaint data sets to identify systemic issues; promptly escalate possible systemic issues to appropriate areas within the firm for investigation and action; and report internally on the outcome of investigations, including actions taken, in a timely manner’. ASIC says that the requirements for boards to set accountabilities and the inclusion of metrics in board reports was broadly supported in submissions to the consultation. ASIC states that the changes are justified on the basis that there is a need for firms to strengthen oversight/management of non-financial risk. ASIC notes that the Hayne Commission highlighted ‘significant shortcomings in the corporate governance practices of many large financial services firms including in relation to the oversight and management of non-financial risk’. This was also confirmed by the findings in ASIC Report 631 Director and officer oversight of non-financial risk (REP 631), which found that oversight and management of non-financial risks ‘has generally not received sufficient attention until recent times—in stark contrast to the focus on financial risk and financial returns’.
In its response to the consultation, ASIC comments that a number of submissions did not agree with the requirement for front line staff to have a role in identifying systemic issues. However, ASIC’s view is that front line staff and staff in specialist IDR teams provide a valuable source of information on systemic issues that should not be ignored. The ability of all staff dealing with complaints to at least ‘flag’ potential systemic issues allows for the matter to be subject to further analysis within the firm.
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Ensuring accessibility In terms of dealing with an ‘authorised representative’, the guidance states that ‘firms should train staff to proactively identify, support and assist people who need help to make a complaint’ and that in the interests of optimising accessibility, ‘firms should allow representatives to lodge complaints on behalf of complainants’. The guide states that once notified that an authorised representative has been appointed, firms should not contact the complainant directly, except where: a. t he complainant specifically requests direct communication with the firm b. the firm reasonably believes that the representative is acting against the complainant’s best interests c. t he firm reasonably believes that the representative is acting in a deceptive or misleading manner with the complainant and/or the firm d. t he firm reasonably believes that the representative is not authorised to represent the complainant; or e. at the time the firm is dealing with the complaint, the representative has been excluded by AFCA from representing complainants in relation to any complaint lodged with AFCA.
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Timing
CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What does the updated RG 271 specify in regard to the way in which complaints are received? a) Verbal complaints should be excluded from the IDR process b) Verbal complaints should not be excluded from the IDR process c) Only written complaints should be included in the IDR process d) Verbal complaints should only be dealt with if followed up in writing 2. What maximum timeframe does the new RG 271 state for responding to death benefit-related complaints? a) 90 calendar days b) 30 calendar days c) 45 calendar days d) 60 calendar days
RG 271 applies to complaints received by financial firms on or after 5 October 2021 to enable sufficient time for firms to ‘undertake internal capacity building, establish clear lines of reporting and accountability, develop processes and systems, and upskill staff who are responsible for dealing with complaints’. Until that date, RG 165 continues to apply. In a statement, AFCA chief executive and chief ombudsman David Locke said that, “AFCA strongly supports measures such as the RG 271 to ensure internal dispute resolution (IDR) is made as fair, accessible and timely as possible. AFCA firmly believes that IDR plays a crucial role in the framework to resolve complaints about financial services. We welcome ASIC’s updated standards and requirements.” He added that effective IDR processes provide an opportunity for firms to resolve complaints before they are lodged with AFCA. “IDR is the key to early resolution, which benefits consumers, financial firms and the financial sector broadly. In our view, IDR should focus on helping financial firms to improve internal practices to avoid and resolve disputes. The updated guide will not only improve the quality of internal complaint resolution, but will enable financial firms to deliver better outcomes for consumers and reduce the need to escalate complaints to external dispute resolution,” he said. fs
3. How does ASIC’s updated RG 271 define a small business? a) S horter response timeframes for complaints b) A broader definition of complaints c) An amended definition of small business d) All of the above 4. ASIC’s new IDR guidance includes which of the following? a) S horter response timeframes for complaints b) A broader definition of complaints c) An amended definition of small business d) All of the above 5. ASIC wants to ensure that all small businesses that are entitled to access AFCA are also entitled to IDR. a) True b) False 6. ASIC’s requirement that receipt of a complaint be acknowledged within 24 hours will be enforceable. a) True
b) False
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Ethics & Governance:
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Walk the talk: On engagement and proxy voting By Bjorn De Smedt, ISS
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ESG compliance during a pandemic By Christine Covington, Corrs Chambers Westgarth
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Calls for investors to become more active owners have highlighted the importance of engagement and proxy voting as mechanisms for shareholders to exert their influence over a company’s operations and ESG policies.
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Walk the talk: On engagement and proxy voting An Australian perspective
I
Bjorn De Smedt
n the last few years, a growing number of investor stewardship codes have called for investors to become more active owners. Stewardship codes typically outline how investors can encourage companies to incorporate and maintain good corporate governance and integrate sustainability into their business practices. These factors are often described as non-financial risks; however, they have been observed to have a significant bearing on shareholder value. Engagement and proxy voting are two crucial components of investment stewardship. This paper provides investors with some guidance to help navigate this aspect of the responsible investment journey in Australia and beyond.
Stewardship codes and active ownership Institutional investors such as superannuation funds and investment managers hold assets entrusted to them pursuant to strict statutory and regulatory requirements. When investing part of that capital in company shares, these investors have a duty to act in the best interest of their members and clients, with a view to creating long-term value in the companies in which they invest. One of the primary mecha-
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nisms for investors to influence companies is through the exercise of shareholder voting rights and engaging with the management and directors of their investee companies. These have become critical components of good stewardship and fundamental to most institutional investors’ active ownership approach. After the Principles for Responsible Investment (PRI) were launched in 2006, active ownership (incorporating proxy voting, corporate engagement and reporting on sustainable business practices) has gathered significant traction. Active ownership has also been affirmed by the many stewardship codes which have been introduced by regulators and industry bodies in many jurisdictions. Stewardship codes set guidelines for institutions that invest money on behalf of savers and retirees, and include guidance for the responsible allocation of assets, management and oversight of capital to create long-term value, and detailed disclosure of stewardship activities to stakeholders. We have seen substantial overhauls of various stewardship codes in recent years, incorporating increased expectations for integrating stewardship into an investor’s overall policy setting, and specifically incorporating environmental, social and governance (ESG) objectives. The latest in a long series of stewardship codes is the recent launch of India’s mandatory Stewardship Code, effective from 1 July
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2020. This will apply to all asset managers and mutual and alternative investment funds invested in listed Indian companies. The code follows similar sector-specific initiatives for Indian insurers (IRDAI code) and pension funds (PRFDA code).1 In Australia, the Financial Services Council (FSC) issued its first edition of the Proxy Voting Standard No.13 in 2004, which was updated in 2013.2 This requires FSC members to update and disclose their proxy voting policies, disclose the use of a proxy adviser and provide an annual update of their voting records. Under the Stronger Super Reforms, which commenced in 2014, the Australian Securities and Investments Commission (ASIC) issued Regulatory Guide RG 252: Keeping superannuation websites up to date. In 2017, the FSC issued Standard No. 23: Principles of internal governance and asset stewardship, followed by the voluntary Australian Asset Owner Stewardship Code in May 2018. The purpose of these initiatives is to ensure that institutional investors are accountable to the market by improving the transparency of funds and the manner in which they are governed and managed. While New Zealand does not have a formal stewardship code, there are several corporate governance codes, including the NZX Corporate Governance Code, which is supplemented by an ESG Guidance Note, and is integrated into the NZX Listing rules. The Financial Markets Authority (FMA) issued the Corporate Governance Handbook in February 2018, and, prior to that, a group
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of New Zealand institutional investors launched the New Zealand Corporate Governance Forum in July 2015. In 2019, the PRI launched a guide, ‘Active Ownership 2.0: The evolution stewardship urgently needs’.3 In this position paper, the PRI encouraged institutional investors to shift their stewardship efforts towards outcomes, including addressing broader systemic issues such as climate change, modern slavery, and corruption. The new approach takes active ownership to a new level, encouraging collective effort among investors aimed at achieving specific outcomes, rather than changes in process and activities or the narrow interests of individual holdings. In the most recent Responsible Investment Association of Australia (RIAA) Benchmarking Report 2019, 49% (28 out of 57) of responsible investment (RI) funds incorporate formal engagement policies into their investment processes. Of the respondents, 25 indicated that they undertake direct individual engagement, and 38 funds (67%) participated in collaborative engagements.4 While ESG integration is the most common RI strategy applied in Australia, proxy voting and engagement is a close second. In New Zealand, active ownership is the third most popular strategy, behind negative screening and ESG integration. The shift toward outcomes-focused engagement proposed by the PRI has played out in recent months, with asset owners and investment managers facing increased scrutiny of their commitment to ESG integration. There have been several articles in the Australian financial
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Bjorn De Smedt, ISS Bjorn De Smedt is the account executive for Australia and New Zealand at ISS Australia. Before joining ISS Australia in 2011, he held a similar position in the ISS Brussels office, advising large asset owners and investment managers in Northern Europe on active ownership and responsible investment.
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The quote
Most Australian superannuation funds and investment managers have proxy voting policies and periodically disclose their voting behaviour.
press scrutinising the actions taken by superannuation funds and investment managers on climate change and how they deal with companies that have been involved in environmental and social controversies. Accordingly, increased focus is being placed on proxy voting and engagement, where active ownership becomes vital to demonstrating if an investor is in fact ‘walking the talk’.
On proxy voting Proxy voting is often seen as the first touchpoint of active ownership, and it is increasingly common for institutional investors to vote their shares at a company’s annual general meeting. Share ownership entitles investors to vote on specific matters that are proposed by a company, including in relation to director elections and executive remuneration. Additionally, shareholders may propose and vote on certain resolutions. Proxy voting is an important mechanism that enables shareholders to exert their influence over a company’s operations, corporate governance and social and environmental policies. Voting on company resolutions represents an opportunity for shareholders to express their opinion and provide a signal to a board regarding governance matters and financial performance of the company. Most Australian superannuation funds and investment managers have proxy voting policies and periodically disclose their voting behaviour; however, there are considerable differences among funds and managers in terms of the extent and nature of processes in applying these policies.
Voting strategies The proxy voting landscape in Australia and New Zealand is disparate. The majority of industry superannuation funds have internal proxy voting processes that incorporate advice from external proxy advisers. Internal stewardship teams are responsible for overseeing corporate governance and the ESG practices of investee companies and in executing their votes on AGM resolutions, having considered the reports and recommendations of proxy advisers. Where a fund’s view differs with that of an adviser, the fund may override their adviser’s recommendation. This voting strategy enables superannuation funds to manage their workload and have a consistent vote across the funds managed on their behalf by various mandated investment managers. Investment managers are also likely to consider all information available to them, including the vote recommendations and reports received from proxy advisers, and are equally likely to override any recommendation of a proxy adviser. Asset owners will also fully or partially outsource (eg. for global equities mandates) the voting process to the external investment managers, who will vote their managed funds in line with their voting policies and procedures. Such external managers would provide a superannuation fund with periodic voting records for compliance with disclosure requirements. This is a common strategy for smaller superannuation funds. It is not without risk, however, given that it exposes a fund to conflicting votes among different invest-
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ment managers which hold investments in the same companies, potentially cancelling out the votes. The absence of discrete mandates or insufficient internal resources are the main reasons for externalising vote execution. Hybrid models are also used, where both external managers and asset owners are actively involved in the voting process. An external investment manager may provide their voting intentions and, in certain instances, additional commentary when the manager’s view may go against company management or against a default vote policy of the client fund. In the event of such conflicting views, an asset owner may assess the different voting intentions provided by various investment managers and prescribe a consistent and final voting position across all external investment managers. Where required by internal policies, an asset owner’s stewardship team may present its final voting recommendation in the event of conflicting or controversial cases for approval by its board or investment committee. Such hybrid models not only require sufficient internal resources, but also a clear position on a fund’s RI commitments.
ESG integration ESG matters are becoming an increasingly important component in the investment strategies of the investment community. These topics include environmental stewardship, human rights, labour rights and supply chain risks, bribery and corruption, as well as governance and risk oversight failures. As ESG issues become more prominent, investors are working to align their position on these issues with their proxy voting policies and investment practices. In doing so, more investors are looking for specialised proxy voting policies that integrate specific ESG topics that would drive vote recommendations. A variety of voting policies are available to assist funds with the integration of ESG risks, sustainability and climate change. Where a voting policy which focuses on sustainability may identify certain ESG risks and controversies, a climate voting policy may recognise that the environmental threats of climate change pose significant economic and business risks. Such specialty policies are based on principles which are consistent with good stewardship and incorporate specific ESG and climate information, flags and voting recommendations, which investors can use to apply their views when voting on a company’s ESG and climate performance and disclosure.
On engagement Whereas proxy voting traditionally has been perceived as a seasonal activity in line with company annual reporting and the AGM season, corporate engagements may take place on a year-round basis, before, during and after a company’s AGM. Investors are expected to have a deep understanding of the activities of their investee companies to ensure that they have the ability to establish a constructive relationship with management and directors and conduct
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meaningful discussions on company strategy and ESG issues. The role of corporate engagement in an investor’s stewardship process is to positively influence corporate behaviour and ensure transparency and accountability of a board to shareholders in driving long-term, sustainable returns for members or clients. Measurement of the effectiveness and impact of corporate engagement and transparency around engagements is a challenge for investors, although the practice remains a critical aspect of most responsible investment strategies. Transparency of responsible investment activities, including proxy voting and engagement, is crucial to providing stakeholders with assurance that an investor is acting in line with its stated commitments. Disclosure practices relating to corporate engagements varies among superannuation funds and investment managers, with some investors providing general statistics on their engagement activities, while others provide a list of issues or a listing of companies with whom engagements were conducted by the stewardship team. Engagements may also take various forms, including both individual engagements and collaborative engagements through member-based organisations (eg. PRI, IGCC, RIAA), or service providers (eg. ISS ESG Pooled Engagement services). Interest groups, including the Australasian Centre for Corporate Responsibility (ACCR) and Market Forces in
Australia, Mindful Money in New Zealand, and other stakeholders, are increasingly active in holding investors accountable for their RI policies and procedures. This means that investors may need to improve disclosure of their corporate engagement activities and demonstrate alignment with their disclosed RI commitments. An absence of transparency has been observed to lead to situations where investors have had to justify their actions or respond to media criticism. Transparency and disclosure of active ownership activities would increase awareness among a broader group of stakeholders of an investor’s commitment to ESG issues, including the presence of a consistent approach across all stages of the active ownership process. A clear articulation is also increasingly expected by the investment community of how ESG issues are integrated into investment selection, proxy voting and engagement policies. Reporting on achievements, or otherwise, in regard to corporate engagement activities and outcomes, and voting records beyond general policy descriptions and processes are important aspects of this communication, and assist in avoiding criticism or misunderstanding among stakeholders of the approach to responsible investment by superannuation funds and investment managers. Recent examples of the increased media scrutiny are seen in the following articles:
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The quote
Proxy voting is an important mechanism that enables shareholders to exert their influence over a company’s operations, corporate governance, social and environmental policies.
Figure 1. Example of an engagement report available via ProxyExchange
Source: Institutional Shareholder Services group of companies (ISS), 2020.
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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. The PRI’s new outcomes approach aims to address which of the following systemic issues? a) Corruption b) Modern slavery c) Climate change d) All of the above 2. What is cited as one of the main mechanisms that investors can use to influence companies? a) Engage with the company’s legal counsel b) Exercise their shareholder voting rights c) Engage with the various PRI committees d) Lobby the Australian Securities Exchange 3. Under the PRI, what does active ownership incorporate? a) Reporting on sustainable practices b) Corporate engagement c) Proxy voting d) All of the above 4. What is cited as the most common responsible investing strategy applied in Australia? a) ESG integration b) Proxy voting c) Engagement d) Active ownership 5. Stewardship codes set guidelines for institutions that invest money on behalf of savers and retirees. a) True b) False 6. Very few Australian super funds and investment managers have proxy voting policies. a) True
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• Charlotte Grieve, ‘Super giants funnel billions into fossil fuels, vote down climate change’, The Sydney Morning Herald, 13 February 2020. • Edward Helmore, ‘Wall Street investment giants voting against key climate resolutions’, The Guardian, 17 September 2019. • Charlotte Grieve, ‘Top super funds increasingly vote down climate resolutions’, The Sydney Morning Herald, 8 June 2020. • Killian Plastow, ‘Super funds under fire after report reveals poor history on climate votes’, The New Daily, 9 June 2020.
Supporting investors As the only service provider covering proxy research and data analytics, vote execution, engagement and ESG services, ISS is in a unique position to support investors in their responsible investment journey. ISS can assist investors in every step, from the development of robust responsible investment policies to vote execution and reporting. ISS ESG Corporate Ratings, Climate Change Solutions, sector-based and controversies screening identify companies with varying sustainability practices and issues, or those involved in controversial business practices or activities that might not be not aligned with an investor’s investment strategy. The ISS ESG Pooled Engagement product facilitates constructive dialogue with investee companies aimed at increasing disclosure or changing company behaviour. ISS Proxy Voting services assist investors in holding management and boards accountable for their responsiveness to shareholders, and for governance and performance issues. ISS offers a comprehensive product suite to assist investors in ensuring that their stewardship policies are executed in a consistent manner which spans identification of ESG issues; assisting in the exercise of an investor’s voting rights at a company’s AGM for meaningful impact; and detailed reporting of outcomes. fs Notes 1. PRFDA Code Stewardship for Pension Funds, Pensions Fund Regulatory Development Authority, 2018. 2. FSC Standard 13: Voting Policy, Proxy Voting and Disclosure, issued initially in 2004, updated in 2013, 2019, with new version effective 1 July 2021. 3. PRI Active Ownership 2.0: The evolution stewardship urgently needs, 2019. 4. RIAA RI Benchmark Report 2019, Australia.
b) False
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Despite the pandemic, corporations cannot allow their ESG agenda to stagnate. Funds face significant risks if they take their eye off ESG compliance while dealing with COVID-19 impacts and responses.
Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
ESG compliance during a pandemic Maintaining a focus on ESG compliance is critical
T Christine Covington
he COVID-19 pandemic has justifiably absorbed management and board attention, but environmental and other activist groups have not shifted their focus during the lockdown. Despite the coronavirus, climate change and environment organisations remain attentive, so corporations cannot allow their environmental, social and governance (ESG) agenda to stagnate. Managing business survival during the pandemic, and ensuring compliance with ESG policies, are not mutually exclusive goals. Even in a pandemic, maintaining a focus on ESG compliance is critical. Significant risk lies in corporations taking an eye off the ‘compliance clock’ while distracted with COVID-19 responses and impacts.
Evidence of activism mounts In March 2020, the Rainforest Alliance Network (RAN) released its ‘Banking on Climate Change’ report into the financing of the fossil fuel industry by 35 private-sector banks. It found that since the Paris Agreement in 2016, banks, including JPMorgan Chase, Barclays and Bank of China, had funded US$2.7 trillion worth of fossil fuel projects. RAN has now called for an immediate end to the financing of fossil fuel expansion and real commitment toward the phasing out of fossil fuel financing.
FS Super
Even in the midst of the COVID-19 pandemic, reports like these are not going unheard, with large investment groups urging companies to maintain their attention on reducing carbon emissions, as shareholders strive to see their investments protected against the anticipated risks of climate change. According to Stockhead, the incidence of shareholder activism in Australia doubled in 2019 and, despite the pandemic, the appetite of environmental activists does not appear to have been dulled in 2020. Already this year, several resolutions have been brought by shareholder advocacy groups such as Institutional Shareholder Services (ISS), Australasian Centre for Corporate Responsibility (ACCR) and Market Forces, calling upon Australian corporations to set Paris Agreement-aligned emissions reductions targets, particularly in the area of scope 3 emissions. While few climate-related resolutions have found favour with the majority of investors, support is growing and the status quo is shifting. This response is being hastened by the Australian Securities and Investments Commission (ASIC), after it announced in December 2019 that it would begin targeting ASX-listed companies which fail to adequately report on their exposure to climate-related financial risks. The growing trend of investor-backed climate motions is unlikely to dissipate, as investment groups like ISS and the ACCR continue to drive investor action on climate change.
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Ethics & Governance
Litigation is also in the toolkit
The quote
Managing business survival during the pandemic, and ensuring compliance with ESG policies, are not mutually exclusive goals.
AGMs are not the only fora for action. The ACCR has pursued legal action in the past. In 2016, ACCR unsuccessfully sought a declaration from the Federal Court that a proposed resolution regarding greenhouse gas emissions could be validly moved. The ongoing litigation between Mark McVeigh and Retail Employees Superannuation Trust (REST) is likely to influence future climate-related legal challenges. If successful, superannuation fund trustees would be legally obligated to consider the climate risks of their investment activities. For the first time in Australia’s legal history, a coal mine is being challenged on human rights grounds. On 13 May 2020, the Environmental Defenders Office (EDO), acting on behalf of Youth Verdict, lodged an objection to the proposed Galilee Coal Project in Queensland’s Land Court against Clive Palmer’s company Waratah Coal. Among other things, the EDO alleges that the proposed mine violates the right to life, recognised under the newly created Queensland Human Rights Act 2019 because of its adverse contribution to climate change. If successful, the Youth Verdict case could pave the way for similar challenges, particularly in States and Territories with similar legislation, like Victoria.
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Increasing litigation over climate change is another sign that corporations should not take their focus off the environment. The recent introduction of the Liability for Climate Change Damage (Make the Polluters Pay) Bill 2020 (the Bill) has the potential to further magnify the legal challenges confronted by Australian companies. While its prospects of successful passage through Parliament are not high, the Bill seeks to make any fossil fuel company potentially liable for climate change damage if it has emitted more than one million tonnes of emissions in any 12-month period since 1 September 1990. In New South Wales, the EDO, acting on behalf of Bushfire Survivors for Climate Action, launched a Class 4, civil enforcement, proceeding, in the NSW Land and Environment Court against the NSW Environment Protection Authority (EPA). The EDO alleges that bushfires have become more frequent and intense as a result of climate change. They say the EPA has a legal obligation under the Protection of the Environment Operations Act 1997(NSW) to take action in relation to climate-related issues, including by controlling greenhouse gases. As a consequence, the EDO is seeking orders to compel the EPA to develop a policy with respect to greenhouse gas emissions.
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It’s happening elsewhere too
There is an upside
Australia is not the only place where the heat is rising on corporations. In February 2020, it was announced that Poland’s last planned coal plant would no longer proceed, after ClientEarth, one of the world’s leading environmental law charities, successfully litigated two cases against the plant’s co-sponsor, Enea. ClientEarth is now pursuing Europe’s largest coal plant, Bełchatów power station, demanding that the plant eliminates all carbon emissions by 2035. The United States leader in shareholder advocacy, As You Sow, has reported that despite attempts by the US Securities Exchange Commission (SEC) to stifle climate-related resolutions, climate change continues to be the dominant environmental topic in 2020. On 19 May 2020, shareholders of JP Morgan Chase, America’s largest bank, narrowly lost a vote which saw 49.6% of investors demand that Chase disclose the carbon emissions of all companies to which it makes loans. While the vote did not succeed, it has sent a strong message to climate investors. In Norway, the response to climate change has been even more profound. Changes introduced by Norway’s Parliament in June 2019 mean that Norway’s US$1 trillion wealth fund can no longer invest in companies that mine more than 20 million tonnes of coal per year or generate more than 10 gigawatts of power from coal. The fund also excluded four Canadian oil companies for producing excessive greenhouse emissions. Further exclusions are expected.
As demonstrated by the success of companies focused on ESG compliance during the global financial crisis (GFC), increased engagement with these policies may be key to businesses not just surviving but thriving throughout the pandemic and its aftermath. It is already evident that the COVID-19 lockdown will cause an even more severe economic downturn than that experienced during and after the GFC. Nevertheless, as the most recent rapid global economic downturn, the GFC is a highly relevant yardstick in analysing the relationship between business survival during crises and their management of ESG issues. A 2016 study by Harvard University found that American companies with good ESG policies achieved ‘above average’ financial performance for the 2008/09 financial year. They experienced a 40-45% lower cost of debt than their counterparts [‘The comprehensive case for sustainability’, Harvard Business Review, 21 October 2016]. The study suggested that companies which focused on ESG did not experience the significant declines in share price which their industry peers did during the crisis, being better prepared for sudden industry changes. In 80% of the companies studied, there was a link between sustainability practices and increased share price performance. Perhaps more importantly, the GFC refocused individual and shareholder attention on corporate ESG responsibilities (see Morningstar research). This is demonstrated by the significantly increased popularity of ethically managed funds following the GFC, with assets under management in ESG portfolios growing by 25% between 2014 and 2016 to an estimated US$23 trillion by the start of 2016. ESG compliance may be essential in not only mitigating poor financial performance but in improving it during times of turbulence.
Regulatory risk Even against this background, with many companies under pressure to merely remain viable, environmental compliance obligations can easily slip down the agenda. This would seem to even have been encouraged in the United States. In response to the overwhelming financial impacts of COVID-19, the United States Environmental Protection Agency has suspended its enforcement of environmental regulations. It announced in March 2020 that it will not expect or enforce regulatory compliance relating to pollution during the pandemic, nor later pursue companies with penalties, so long as the entity can demonstrate that any non-compliant activity was caused by COVID-19. Australian businesses do not enjoy the same degree of leniency, although Victoria has delayed commencement of its significant environmental protection legislation, and other regulators have hinted at a more accommodating exercise of discretion when applying prosecution guidelines. The financial (and reputational) cost of non-compliance remains high. For example, in New South Wales, a factor in sentencing for breach of the Protection of the Environment Operations Act 1997 is whether the offender’s conduct resulted in financial gain. Negligent behaviour is treated as severely as deliberate offending in some offences, such as the harmful disposal of waste under section 115.
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ESG: A line of white pebbles through COVID-19 The market disruption caused by COVID-19 presents an opportunity to implement and expand corporate ESG policies. The fragility of supply chains could not have been more starkly demonstrated than over the past few months of pandemic-related disruption. For this reason alone, companies are well advised to use this time to review, identify and mitigate against strategic and operational risks. The ‘S’ in ESG has also emerged as an important consideration for companies. In March 2020, a group of investors representing more than USD 8.2 trillion in assets called upon corporations to provide paid leave, prioritise health and safety and retain jobs. There is a growing recognition that social issues caused by the pandemic constitute a real investment risk. From a supply chain perspective, not only human risk factors, but also issues such as natural resource deple-
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Christine Covington, Corrs Chambers Westgarth Christine Covington is a planning and environmental specialist, as well as a property lawyer. She also has extensive experience acting in planning and environment appeals in the NSW Land and Environment Court.
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Ethics & Governance
CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What does the author say in relation to trends in investorbacked climate-related motions? a) The once-growing trend is now likely to dissipate b) The growing trend is unlikely to dissipate c) The once-growing trend has dissipated in 2020 d) The once-growing trend has reversed in 2020 2. What has been the US Environmental Protection Agency’s response to the financial impact of covid-19? a) I t won’t pursue penalties if non-compliance is pandemicrelated b) It won’t enforce regulatory compliance in regard to pollution during this time c) It has suspended enforcement of environmental regulations d) All of the above 3. Which statement reflects the commentary in regard to shareholder activism in Australia? a) T he incidence of shareholder activism has halved since 2019 b) The incidence of activism in 2020 is far less than in 2019 c) The incidence of activism doubled in 2019 and has not dulled since d) The incidence of activism in 2020 is notably lower than in 2019
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tion, human rights violations and corruption are being increasingly subject to regulator and consumer attention. COVID-19 is an opportunity for corporates to align their assets to organisational values, minimise their headline risks and enhance their reputations. Companies which incorporate ESG principles avoid risk by investing in activities with long-term growth prospects that will not be weakened by future market disruptions such as climate change. A 2019 report from the Responsible Investment Association Australasia indicated that ‘responsible investing’ funds already outperform mainstream funds over most asset classes and time frames. Credit Suisse has forecast that stocks with poor ESG credentials will eventually trade at a discount. An analysis undertaken by investment bank, HSBC, has revealed that shares in ESG-aware companies have outperformed non-ESG companies during the COVID-19 pandemic by as much as 7%. In the economic aftermath of COVID-19, investors will be looking to see how businesses have identified and mitigated future risks, in order to preserve and enhance their value.
Taking a lead With the public’s increasing preference for carbon-neutral industry, the current market disruption provides an excellent opportunity for businesses to review their compliance practices and ESG policies, to take competitive advantage. Perhaps even more significantly, updating these policies and ensuring that there is no loss of focus on the compliance framework is critical in developing companies’ risk tolerance and resilience. Communities, regulators and shareholders are unlikely to be particularly forgiving of those who allow their compliance focus to slip. fs
4. What is cited as a sign that corporations should not take their focus off the environment? a) Increasing litigation over climate change b) Increased media coverage of ESG-related matters c) Increased compliance checks in 2020-21 d) Increased funding for the regulator in 2020 5. For the first time in Australia’s legal history, a coal mine is being challenged on human rights grounds. a) True b) False 6. Managing business survival during the pandemic and ensuring ESG compliance are seen to be mutually exclusive goals. a) True
b) False
Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
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Investment:
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Equity portfolio evolution
By Raewyn Williams and Joshua McKenzie, Parametric
Staring down the barrel of an
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uncertain future By Mark Lewis, BNP Paribas Asset Management
The road ahead: Secondaries
markets in 2020-21 By Sean Cote, Allens
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Investment
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: As superannuation funds and investment managers look to better ways to structure equity portfolios, they need to understand how to manage the significant tax costs involved in changing portfolio structures. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
Equity portfolio evolution A framework in a taxable environment
A
Raewyn Williams and Joshua McKenzie
ll sectors of the superannuation industry agree that successful equity investing entails some short-term pain to enjoy long-term gain. Superannuation funds and investment managers who embrace an active management philosophy can feel this acutely when their style does not pay off in a certain stage of the market cycle or there is a regime shift to a ‘new normal’. Those with more faith in the market itself—passive investors—feel the pain of underperforming active peers in market downturns or when active theses are having their day. Yet, all would advocate to ‘hold the line’, for superannuation investing is a long-horizon game designed to benefit members who have a whole working life to save for retirement within superannuation and, for most, decades more in retirement to enjoy the fruits of superannuation. This long-horizon perspective should make it easy for superannuation funds to continue to evolve their equity portfolios as new, better structures become available. And yet, there is a roadblock: in Australia, funds invest in a taxable environment and a step forward in the portfolio evolutionary chain can require a fund to write a cheque to the Australian Tax Office. This tax bill too often cuts short or delays what should be a natural, healthy process of superannuation equity portfolio evolution. Our concern is that, on its face, baulking at a
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single, upfront tax cost sits uncomfortably with an espoused commitment to long-horizon investing. This paper looks specifically at one critical stage of equity portfolio evolution—the move from a pooled fund (‘unit trust’) investment structure to a separate account (‘discrete mandate’) structure which brings flexibility, transparency, ability to customise and tax efficiency. With a realistic hypothetical example, we identify the potential tax problem in making this move and adopt a simple framework for removing this evolutionary roadblock, re-characterising the upfront tax cost as an investment in a superior portfolio structure intended to reap longer-term, quantifiable rewards. In this reframing, the focus moves from a single, sometimes intimidating tax cost figure to a future ‘break-even point’ where the initial tax outlay is recouped by the benefits of this portfolio evolution, and the key question becomes: what is a satisfactory length of time to reach the break-even point, beyond which the move to a better portfolio structure delivers pure wins to the fund? Using a break-even framework, funds’ (very) long investment horizon makes it far easier to push forward with equity portfolio evolution in a taxable environment: in our base-case scenario, the portfolio breaks even in eight years; in our best-case scenario, it is less than three years. Portfolio evolution becomes even easier for funds whose equity portfolios have experienced flat-to-moderate growth, and market volatility
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provides an important ‘window of opportunity’ for funds with high performing portfolios in their evolutionary journey. We show why all superannuation funds should favour large evolutionary ‘leaps’ over small, incremental steps, and why adding a genuine after-tax equity focus is a key step in the fund’s evolution. The message is that there is no place in taxable portfolio evolution for a short-term mindset and superannuation funds will find it much easier to continue to evolve by staying focused on the long-term nature of their mission.
Institutional-sized superannuation equity portfolios In previous research, we traced the history of large fund equity structures in Australia, beginning with the single-manager diversified portfolios of the 1990s in which listed equities were one piece of a broader multi-asset solution (Parametric Research, July 2015). Most superannuation funds evolved from this structure in the 2000s to use a suite of specialist equity managers with diverse, complementary styles (a multimanager portfolio). Typically, these equity strategies remained housed in pooled funds, which commingle the investment capital of many underlying investors, making them essentially off-the-shelf products. The last decade has seen a mounting desire for super funds to break out of these pooled fund vehicles and move their assets into separate individual accounts. This structural evolution moves ownership of the underlying equities directly into the hands of the super fund, providing flexibility and transparency as well as the ability to customise the portfolio to the super fund’s specific preferences (eg. ESG screens, factor-based tilts, separate accumulation and pension portfolios). Removing the interposed trust structure from the fund’s equity holdings also improves the tax efficiency of the structure, which can be further enhanced when the new discrete mandate is tax-aware. The value of tax efficiency reflects a policy quirk in the advent of compulsory superannuation in Australia, which chose to tax superan-
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nuation in the contribution and investment (wealth accumulation) stages, rather than the benefit payment stage where tax is levied on most global pension fund peers. Figure 1 below captures our sense of how multi-manager listed equity investment structures have evolved and will continue to evolve within institutional superannuation in Australia. The evolution from a pooled fund to separate account holding structure usually occurs in moving from step 2 to 3 (to embrace a core-satellite structure), or step 3 to 4 (to adopt a tax managed core), in this journey, though of course variations are possible. Perhaps unfairly, this move is a taxable event under Australian tax law, even when the equities are transitioned in specie and even when there is no change in the composition of the equity portfolio itself. This tax bill presents a problem for a super fund wanting to continue this natural, important progression, but unwilling to bear a potentially significant point-in-time tax ‘hit’ as a cost of taking the next evolutionary step. There are cases where the identified tax cost has sidelined the move indefinitely.
A long-horizon framework To address the problem of an up-front tax cost of evolving a fund’s equity investment structure, we suggest drawing on the familiar business concept of ‘breaking even’. A break-even analysis involves modelling the potential returns from an outlay to determine the point at which the outlay is recouped, after which future returns make the idea or initiative net profitable. What stops superannuation funds from applying a break-even analysis to this problem is not a lack of familiarity with the concept. More likely, it is the difficulty of estimating the pay-offs from moving to a better investment structure—in essence, funds can solve one side of the equation (the initial tax cost of moving) but not the other. Funds know the pay-offs are there, but they aren’t easily estimated. The qualitative benefits of using a better investment structure (flexibility, transparency, ability to customise) also bolster funds’ commitment to evolve,
Raewyn Williams, Parametric Raewyn Williams is the managing director of research for Australia, responsible for the research agenda and developing new products.
Figure 1. Evolution of multi-manager equity portfolio Step 1 Single manager multi asset balanced portfolio
Step 2 Multi-manager specialists style boxes
Step 3
Step 4
Step 5
Core-satellite
Satellite with taxmanaged core
Joshua McKenzie, Parametric
Tax-managed CPM
Source: Parametric. The majority of APRA-regulated super fund equity portfolios use configurations similar to steps 2 and 3. Only a small minority (representing approximately $6 billion in equities) have reached step 5, Centralised Portfolio Management (CPM), our capability which we consider best-of-breed for transparency, customisation potential, flexibility and tax efficiency.
FS Super
Joshua McKenzie is an analyst, responsible for assisting the managing director of research with the Australian research agenda.
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The quote
This paper implores super funds eyeing ever-better ways to structure equity portfolios not to be confounded by the seemingly significant tax costs of making these moves.
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but aren’t easily weighed against the hard number of an up-front tax cost. A couple of behavioural biases play into this fixation on the immediate tax cost: • availability bias, which makes it easier to support a decision based on a to-hand, hard-and-fast number • recency bias, which places extra weight on the immediacy of the tax cost and downplays the value of future benefits. Applying a more scientific process, such as the breakeven framework, is a way to overcome these biases. The long-term horizon of a superannuation fund’s investment decision-making must come to the fore here. It is, in fact, exceedingly long-term, which should act to diminish the impact of a single tax cost relative to the powerful compounding of benefits of a better equity investment structure over such a long time horizon. All other things equal, a single up-front tax cost, regardless of size, creates quite a hurdle for short-term investors; less of a hurdle for investors who have five years to make up the cost and add to returns; and less still for investors who have a decade or two to end up ahead. For superannuation funds with investment horizons of 40 years or more (even before considering retirement solutions) to reap the benefits of a better investment structure, it would take a lot for the single cost to matter at all. We now look at how a superannuation fund could apply a break-even framework to navigate the issue of tax restructuring costs in the face of the fund’s continuing need to evolve its equity investment structure.
the tracking error-to-index budget and off-benchmark universe bets the fund is willing to permit the manager, screen out certain stocks to reflect the fund’s ESG beliefs, apply the fund’s preferred risk analytics to the portfolio from time to time and have the portfolio taxmanaged to improve the after-tax returns of the portfolio—all things not offered in the fund’s current ‘off-theshelf’ unit trust structure. As the fund readies itself for this important evolutionary step, bad news strikes: because the portfolio has appreciated in value by 20% since acquisition and 10% of the pooled fund unitholdings were acquired within the past year, the super fund faces a tax bill of $10.5 million (2.1% of portfolio value) to make this move. Assuming the tax will be funded from this portfolio, this would make the new portfolio’s starting value $489.5 million, not $500 million. One can understand the fund’s reluctance to continue. Instead, the fund invokes its commitment to longterm investing and brings a break-even perspective to the analysis. To show what this could look like, we begin with a conservative base case and then explore variations (sensitivities to the base case assumptions) to cover a myriad of scenarios that might better fit the fund. Base case
Say the superannuation fund’s (or asset consultant’s) due diligence leads it to rely on the following assumptions: • expected pre-tax portfolio returns of 4% annually under the old or new structure • expected sell turnover of 10% annually under the old or new structure • an expected uplift in after-tax returns of 30 basis points annually, but only from moving to the new taxefficient structure. Our break-even modelling of after-
Breaking even on tax costs, and beyond Consider a hypothetical superannuation fund with a desire to move its $500 million portfolio of international equities from a unit trust (pooled fund) into a separate account. It’s motivations are to (in time) define Figure 2. Break-even point—base case $1,150,000,000 $1,050,000,000 $950,000,000 $850,000,000 $750,000,000
$684,284,525
$650,000,000 $550,000,000 $450,000,000 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Years
Old - Base Case
New - Base Case
New - Base Case Breakeven
ource: Parametric. Hypothetical data for illustrative purposes only. It does not reflect the experience of any investor or fund. We treat realised tax as an annual cash outflow from each hypothetical S portfolio to calculate and compare portfolio value through time.
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tax return benefits is helped by our hypothetical fund moving to an after-tax focused equity mandate whose manager can easily estimate the after-tax pay-offs of the move. With these assumptions and noting the initial tax cost of the move will be $10.5 million, the fund can now create a long-horizon model and find the break-even point for this portfolio evolution, as shown in Figure 2. The superannuation fund can see that the up-front tax cost of evolving its equity investment structure causes the starting value of its ‘new’ portfolio to be below the value of the ‘old’ portfolio if no move was made. But an extended line-of-sight now shows how through time this cost is recouped by the after-tax returns of the new portfolio steadily outpacing those of the old portfolio, with the new portfolio ahead by approximately $40.6 million by year 20, the end of our analysis period. The fund pinpoints the break-even point to occur within the first decade of the move (year 8), at which time the equity portfolio value has grown from $500 million pre-move ($489.5 million post-move) to over $684 million. In the context of the fund’s multi-decade investment horizon, a year 8 break-even point is very promising; a reminder that qualitative benefits of the new structure may be reaped from year 1 further encourages the fund to continue its evolutionary journey.
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The tax cost of the evolution will be lower the less appreciated the portfolio is, and higher for more strongly-appreciated portfolios. Hence, it is logical to see the break-even point attained much sooner for lower-appreciated scenarios (as soon as year 4 for the 10%-appreciated portfolio) and much later the more highly appreciated the portfolio is (almost two decades after the move for a 50%-appreciated portfolio). The sensitivity analysis provides two important practical insights: 1. a super fund clearly has more incentive (or less disincentive) to evolve when its equities allocation has experienced flat or only modest growth 2. market volatility provides an important window of opportunity for funds with portfolios that have performed strongly to take the next evolutionary step. The degree of appreciation tracks in line with portfolio value and can drop quickly (if temporarily) in times of volatility, enabling a well-prepared, quick-thinking fund to adopt a better equity structure with a reduced tax hit, and much nearer break-even point, before market stability resumes and portfolio value is restored. This insight is especially timely given the current pandemic crisis and ongoing volatility in equity markets worldwide. Base case variation: After-tax return increment
Base case variation: Tax cost base
Our hypothetical superannuation fund’s break-even analysis is sensitive to (among other things) the amount by which its $500 million portfolio has appreciated in value at the time of the evolutionary step. This is because the tax cost of the change is calculated on the increase in value relative to tax cost base. The fund’s base case analysis used a 20% appreciation assumption (implying a tax cost base at transition of $400 million). Figure 3 explores this sensitivity using a 10% to 50% range of appreciation scenarios (portfolio value relative to tax cost base). This allows the fund to draw out an important, and intuitive, principle: the more highly appreciated the $500 million portfolio is at the time of the move, the further out in time will be the break-even point. Figure 3. Break-even point –different levels of cost base appreciation $1,200,000,000 $1,053,424,588 Breakeven Portfolio Value
$1,000,000,000
$684,284,525 $584,929,280
$600,000,000 $400,000,000 $200,000,000
$0
1
2
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10 11 12 13 14 15 16 17 18 19 20
Years Until Breakeven New - 10%
New - Base Case
New - 30%
Source: Parametric. Hypothetical data for illustrative purposes only.
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New - 40%
Figure 4. Annual returns and tax drag on international equity portfolios Equity management style Value
Expected pre-tax return
Estimated tax drag (basis points)
8.91% 84
Momentum
7.76% 69
Low volatility
8.62%
79
Blend – value/
8.93%
72
momentum/profitability (VMP) Source: S&P, Parametric 2017. Hypothetical performance is for illustrative purposes. It does not reflect the experience of any actual investor and is not intended to reflect the performance of any strategy offered by Parametric or EVMI. Calculations reflect developed market equity universe, are annualised over the period 31 January 1997 31 December 2016, assume all dividends are reinvested and are stated net of assumed fees and transaction costs (10 bps).
$900,471,753 $800,516,109
$800,000,000
Our hypothetical superannuation fund may also test the sensitivity of its break-even analysis to the expected uplift in after-tax returns from continuing its portfolio evolution. While our base case assumes an annual pre-tax return of 4% and ‘tax alpha’ benefit of 30 basis points, we have previously published research on international equities which estimates that adopting a more active rules-based style of management to improve pre-tax returns comes with tax drag in the following range, depending on the management style (Parametric Research, 2017).
New - 50%
Each equity management style has its own innate tax attributes relating to matters like turnover and capital gains realisation (and typically the manager’s investment mandate will be pre-tax focused and ignore opportunities to improve the portfolio’s tax efficiency). For example, a value strategy attempts to buy stocks that are undervalued and sell them after they have appreciated, which can create significant realised capital gains and a relatively large tax drag. On the other hand, a momentum strategy tends to hold the winners longer and generates fewer realised gains, so has a lower tax drag. All strategies can benefit from an explicit after-tax investment focus. To illustrate our breakeven approach in this context, we now assume the super fund adopts one of the active styles we list in Figure
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4 as part of its portfolio restructure to increase pre-tax returns plus deliver ‘tax alpha’ through a more tax efficient structure and an explicit after-tax investing focus to eliminate the associated tax drag. We relax our base case assumptions to fit the expected pre-tax return and tax characteristics of each management style while keeping other base case assumptions the same. So, instead of the portfolio evolution delivering a (base case) 4% pre-tax return and additional 30 basis point contribution from lower tax each year, we can find break-even points for moving to a value strategy which potentially delivers 8.91% + 0.84% each year, a momentum strategy which could deliver 7.76% + 0.59% each year and so on, as Figure 5 shows. Our hypothetical superannuation fund, again, sees an intuitive result: the higher the expected reward from the evolutionary move, the sooner the portfolio breaks even, recouping the initial tax cost of the move. Figure 5. Break-even point—portfolios with range of styles, returns and
Breakeven Portfolio Value
levels of tax efficiency $720,000,000 $703,979,510
$700,000,000
$684,284,525
$680,000,000
$674,217,988
$660,000,000
$645,911,889
$640,000,000
$640,765,912
$620,000,000 $600,000,000
0
1
2
3
4
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6
7
8
9
Years Until Breakeven Low Vol
Value
VMP
Momentum
New - Base Case
ource: Parametric. Hypothetical data for illustrative purposes; it does not reflect the experience of any S investor or fund.
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We observed earlier that even the modest base case scenario (30 basis point after-tax return improvement annually) breaks even in year 8—a healthy outcome for a long horizon investor. Here, the news is better: depending on the equity management style used, the up-front tax cost could be recouped as early as year 3 (for the low volatility and value styles), and for every style, well inside a single decade. Of course, Figure 5’s break-even points reflect a confident view of how effective the new after-tax-focused equity solution—a key ingredient in the portfolio’s evolution—will be in reaping ongoing benefits. In practice, we would encourage a super fund to be guided by the new equity manager to set reasonable after-tax performance expectations. The analysis is also a caution to super funds as they look to evolve portfolios in a taxable environment: there is a need to get ‘bang for buck’ from each step-change because the tax cost of restructuring relates to what the fund is moving from, and is no reflection on the quality of what the fund is moving to. The fund’s best chance of breaking even sooner, for each (taxable) change, will come from taking bigger, bolder steps to solutions with higher expected after-tax rewards, rather than settling for a stretched-out series of incremental improvements. Returning to Figure 1, where we charted the evolution of a superannuation fund equity portfolio, this should embolden a fund only at stage 2 or 3 to ‘skip steps’ and consider moving straight to what they believe to be their ideal equity investment structure. As a final note, we see a nice symmetry in using tax thinking to not only identify the problem of evolving a superannuation equity portfolio in a taxable environment, but help solve the problem as well by using tax management so funds can reach their break-even point sooner. The journey from tax-agnosticism to an intentional aftertax focus, adding tax efficiency to the tools of equity management, is something we regard as essential to a super fund’s overall equity portfolio evolution.
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Conclusion This paper implores superannuation funds eyeing ever-better ways to structure equity portfolios not to be confounded by the seemingly significant tax costs of making these moves. To halt the natural, important evolution of a fund’s equity portfolio for this reason reflects harmful behavioural biases and is fundamentally inconsistent with the fund’s nature as a long-term investor. In our view, far better to accept that, like other aspects of investing, equity portfolio evolution in a taxable environment entails short-term pain for long-term gain. This challenge was illustrated by isolating an important stage in the evolution of a superannuation fund’s equity portfolio—the move from holding assets via a legal trust structure to holding the assets directly. We believe the key (but not only) advantages of this move are the flexibility and transparency it brings to a portfolio, the ability to customise the manager’s investment mandate to the fund’s specific preferences and tax efficiency. By lengthening our gaze, we employed a ‘break even’ framework so that what the fund focuses on is not the initial tax cost of making such a move, but how soon the cost can be recouped by the ongoing benefits gained. All assumptions used are based on our own research, data and forecasts readily available to super funds. A framework such as this could become a staple for funds; the new way of taking up the challenge of equity portfolio evolution in a taxable environment. We have also shown that these evolutionary steps are not so painful when portfolios are less appreciated in value—something a fund should recognise and prioritise for action while this scenario exists. A more opportunistic, agile mindset helps super funds with more highly appreciated equity portfolios—times of market volatility can allow these funds, having done the work beforehand, to restructure during a temporary drop in portfolio value. This may be one silver lining in the current pandemic financial crisis. Further, we have shown why bigger, bolder steps may trump incremental improvements, especially if the new portfolio solution is after-tax focused and can deliver tax metrics to the fund decisionmaker before and after the move is made. Perhaps the strongest feature of our framework for taxable equity portfolio evolution is in re-aligning the problem with the long-term mission and investment perspective of superannuation funds. With the very long investment horizons funds work with, a single, pointin-time tax cost should, in our view, rarely stymie the fund’s onward push towards the rich rewards that come with a custom, flexible, transparent and tax-efficient platform for equity investing. fs
CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. In the base-case scenario proposed by the authors, the portfolio breaks even in how many years? a) Six years b) 10 years c) Eight years d) Three years 2. The structural evolution in super funds in the past decade has led to which of the following? a) Assets have moved away from separate individual accounts b) Ownership of the underlying equities has moved directly into the fund’s hands c) Assets have been moved into pooled fund vehicles d) Ownership of the underlying equities has been taken away from the fund 3. What has stopped funds from applying a break-even analysis? a) A lack of familiarity with the concept b) A lack of awareness that there are pay-offs c) Difficulty in estimating the pay-offs to be gained d) None of the above 4. In the best-case scenario proposed by the authors, at what point does the portfolio break even? a) In less than three years b) In about eight years c) Between four and five years d) Around six years 5. The authors state that a short-term mindset has no place in taxable portfolio evolution. a) True b) False 6. The break-even framework focuses on how soon costs can be recouped, rather than on the initial costs of changing structures. a) True
b) False
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: With low returns and volatility in the oil markets, and the COVID crisis likely to accelerate the transition away from fossil fuels to cleaner renewable energies, investors are looking at projects that offer longer-term visibility of earnings. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
Staring down the barrel of an uncertain future Has the demand for big oil peaked?
A Mark Lewis
few months is a long time in oil markets. In late February 2020, the attention of oil-industry analysts and investors was fixed firmly on the supply side of the market, with all eyes on the growing power struggle between Saudi Arabia and Russia over the appropriate response to an increasingly over-supplied market as the COVID-19 pandemic cut into oil demand in China—the world’s second largest consumer and the biggest source of global demand growth. In early March, tensions boiled over when Russia refused to co-operate with other members of the so-called OPEC+ group of oil producers in a renewed round of output cuts, thereby prompting Saudi Arabia to increase supply and slash its export prices in a move designed to re-establish its hegemony as the world’s largest oil producer. The market reaction to the Saudi move was swift and violent, with crude oil prices dropping by over 30% on 9 March 2020, their second-largest one-day drop ever (Bloomberg). By this time, however, the impact of the pandemic was no longer restricted to China in par-
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ticular, or even Asia more generally, but had spread to Europe and North America. As lockdowns took hold across much of the world over the second half of March and early April, the focus of industry analysts and investors switched to the demand side and the unprecedented drop in oil consumption being experienced. In June 2020, after the convulsions of the previous three months and with the world starting to emerge from lockdown, the big question for investors is where does this leave the outlook for the oil industry in general and the oil majors in particular? Our view is that the peak in global oil demand may already have been seen in 2019, and that even if this is not the case, market expectations of when the peak will happen have been brought forward by the impact of the pandemic and the behavioural changes in response to it. If so, this could prompt significant structural changes on the supply side going forward, with Saudi Arabia in particular likely to think hard about how best to maximise the value of the cheapest and most abundant oil reserves that lie under its sands in future. In short, the price volatility in global oil markets may just be a foretaste of the drama to come as the end of the petroleum age comes into view. In turn, this means investors are likely to find the visibil-
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ity offered by the business model of renewable-energy companies all the more attractive in future relative to the volatility inherent in the business model of the oil majors.
The pandemic brings the prospect of peak demand closer Already under increasing pressure from long-term structural changes in world energy markets, the oil industry has suffered its biggest ever drop in demand in the past few months as a result of the lockdowns introduced across the world to stop the spread of the COVID-19 virus. The United States’ Energy Information Administration (EIA) estimates a year-on-year contraction in consumption of 25mbd in April and of 8.1mbd for 2020 as a whole, while the International Energy Agency (IEA) sees a slightly bigger drop both at the trough in April (29mbd) and for 2020 as a whole (8.6mbd). To put this into perspective, BP data shows that the largest year-on-year decline ever before this year was 2.6mbd way back in 1980. So severe has the impact of the demand drop been that for the first time in history oil prices in the US futures market actually went negative, with the front-month contract for West Texas Intermediate (WTI) crude closing at USD -$37/bbl on April 20 (Figure 1). These unprecedented shocks to an industry used to growth naturally raise the question as to what the shape of the recovery will be like. The EIA sees a V-shaped rebound, projecting 2021 demand at 99.5mbd, 7mbd higher than 2020 and close to the 2019 level of 100.8mbd. Meanwhile, by the end of this year the IEA sees demand back to less than 3mbd below the level at year-end 2019. Nonetheless, it now seems reasonable to ask whether we might in fact already have seen the peak in 2019. This is because the structural pressures bearing down
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on global oil demand will still be there once lockdowns start to be lifted, but their force will now be compounded by the behavioural changes prompted by the pandemic, some of which look set to endure. Consider first the structural side of the vice the oil industry now finds itself in, and what we might call the three ‘D’s. First, there is the mega-trend of decarbonisation. To stand any chance of achieving the goal of the Paris Agreement on climate change of ‘holding the increase in global average temperatures to well below 2°C above pre-industrial levels’, we have to decarbonise transport and industry as quickly as possible. That means burning less oil. Second, there is deflation, or more specifically the deflationary impact of renewable energy. The cost of renewable energy has plummeted over the last decade owing to technological improvements and economies of scale. According to a recent IEA study of the impact of the pandemic on energy markets, renewables will be the only form of energy to see demand growth this year, and with over 50% of global oil demand accounted for by road transportation, the electrification of mobility made possible by the rise of electric vehicles (EVs) poses an existential threat to the oil industry. The simple truth is that EVs are much more efficient than gasoline or diesel internal-combustion engines. That is just physics. Indeed, in this respect it is worth highlighting that the structural pressure of efficiency improvements has been clearly visible in US oil demand over the last decade and a half even before the impact of renewables and EVs in tandem has started to be felt. According to the EIA, the highest level of US oil demand to date was registered all the way back in 2005 at 20.8mbd (Figure 2). Despite the US population grow-
Figure 1. Front-month WTI futures contract, January-May 2020
Mark Lewis, BNP Paribas Asset Management
Source: Bloomberg.
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Mark Lewis, global head of sustainability research, joined BNP Paribas Asset Management in January 2019. Previous roles include managing director and head of research at the Carbon Tracker Initiative.
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Figure 2. US oil demand, 1990-2019 (kbd) 25000
20802 19701
20000
19534
20464
19180
17725 16988
15000
10000
5000
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: US Energy Information Administration. Thousands of barrels per day.
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30%
Oil price plummeted on 9 March 2020.
ing by 20 million people over 2005-19, and vehicle miles travelled (VMT) increasing by nearly 10% from 8.2bn miles a day in 2005 to 9bn miles a day in 2019, US oil consumption in 2019 was still below the 2005 level (Figure 2). The increases in population and VMT were outweighed by greater vehicle efficiency and by tighter pollution regulations on fuel emissions. Third, there is the pressure for the detoxification of air in the world’s largest cities, and nowhere more so than in the megalopolises of Asia. According to the University of Chicago’s research on air quality, pollution from particulate matter caused mainly by the burning of fossil fuels is now the world’s largest killer, cutting average life expectancy globally by nearly two years. This issue was already rising up the global policy agenda before the coronavirus hit, but a striking feature of the pandemic’s impact has been the blue skies and clean air registered in large cities around the world as oil-burning traffic has come to a halt. Citizens everywhere will likely now push harder than ever for cleaner air, thereby accelerating the phase-out of petrol and diesel vehicles in the world’s largest conurbations. Behavioural changes
Then there is the second side of the vice squeezing the future outlook for oil: the behavioural changes caused by the pandemic that have sapped oil demand in the past few months and that may live on in less dramatic form once the lockdowns come to an end. First, there has been a dramatic increase in working from home, especially for white-collar workers across the industrialised world, with hundreds of millions of daily commutes eliminated since the imposition of confinement. It seems reasonable to assume that this will give rise to permanently higher rates of tele-working in future, and hence that some of the
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oil demand lost in the lockdown will never return. Second, international air travel—one of the fastest growing sources of oil demand over the last two decades—has evaporated over the last couple of months like the contrails from a jet engine on a hot, dry day. Growth will come back, but with businesses reaping cost and efficiency savings from substituting video-conferences for face-to-face meetings many will probably now think twice when it comes to approving long-haul trips in future. Some air travel might therefore never return. Third, until a vaccine is found we will continue to see social distancing to a greater or lesser degree, and this will militate against a rapid easing of restrictions on large gatherings such as sporting events and many other forms of collective leisure and entertainment. And many people may remain shy of large gatherings on a permanent basis even when the public-health advice does allow for them again. Once more, this means some oil demand associated with individuals’ leisure activities may be lost for good. In short, the future for oil is now more uncertain than ever before. As the chief executive of Royal Dutch Shell, Ben van Beurden, said on the company’s Q1 earnings call on 30 April: “We do not expect a recovery of oil prices or demand for our products in the medium term … we live in a crisis of uncertainty at the moment; we don’t know what is on the other side.” And then, in an interview with the Financial Times trailed on 12 May, the chief executive of BP, Bernard Looney, said of the impact of the pandemic on oil demand: “I don’t think we know how this is going to play out. I certainly don’t know. Could it be peak oil? Possibly, possibly. I would not write that off.” All of this is bad enough, but what if there is more disruption to come on the supply side over the medium to long term?
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The prospect of peak demand could change the strategy What if Saudi Arabia is already starting to think about the long-term implications of the increasing global policy ambition around decarbonisation and the rapidly improving economics of renewable energy, battery storage, and EVs? If you are the Kingdom of Saudi Arabia and you are looking at the rapidly changing investment sentiment towards oil owing to the growing traction of the peak-demand narrative and the relentless rise of renewable energy, do you not start to re-appraise your most fundamental assumptions about value optimization. If you see a rising risk that the market will start to price in peak demand happening by 2030 or sooner, do you not start thinking about significantly increasing your capacity and going for a volume-led strategy over the next 30 years rather than the price-led strategy you have followed for the last 50? The point is that with oil having to compete increasingly with the deflationary dynamics of renewables going forward, the long-term Power-Purchase-Agreement (PPA) contract model of electricity markets might start to look attractive to the world’s lowest-cost oil producer with the world’s largest reserves. If you are sitting on the cheapest and most abundant oil in the world then you have a big incentive to shift as much of it as possible over the next few decades as the global energy system accelerates its transition away from hydrocarbons. If Saudi Arabia could offer counties like China and India long-term offtake contracts in significant volumes at a fixed price of, say, USD $40-50/bbl, this could be a win-win strategy both for the Kingdom and the largest importing countries. The Saudis would get long-term
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visibility on increased volumes at a price that still locked in a huge amount of rent, while the likes of China and India would get long-term security of supply at affordable and stable prices. Assuming required capital expenditure of USD $25$30bn per 1mbd of extra capacity (as estimated by UBS), it would cost Saudi Arabia in the region of USD $200bn to add 7.5mbd of extra production over the next decade, which in turn would raise its total potential output to 20mbd (the Kingdom currently produces about 10mbd but sits on about 2.5mbd of spare capacity). USD $200bn is a lot of money even for Saudi Arabia, but let us put it into context. Assuming operational lifting costs of USD $10/bbl, and assuming that half of this hypothetical future production were sold at a fixed offtake price of USD $45/bbl to large Asian importers while the other half continued to be sold at merchant prices, the annual operating profit from the incremental 10mbd sold would be USD $130bn a year, or USD $2.6trn over 20 years. In other words, the upfront capex would be covered with only 18 months’ worth of extra production. At the same time, this hypothetical scenario would allow Saudi Arabia to retain pricing flexibility over the other 10mbd of its capacity and hence the opportunity to benefit from any price spikes that might occur on the downslope in global consumption after peak demand had occurred. This might sound fanciful but the speed with which the rules of the global energy game are being re-written by the inexorable progress in renewables, batteries, and EVs means that the world’s cheapest and largest oil producer has every incentive to game out a scenario such as this, however far-fetched it might seem against the backdrop of the oil market we are all used to.
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The quote
… the big question for investors is where does this leave the outlook for the oil industry in general and the oil majors in particular?
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Renewables versus oil: Visibility versus volatility
CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What was the trend in crude oil prices in early March 2020? a) Prices dropped by 30% b) Prices dropped by 13% c) Prices increased by 3% d) Prices remained stable 2. What is cited as a structural pressure on global oil demand? a) Deflationary impact of renewable energy b) Detoxification of the world’s cities c) The trend towards decarbonisation d) All of the above
Against this uncertain backdrop, the impact of the COVID pandemic will likely be to accelerate the energy transition away from fossil fuels and towards cleaner renewable energies, with the depressed returns and volatility in oil markets likely to weigh on investor sentiment for the foreseeable future, thereby boosting the attractiveness of renewable-energy projects offering lower-risk, longer-term visibility of earnings. fs
Disclaimer This article is issued by BNP Paribus Asset Management Australia Limited AFSL 223418 ABN 78 008 576 449 and produced for information purposes only. It does not constitute financial product advice, an offer to issue or recommendation to acquire any financial product. Opinions in this article constitute the judgement of the company at the time specified and may be subject to change without notice.
3. What is the author’s view in regard to global oil demand? a) Demand is likely to peak in 2020/21 b) Global demand is expected to peak by end 2020 c) Demand might have already peaked in 2019 d) Global demand dropped in 2019 4. Which of the following is cited as a likely impact of the COVID-19 pandemic? a) It will slow the transition from fossil fuels to renewable energies b) It will accelerate the transition from fossil fuels to renewable energies c) It will increase the use of fossil fuels in the next few years d) None of the above 5. China is cited as the world’s second largest consumer of global oil. a) True b) False 6. India is cited as the world’s largest consumer of global oil. a) True
b) False
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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Despite the pause in new deal activity in fund secondaries markets in the first half of 2020, there are expectations of increased deal activity ahead for superannuation and institutional investors.
Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
The road ahead: Secondaries markets in 2020-21 Considerations for superannuation and institutional limited partners
W Sean Cole
hile there has been a hiatus in new deal activity in fund secondaries markets during the significant market dislocation experienced in the first quarter of this year, we look ahead to the green shoots in the secondaries market, with expectations of increased deal activity 2020-21.
What can we expect?
Over 2020-21, will see a number of drivers influencing both sellside and buy-side demand in the secondaries market. This paper outlines what we can expect and discusses the thematics for superannuation and institutional LP (limited partners) participants over this period. Denominator effect: Opportunity or recurrent threat?
While some superannuation and institutional LPs will continue to rebalance their alternative asset portfolios as a result of the ‘denomi-
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nator effect’ (being the decline in the value of equities holdings outpacing alternative assets holdings, resulting in an overweight allocation to alternative assets); for others, the rebound in public equity markets during the second quarter of this year will have resulted in alternative asset allocations falling back within target asset allocation bands (or slightly underweight), presenting opportunities to increase exposure to alternative assets. That said, such opportunity could quickly be tempered by any subsequent equity market correction as a result of the continued volatility caused by COVID-19 or the outcome of the United States election. Risk-adjusted outperformance
Historical performance data demonstrates, as compared to the last period of significant market dislocation caused by the global financial crisis (GFC), that alternative asset portfolios acquired in the period immediately after the GFC significantly outperformed, with returns driven by a combination of alternative assets being acquired at steep discounts to net asset valuations (NAV) and underlying portfolio company valuations rebounding as the economy recovered.
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Secondaries dry powder
The quote
We will see a number of drivers influencing both sell-side and buy-side demand in the secondaries market.
Significant capital awaits deployment by specialist secondary managers, with BlackRock and Manulife, to name a few, launching new secondaries strategies or funds in late 2019 / early 2020. The second half of 2020 presents an opportunity for those strategies to meet deployment targets. Leaning-in on co-investment programs
For those LPs with mature co-investment fund programs benefiting from reduced (or nil) carry and enhanced governance rights, the continuing pressure on superannuation funds to lower indirect costs of their alternative asset portfolios driven by ASIC’s Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97) may motivate superannuation funds to trade their exposure to higher cost private equity main or flagship fund investments.
What deal mechanics will we see in secondaries sale negotiations? Bridging valuation gaps
The traditional pricing structure deployed in a fund secondaries transaction is to value the fund stake(s) based on the previous quarter or half yearly NAV, coupled with a purchase adjustment for distributions and any other payments paid to the seller between the valuation date and closing date and capital call amounts paid by the seller between the valuation date and closing. In an environment where distributions have been reduced or turned off, frequency of capital calls increased and NAV discounts widened, the market swung wildly in favour of buyers. As a result, creative earn-out structures have made a resurgence in secondaries market transac-
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tions, offering a way to bridge valuation gaps and allow the seller to exit while retaining a contractual right to participate in some of the upside that may be expected after close, as fund valuations improve over and above an agreed return hurdle. Supporting the seller’s entitlement to earn-outs and deferred consideration
Deploying earn-out structures or offering the buyer deferred consideration terms brings into sharper focus the financial substance of the acquirer, particularly if the parties are transacting in more recent vintage portfolios and the buyer is assuming significant unfunded commitment liabilities. While historically unheard of in secondaries transactions, taking security over the disposed fund interests, agreeing third party escrow arrangements or seeking guarantees from other buyer group members are now being sought to support the seller’s contractual right to an earn-out or deferred consideration under the purchase and sale agreement (PSA). If buyers and sellers are subject to different international regulatory regimes or currency risk needs to be allocated between the parties as part of the sale structure, these can present novel issues which need to be worked through and may extend the usual expedited timetable in which a PSA can be negotiated. Caution with respect to distressed sellers
Caution should also be exercised by buyers acquiring fund interests from distressed sellers in the current environment (in particular, where the interests relate to earlier vintages and there is a longer period of ownership being warranted by the seller). Buyers are becom-
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ing more focused on the ongoing financial substance of a distressed seller having the means to stand behind the typical range of ‘excluded obligations’ for which the seller customarily remains responsible (being those obligations and liabilities referable to the seller’s period of ownership (including any LP clawback obligations)). This can result in contingent or deferred consideration structures or escrow arrangements being pursued by buyers. Structuring of portfolio sales
In structuring the sale of a portfolio of fund interests, the traditional focus of parties was to ensure that: • consecutive closings of each fund interest could be held as soon as possible after the conditions to closing of that fund interest were satisfied; and • failure to satisfy conditions to close of one fund interest would not derail the closing of other fund interests being transacted. In the current environment, sellers will be focused on ensuring sufficient fund interests close with certainty (particularly those interests which carry larger unfunded commitments) so as not to allow the buyer to cherry pick and walk away from closing on the remaining interests. MAC clauses
While MAC clauses are back on the negotiating table after some time on the sidelines in the preceding few years of buoyant secondaries market volumes, as the pandemic plays out and we see a broad range of health and economic outcomes across different jurisdictions, precision in articulating the parties’ intended risk allocation outcomes has never been more important. If parties proceed into the territory of negotiating a MAC, they should ensure that the time invested in negotiating and settling MAC triggers (which both operate in a way that provides the parties with certainty as to risk allocation and are appropriate to a portfolio of fund interests (which traverse investments in multiple jurisdictions that may be impacted in very different ways by COVID-19 and subsequent economic consequences)) will be proportionate and warranted, having regard to the size of the transaction and the anticipated time period between pricing of the transaction and closing. Finally, with an enhanced level of diligence and disclosure of information expected in the current environment, some sellers may also seek to limit the buyer’s ability to bring particular PSA warranty claims if such a claim relates to information disclosed to the buyer during the diligence process (and there are agreed parameters around the record of information disclosed).
Alternative structures for LPs seeking liquidity Other structured solutions being considered by LPs wishing to achieve liquidity while maintaining partial exposure to future upside on their alternative asset fund investments include:
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• Preferred equity structures—which can take a number of different forms (and may be LP-led or GPled). Preferred equity has traditionally been structured as a transfer of the fund interest into a new vehicle managed by the preferred equity sponsor. The seller receives part cash consideration upfront, while continuing to hold an interest in the new vehicle, entitling the seller to returns achieved above an agreed hurdle rate with the sponsor. Depending on the nature of the structure and scope of affiliate transfer provisions, some preferred equity structures can be implemented with limited conditionality and without requiring GP consent. Deployment of preferred equity structures remains in its infancy in the Australian market, but we expect will continue to grow in line with their continuing evolution internationally. • NAV-based lending—in the current environment, we have continued to see increased marketing of NAVbased lending facilities to LP investors as a liquidity solution, being secured over a portfolio of limited partnership, unit trust and other equity interests in hedge funds and private equity funds. The difficulty in the current environment, reflecting what so far has proved to be a valuation crisis rather than a liquidity or credit crisis, is the challenge lenders face on settling on NAV valuations (the base from which LTV ratios are struck). An impediment to regulated superannuation funds deploying NAV-based lending facilities is the prohibition on borrowing in section 67 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and corresponding prohibition of charging of fund assets, resulting in the need to restructure the secured fund interests into an SPV before the NAV-based facility can be effected. Superannuation trustees should also be mindful, in undertaking such restructuring, of the in-house asset rules under the SIS Act and APRA’s expansive directions powers (which appear to us to be broad enough to include directions in relation to borrowing activity of a controlled vehicle).
Alternative and private equity closedended investments: Not so illiquid?
Sean Cole, Allens
The evolution of the global secondaries market over the past decade (2019 volume notably hit a record close to $90 billion) has resulted in a liquid and transparent market with a well-developed set of legal terms at the disposal of superannuation, pension fund and endowment fund LPs. Subject to agreeing price referable to the last available NAV valuations (and we don’t downplay the difficulty of this task in the current environment), a customary secondary market transaction can be negotiated within a few weeks, with closing to follow at the next month or quarter end. As a result of market dislocation and the government’s change in policy settings introducing the temporary early release of superannuation payments, ASIC and APRA’s regulatory focus shifted to monitoring liquidity and ensuring regulated superannuation funds could
Sean Cole is a partner in the firm's funds, superannuation and wealth team, specialising in funds-related investments, wholesale fund formation and transactional work in the superannuation and financial services sectors.
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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What was the volume of the global secondaries market in 2019? a) Close to $90 billion b) About $1.9 trillion c) Almost $9 billion d) About $1.9 billion 2. W hich statement is accurate in regard to alternative asset portfolios acquired immediately after the GFC? a) They underperformed slightly b) They significantly outperformed c) They significantly underperformed d) They didn’t rebound for some years 3. What does the author state in regard to exposure to alternative assets in 2020-21? a) There will be little to no opportunity to increase exposure to alternative assets b) I t is likely that most will have to limit their exposure to alternative assets c) For some, there will be opportunities to increase exposure to alternative assets d) None of the above
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meet their payment obligations, including early release payments. While debate has ensued over certain segments of the superannuation sector’s exposure to private equity and alternative asset investments traditionally considered ‘illiquid’, the maturation of the secondaries market and its ability to provide liquidity solutions over the short term was largely glossed over in the debate. That is not to say that superannuation LPs have been distressed sellers of alternative assets in secondaries markets—having weathered the combination of a severe equities market correction and the unforeseen liquidity challenges brought about by the introduction of the government’s early release regime, it is a testament to the liquidity management planning and stress testing undertaken by regulated superannuation funds in Australia, demonstrating the prudential strength of the sector.
A final note With the secondaries markets seemingly being pulled in multiple directions, from the opportunities presented by the secondary dry powder available and reset in NAV prices expected as Q2 valuations are released, to the risks associated with a second equities market correction or rolling COVID-19 lockdowns globally weighing on secondaries sentiment, it couldn’t be more different from the record volumes achieved in 2019. With Q2 portfolio valuations arriving from GPs, we expect that LPs will take this opportunity to consider their core and outlier alternatives positions (and the associated direct and indirect cost profile of those portfolios), ready for what is shaping up to be a dynamic, challenging and opportunistic six months ahead for portfolio management in alternative assets. fs
4. W ith the temporary early release of super, APRA and ASIC have shifted their focus to which of the following? a) Eligibility criteria b) Fund liquidity c) Compliance checks d) Super guarantee matters 5. T he author expects that there will be increased deal activity in the second half of 2020-21. a) True b) False 6. The risks faced by secondaries markets in late 2020 are much the same as those faced in 2019. a) True b) False Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.
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www.fssuper.com.au Volume 12 Issue 04 | 2020
News and opinion
White papers
AMP 8
Administration & Management Superannuation fund mergers
AMP Capital
13
Australian Catholic Superannuation and Retirement Fund AustralianSuper
Superannuation, property settlements and COVID-19 28 10 6, 7, 11
Aware Super
10
Bank of Queensland
16
Bravura 10 BT
24
12
Complaints handling: A board responsibility
32
Ethics & Governance Walk the talk: On engagement and proxy voting
38
ESG compliance during a pandemic
43
Club Plus Super
6
Investment Equity portfolio evolution
Colonial First State
9
Staring down the barrel of an uncertain future
54
The road ahead: Secondaries markets in 2020-21
59
BUSSQ 12
ESSSuper 13 Financial Recovery Technologies
48
15
Legalsuper 13 LGIAsuper
16
Meat Industry Employees’ Superannuation Fund
16
Media Super
7
Mercer 13 MLC Super
8
MTAA Super
11
NGS Super
7
Northern Trust OnePath
10 8, 9
Rest 12 Russell Investments
11
Stake 7 State Super
9
Sunsuper 9 Tasplan 11 UniSuper 7 Vanguard 13 Victorian Funds Management Corporation
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FRANKLIN GLOBAL GROWTH FUND
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1. Average portfolio holdings as at 30/4/20. Portfolio holdings subject to change. ©2020 Franklin Templeton. All rights reserved. Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services Licence Holder No. 225328) issues this publication for information purposes only and not investment or financial product advice. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation, or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision. A Product Disclosure Statement (PDS) for any Franklin Templeton funds referred to in this document is available from Franklin Templeton at Level 19, 101 Collins Street, Melbourne, Victoria, 3000 or www.franklintempleton.com.au or by calling 1800 673 776. The PDS should be considered before making an investment decision. Morningstar Awards 2020 ©. Morningstar, Inc. All Rights Reserved. Awarded to Franklin Global Growth Fund for Fund Manager of the Year, Global Equities, Australia.
Resilient by design In a world of uncertainty, achieving resilience in investment requires discipline and a heritage of managing risk. To us, resilience means being able to imagine and prepare for multiple futures. Our proven skillset in portfolio construction, risk management and integrated ESG allows us to deliver robust solutions and more sustainable outcomes for our clients. To find out more about why resilience is a matter of design, not luck, visit: www.avivainvestors.com/resilient The value of investments can go down as well as up. Investors may not get back the original amount invested. fig #1
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fig #2
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