Latest episodes:
Mind the gap: Do super tax changes mean anything for women?
Super shakeup
Material change
Three years after it first announced plans for a superannuation offering, Vanguard is now home to one of the cheapest MySuper products.
Mercer analysis of publicly available retirement income strategy summaries shows a great disparity between super funds’ approaches.
SUPER
Cbus chair Wayne Swan has warned the industry has a fight on its hands when it comes to big structural reforms moving forward.
AUSTRALIANSUPER ENTERS TOP 20 PENSION FUNDS
The super giant has risen two places and now ranks number 20.
PERFORMANCE TEST PAUSE IN MEMBERS’ BEST INTERESTS
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Chant West has welcomed the proposed pause in the Your Future, Your Super performance test, saying it’s in the best interest of super fund members.
Associate Editor Andrew McKean andrew.mckean@financialstandard.com.au
Design & Production
Shauna Milani shauna.milani@financialstandard.com.au
Technical Services
Roger Marshman roger.marshman@rainmaker.com.au
Ian Newbert ian.newbert@rainmaker.com.au
Fiona Brillantes fiona.brillantes@rainmaker.com.au
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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
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 Rainmaker Information company.
57 604 552 874
This CPD-accredited forum will explore how considering people, planet and profit can impact investment performance. ESG and ethical investing have never mattered more to advisers, institutional investors, retail investors as well as super fund members, and regulatory scrutiny on this space has never been more intense.
We will explore the nuances of ESG investing, the state of the market, products on offer and how ESG screened portfolios can be used to gain performance benefits. Hear a dynamic mixture of speaker presentations, panel discussions and case studies to help explore the evolving world of ESG investing.
Tuesday, 23 May 2023 | 8:30am to 2:30pm
Sydney | In-person & virtual
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Investment
ASSESSING WORKPLACE SUPER FUND PERFORMANCE
By Rainmaker Information
This paper explains the development of the RMetrics assessment model as a means of capturing multiple measures of risk-adjusted return for a product and integrating them into a single holistic risk score.
Investment INVESTING TREATIES IN CONFLICT ZONES
By Nastasja Suhadolnik, Cara North, Caitlyn Georgeson, Madelyn Attwood, Corrs
Chambers Westgarth
The nature and importance of bilateral investment treaties in terms of the protections they offer to individual and corporate entities when investing in territories other than their state of nationality.
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Compliance BUILDING A SUSTAINABLE SYSTEM TO MANAGE REGULATORY CHANGE
By Richard Batten, Donna Worthington, Ian Lockhart, Michael Lawson, MinterEllison
To assist Australian financial services businesses with managing regulatory change, this paper offers a framework that can be applied to build a sustainable approach to change.
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Ethics & Governance GREENWASHING: TAKING A PEEK BEHIND THE GREEN SCREEN
By Jonathan Steffanoni & Jessica Pomeroy, QMV Legal Trustees are under increasing pressure to ensure that in promoting the green credentials of their investment products they provide a clear and accurate representation of the funds’ ESG-related investment practices, goals and targets in all communications with potential investors.
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Insurance USING DATA TO BETTER TARGET INSURANCE BENEFITS WITH SUPER
By John O’Mahony and Ben Lodewijks, Deloitte
This paper investigates how better collection, access to and analysis of member data can lead to the better alignment of default life, TPD and IP insurance policies offered to superannuation members.
SMSFs
WHEN DO TRUSTEES NEED MINUTES AND RESOLUTIONS
By Phillip La Greca, SuperConcepts
What, when and how to document key decision-making processes and their outcomes is a critical issue for all trustees, including SMSF trustees.
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SMSFs
THE GUIDE TO PAYING SUPERANNUATOI DEATH BENEFITS
By Graeme Colley, SuperConcepts
This paper provides a checklist of practical, ordered steps for SMSF trustees to follow to help them meet the deceased member’s wishes while also complying with superannuation law and ensuring that the ongoing trustee structure remains compliant.
59 Ethics & Governance TRUSTEE GOVERNANCE AND ACCOUNTABILITY
By Lisa Butler Beatty, Zein El Hassan, Lisa Rava, My Linh
Pham, KPMG AustraliaThis paper looks at the ramifications for superannuation fund trustees of recent and proposed legislative reforms.
Every middle-class white-collar services sector employee has by now heard of the 'generative artificial intelligence' website ChatGPT. Whether it's coming for your job depends on the value you add doing whatever it is you do.
ChatGPT exploded into the mainstream mid-January this year and within weeks had stirred up a frenzy. In a rendition of the reaction when calculators first went mainstream in Australia, or new laws in Florida banning all books in schools, hundreds of schools and universities quickly announced they would ban it. Trouble for them is that it’s generative content so plagiarism checkers will be useless against it.
This is what happens with every new technology leap: the establishment panics. The same occurred when internet search engines exploded onto our computer desktops and when smartphones were unleashed. But few of us probably expected the greatest disruptor of all, Google, would themselves announce they will block all AI-generated content and not include it in search results.
Many of us may be thinking that friendly, easy to use AI has just crept up on us. Not technology insiders, they've been watching these developments gather pace over the past few years under cover of the pandemic. Which might be why these same insiders are telling us that this is just the beginning.
There are two ways to respond this. One, if you're a services sector professional who gets paid a lot of money to in essence just rehash other people's work, you'd be wise to start updating your resume. I hear the Australian Defence Force is desperately looking for recruits and Australia has a chronic shortage of skilled trades people.
Two, reimagine. AI is one of the most exciting technological breakthroughs in decades that will transform many sectors of the global economy. We're just not sure how. Better to be part of the change than fall victim to it.
We also need to remember that ChatGPT is just a prototype and has many weaknesses and limitations that even its developer, the OpenAI corporation, is warning
us about. But I can already see some useful test case generative AI applications that could fix a few long-standing problems in how the superannuation industry operates.
Like how superannuation is bogged down with blackletter-law compliance, legislative complexity and administrative intensity with vast armies of experts paid big salaries to explain it all to the rest of us.
Play our cards right and within a few years many of those compliance, legislative and pension entitlement experts who spend most of the lives keeping up with technical details, and the thousands analysts working for active investment managers only to be gazumped by the market index each year, might be able to recraft their roles and get back to actually adding value to their employer's clients' lives.
Super fund trustees are meanwhile crying out for scalable financial advice services to help explain to their millions of fund members in or approaching retirement how to best use their super fund. These trustees might now have their solution. The dwindling number of human financial advisers, rather than be threatened by this, would surely welcome the support of generative AI to simultaneously improve service quality and slash costs to fund members.
There's a lot of water to flow under the bridge before these AI efficiencies began to happen in the superannuation sector. But one thing we can count on is that generative AI and how to either harness, regulate or tame it will be 2023's defining issue for corporate Australia. Doubly so for a services sector like the superannuation industry. fs
The quote
I can already see some useful test case generative AI applications that could fix a few long-standing problems in how the superannuation industry operates.
Alex Dunnin executive director, research & compliance Rainmaker InformationAustralian Retirement Trust has appointed State Street as its custodian and administrator.
The $175 billion superannuation fund has confirmed the mandate, chief financial officer Anthony Rose commenting: “After a comprehensive and thorough tender process, Australian Retirement Trust has chosen State Street as our preferred and primary custodian and investment administrator.”
While the fund didn’t confirm when the appointment was effective, a document on the fund’s website last updated May 18 lists State Street as the service provider.
Northern Trust was QSuper’s custodian and was retained in the merger with Sunsuper last year. Interestingly, Northern Trust replaced State Street as QSuper’s custodian in 2018, taking over the mandate State Street had held since 2012.
According to the Australian Custodial Services Association, as at June end, State Street ranked as the fourth largest custodian in Australia with $625.4 billion; Northern Trust ranked second at $679.3 billion.
Meanwhile, following a review, State Street will also continue to provide custodial services for Rest. The mandate includes back office and custody services, accounting, unit pricing, performance, and analytics. fs
Stockspot’s Fat Cat Funds Report has named and shamed the worst performing superannuation funds in Australia, all of which are retail offerings.
OnePath was named the overall worst performer, followed by Colonial First State, AMP, and ClearView.
Meanwhile, Qantas Super was named the best overall performer, followed by UniSuper, HESTA, AustralianSuper, and IOOF.
This year's report compared more than 500 multi-asset investment options offered by Australia’s largest 90 super funds. The funds were assessed on how they performed after fees and compared to other super investment options of similar risk over five years. The data further analysed the success of funds based on investment strategy.
It found the top performing balanced funds based on a five-year return to be Qantas Super - Balanced at 6.10% pa, Qantas Super - Glidepath: Destination at 6.10% pa, and AustralianSuper - Conservative Balanced with 5.51% pa.
The worst balanced options were Zurich - Capital Stable with 0.59% pa, OnePath - OptiMix Conservative on
Chloe Walker
Commonwealth Superannuation Corporation (CSC) selected Iress as its new technology partner in a bid to improve member outcomes, reduce administration complexity and drive down the cost to serve through a digital-first approach.
On an initial five-year contract, Iress will provide the super fund with its registry software, Acurity, for the administration of its defined benefit scheme members.
The registry software will deliver the consolidation of legacy and disparate systems, migrate all products on a single registry and enhance access to data.
The migration of members to Iress’ unified registry and operating model will be managed in stages over a three-year period with the first expected to be completed by July next year.
1.13% pa, and ClearView - IPS Active Dynamic 50 at 2.05% pa.
Other top performers included Qantas Super – Conservative for best moderate fund while TAL Personal Super’s Capital Protected option was the worst. Qantas Super – Growth was best growth option and Zurich – Balanced was the worst. MLC Horizon 7 Accelerated Growth Portfolio was the best performing aggressive growth option while OnePath OptiMix Balanced was the worst.
The report also found that prominent funds investing in unlisted assets claimed to be less impacted by market volatility, due to a long-term strategy.
Despite some fund crediting their exposure to unlisted assets with positive performance last year, the report highlighted there are zero disclosure obligations around these assets.
The second major trend coming out of the report for this year is that scale does not necessarily lead to better outcomes for members.
“We found no evidence that larger funds outperform smaller funds. The performance of merged funds has not improved," it explained. fs
The financial impact of this new contract does not impact 2022 guidance.
CSC’s chief executive officer Damian Hill said: “We’re committed to putting customers first, and this is another important step in a significant transformation program aimed at improving member outcomes and operational efficiency.”
“We selected Iress due to its deep industry and technology expertise, as well as the strength and ability of its software capabilities to deliver on our goals.”
Iress chief executive Andrew Walsh said: “We’re pleased to be selected by CSC to support its vision of reducing cost, minimising risk and eliminating the need for manual and paper-based workflows."
Walsh added that the announcement highlights the demand to adopt a target operating model underpinned by digitisation and automation- regardless of fund size. fs
The quote
We found no evidence that larger funds outperform smaller funds.
Andrew
McKeanAppearing before the House of Representatives’ Economics Committee, APRA’s Margaret Cole said the regulator is concerned about some of the super funds that passed the performance test yet fail the regulator’s own sustainability testing.
In March 2022, APRA released a report that showed 24 smaller super funds face immediate sustainability issues, while more than half of those with between $10 billion and $50 billion in funds also face adversity. This is based on number of member accounts, cash flows and rollovers.
Some of the funds that passed the performance test this year, by APRA’s observations and calculations, don’t look to have a long-term sustainable future, Cole said, saying this is perhaps one of the regulator’s biggest concerns.
“We will continue, even where there aren’t fails to nudge some of those funds that we see probably don’t have sustainability, to consider their options for the future and how their members can be better served,” she told the committee.
The comments followed questioning by independent MP Allegra Spender over whether recent reforms in the sector are driving an excess of consolidation.
Cole acknowledged the industry has experienced significant consolidation in the last two years, driven by the performance test. However, a very large number of trustees remain in the industry, she said.
“We had over 212 in 2013, we’re down to 160 in 2021. It’s still a large number,” Cole said. fs
Three years after it first announced plans for a superannuation offering, Vanguard is now home to one of the cheapest MySuper products - a lifecycle solution that auto-adjusts 36 times.
it the cheapest in market for a $50,000 balance - but only just. ANZ Staff Super has fees of 0.588%.
But it will get cheaper, Lovett told Financial Standard
We've
It was back in November 2019 that Vanguard's Robin Bowerman revealed the indexer's plans to re-enter the super sector. Later that month, Michael Lovett was appointed as head of superannuation, tasked with leading the development and launch.
Three years later, Vanguard has unveiled Vanguard Super SaveSmart, a lifecycle MySuper product and series of index-based diversified options and single sector options.
The product has 36 cohorts, with the allocation to growth assets set to begin reducing when a member celebrates their 47th birthday. A typical lifecycle product adjusts allocations four or five times.
A key selling point of the product is its low-cost, including no dollar-based fees. The lifecycle option comes in at 0.58% total fees per annum which, according to Rainmaker analysis, makes
“We’ve never set ourselves to be the lowest cost in every category, we are a low-cost provider, but I think the difference with us is that we're lower cost in time,” he said.
“So, the more success we have, the lower our fees will drop. What we have now, we think is competitive, but it is going to be lower in five years’ time with success; we’ve been in Australia 25 years, and we’ve dropped our prices 40 times, so we've got that history of doing it.”
As of 10 November 2022, about 18,000 potential members had expressed interest in taking up the product, in addition to several financial advice firms that will be able to access it through the Vanguard Adviser Portal, to be rolled out in the coming months.
“Not all of those will follow through, we know that. But we think a good number will, so we're really excited by Lovett said. fs
A survey of superannuation fund members found overall satisfaction has declined and more are considering changing funds.
The latest CSBA FEAL Superannuation CX benchmarking report surveyed close to 5500 members from 20 super funds and found that customer experience has declined across all key measures.
The survey found overall satisfaction has dropped to 7.7 from 8.1, while the ease of dealing with a fund dropped 8.3 to 8.0, and the likelihood of switching grew from 17% to 23%.
Of those that had recently interacted with their super fund, 25% said they’d considered switching in the last 12 months and 63% of them said they’re likely to do so in the next 12 months.
Broken down, it’s those aged 35-44 that are most
likely to switch, with 30% saying they’d likely do so in the coming year. Those aged 25-34 are also high risk at 26%.
When questioned on whether they feel empowered to retire or in retirement, only 59% of those aged over 55 said they had a high degree of confidence they’d have enough money to be comfortable. Further, 33% said their fund didn’t empower them to plan and prepare for retirement; last year one in four said the same.
Overall, the Net Promoter Score for all funds dropped 11 points to +15.
CSBA CX director of finance Sam Monteath said that while it was no surprise to see current market volatility negatively impact member sentiment, it is now crucial for funds to proactively offer members reassurance using timely and meaningful interactions. fs
never set ourselves to be the lowest cost in every category, we are a low-cost provider...
The super fund introduced Super View, a new online data tool allowing members to see the identity, value and weightings of their investments.
The tool provides members the ability to see how their money is invested across a range of asset classes and derivatives, including unlisted assets.
It also allows users to scope out either an asset class or regional level to sector specific industries and companies and click through to see the fund’s voting history for each company.
The data tool complements, but is separate to, the fund’s existing portfolio holdings disclosures.
Active Super chief executive Phil Stockwell said that, in addition to providing detailed portfolio information and data that is now required under the PHD regulations, the super fund has gone one step further by offering members a proprietary online data visualisation platform.
“We asked some of our members what investment data they wanted represented in a visually rich manner. Most responded by requesting to see the exposure of global investments and the ability to easily see the industries and companies the fund invests in,” he said.
Active Super chief member experience and growth officer Chantal Walker said: “This tool further enhances our transparency and elevates our multichannel member engagement experience.”
“It supports our ambition to be a leading and innovative digital super fund.” fs
The
Mercer analysis of publicly available retirement income strategy summaries shows a great disparity between super funds’ approaches.
Under the requirements of the Retirement Income Covenant, trustees set out how they’ll help members with their retirement outcomes, making summaries publicly available in July.
Mercer said: “We found variations in size, detail, target audience and messaging.”
“Some trustees have adopted a compliance-based approach, while others focus on embracing the intent of the Covenant obligations.”
The funds Mercer reviewed all chose to approach their RIC strategy in one of two ways: targeting industry regulators, experts and interested members, or targeting fund members.
The Covenant requires trustees to specify the members covered, the meaning of retirement income and the period of retirement, including this information in the strategy. But there is no requirement for these de -
terminations to be in the summary, Mercer explained.
Around 50% of funds disclosed their key determinations in their summaries but they weren’t consistent, the research indicated.
There were inconsistencies in the ages of members covered by strategies and periods of retirement, Mercer said.
Definitions of retirement income were also varying, with about 60% of funds using the Covenant’s minimum definition of retirement income, being payments a beneficiary receives from their super fund plus Age Pension.
Contrastingly, other funds definitions provisioned for the inclusion of additional sources of income.
“It raises the question of how these funds will obtain this information and, in the absence of innovative changes to legislation, this is presumably reliant on the member providing it to the fund,” Mercer said.
Moreover, demonstrable of funds’ RIC strategy polarity, only half of the funds reviewed highlighted member’s access to financial advice. fs
Members of funds that failed the inaugural Your Future, Your Super (YFYS) performance test aren’t leaving, with new modelling showing just 10% have found a new fund.
According to Industry Super Australia (ISA) analysis, only 10% of members switched out of the super funds that failed the performance test. However, 850,000 members failed to leave their “dud” super product, costing them $1.6 billion.
ISA modeling shows if a member on the median wage with a balance of $50,000 stayed with one of the poorest performing funds for the next decade they could be approximately $25,000 worse off.
If a 30-year-old was stapled to one of these dud funds for the rest of their working life, they could be $225,000 worse off at retirement.
ISA warned that further losses could accrue because of the previous government’s stapling
reform that can tie members to failing funds unless they act.
As previously reported by Financial Standard, YFYS stapling requirements tied around one million members to a super fund that’s failed APRA’s performance test.
While members can leave underperforming funds, most Australians don’t know the effects of the YFYS reforms and are generally detached from their super.
“This policy (stapling) was designed to get members to switch, but the inaction combined with the stapling reform will mean members are stuck in dud funds for longer,” ISA said.
“While the stapling reform has stopped the future proliferation of unintended multiple accounts it needs to be linked to the performance test so that members can only be stapled to a fund that passes.” fs
Cassandra
BaldiniAware Super has launched its real estate arm and intends to hold $7 billion in assets within five years.
First announced in June 2022, Aware Real Estate will actively manage the super fund’s directly owned Australian living, industrial, office and mixed-use property portfolio.
The portfolio currently consists of 11 operational assets with 99% occupancy and eight development sites in various stages of planning.
Aware Real Estate's chief executive Michelle McNally said the business is a reflection and reinforcement of Aware Super’s commitment to delivering strong risk-adjusted returns to its members.
"We already have a $1.7 billion real estate portfolio, which we’re excited to further expand in the Australian market with an initial focus on industrial, living, and mixed-use sectors," she explained.
Aware Super said the platform is part of its ongoing commitment to lower member fees, its deputy chief investment officer Damien Webb commented that it will also diversify the fund’s real estate holdings to deliver returns and strengthen member retirement security.
"As part of our strategy to lower fees and deliver strong returns for our 1.1 million members, we’re aiming to increase our internally managed portfolio across all asset classes to 50% by 2025," he added.
Altis Property Partners, a long-running partner of Aware Super, is assisting in the establishment of the new real estate platform by "providing invaluable support services." fs
Chloe
WalkerAppearing on a panel at the Conference for Major Super Funds, Cbus chair Wayne Swan warned the industry has a fight on its hands when it comes to big structural reforms moving forward.
“I was in the parliament when we started the Super Guarantee 30 years ago, and I've been a participant looking at it from the outside and now from within,” Swan said.
“I can say what I've found now from within is that I fully understand just how important the collaborative model is, the model of employers and unions getting together as trustees on a profitto-member model.”
Now, he said, super funds have got to decide how to reinvigorate the profit-tomember model, the collaborative model of unions and employers, to meet the attacks which are going to continue to come over the next 30 years.
“We need to find the next generation of CFOs, CIOs, and trustees that are going to breathe much more life into that collaborative model, as it continues to be attacked because it's too commercial,” he said.
Spirit Super independent chair Naomi Edwards shared a slightly different perspective.
“For the last 10 years we've been in
the valley of regulatory terror awaiting what new changes will arise, and I think there'll be a breather from that,” she said.
Now, she said, the new valley of terror that super funds are entering is not regulatory or political, but competitive.
“I think that the competition is not primarily of industry super funds, retail funds, or other funds, as I think we’re now officially “frenemies”,” she said.
“But we're not swimming in our lanes; we're swimming in many funnels nationally across a lot of lanes. And I think that for many of us finding how we succeed and define ourselves with this new competitive threat, let alone new competitive threats that could come from the outside, will be the terrifying thing.
Meanwhile, AustralianSuper trustee director Claire Keating said: “if you don’t like change, don’t be in superannuation.”
“I’ve worked in super for almost 30 years and its changed so many times.
“It seems to be forgotten that responding to constant tinkering and changes and potential changes costs members money, because the preparation we do for things that might happen or might not happen actually takes away from us running the fund for members benefit.” fs
The board of UniSuper will impose a cap on fossil fuel exposure of 7% and has divested from companies that generate more than 10% of revenue from the extraction and production of thermal coal.
UniSuper has issued its fifth annual climate risk report, detailing the $108 billion super fund’s progress towards its net zero 2050 target and activities around climate risk management.
“Decarbonisation will be a pervasive theme for at least the next decade,” chief investment officer John Pearce said in the report. “It is both essential and inevitable. This will involve a much greater share of renewables as a baseload energy source and a phasing out of fossil fuels.”
In September 2020, UniSuper committed to a net zero portfolio by 2050 and a 45% reduction by 2030 through a combination of company engagement, advocacy and investing in companies that are “instrumental in achieving a net-zero future.”
As of 30 June 2022, 2.8% of the fund’s investments were in fossil fuels, up from 2.55% in 2021, which UniSuper said the value of the investments increased due to changes in share prices as opposed to increased allocations.
UniSuper also disclosed that in the last year, 44 of the largest 50 Australian investments set Parisaligned net-zero 2050 targets as well, an increase from 40 in the previous year. fs
The quote
We need to find the next generation of CFOs, CIOs, and trustees that are going to breathe much more life into that collaborative model, as it continues to be attacked because it's too commercial.
Andrew McKean
HESTA has notified AGL, Origin, Santos and Woodside that they’ve been placed on a watchlist under the fund’s engagement escalation framework.
HESTA has written to the chairs of AGL, Origin, Santos and Woodside informing them the companies were placed on the watchlist. The fund outlined its concerns about the disparity between the companies’ strategic targets and the Paris Agreement goals.
Watchlist companies are subject to closer engagement and monitoring. The engagement escalation framework also considers the use of votes against ‘Say on Climate’ resolutions, directors’ elections, support or filing of shareholder resolutions and/or consideration of divestment, where HESTA considers there is inadequate evidence of progress to address risks and it is in members’ best financial interests.
HESTA chief executive Debby Blakey commented the best financial interests of members are served through a timely, equitable and orderly transition to a low carbon economy.
“Each of these companies has a role in mitigating climate risk and reducing emissions in Australia, which will help reduce the systemic climate risk to our members’ portfolio,” Blakey said.
“HESTA has engaged with these companies since at least 2018. While we’ve seen some progress, there’s evidence of a gap between the companies’ commitments and their actions to transition their businesses in line with Paris Agreement goals.”
The fund has sought a response from the companies. fs
The numbers
$23.6tn
The super giant has risen two places and now sits at number 20 with US$169.055 million total asset.
According to annual research conducted by the Thinking Ahead Institute and Pensions & Investments, 15 Australian funds were included in the survey dropping from 16 in 2020.
WTW Australia director of investments Jonathan Grigg said in general the prominence of Australian funds within the survey wane modestly.
“Most Australian funds included fell in the rankings relative to last year, partly due to a weakening Australian dollar over the course of 2021,” he explained.
“However, AustralianSuper has bucked this trend, its growth is, in part, due to consolidation within the Australian superannuation industry, with AustralianSuper a beneficiary of this in terms of increased fund size.”
He added the trend of consolidation has intensified as a result of the Australian Government’s Your Future, Your Super reforms.
Future Fund jumped one stop 26 with US$147.862 total assets while Aware Super fell seven places to 46 with US$107.511.
Grigg said there is an expectation that Australian funds will come in at higher ends in the future as more mergers occur.
“In 2022 we have already seen Australian Super complete a merger with LUCRF Super, further increasing its scale.”
“The flipside to this is that it could also lead to a lower number of Australian funds included in the survey due to mergers. An example being that two of this year’s top 100 funds, QSuper and Sunsuper, which have recently merged to form the significantly larger Australian Retirement Trust.”
The report further revealed assets under management (AUM) of the top 300 pension funds increased 8.9% to US$23.6 trillion in 2021.
While total AUM has reached record highs the report showed that growth has slowed from 11.5% in 2020 to 8.9% in 2021.
“This was to be expected after a very strong performance in asset markets over 2020. However, the latest performance is enough to take five-year cumulative growth to 50.2% in the period between 2016-2021,” it said. fs
Grattan Institute has warned the government against watering down the Your Future, Your Super reforms, saying it should instead focus on implementing the remaining recommendations of the Productivity Commission.
In its submission, Grattan Institute has argued the reforms are working as intended, leading to better outcomes for members. It said retaining the integrity of the performance test is critical.
“The existing test provides a clear and transparent benchmark with defined consequences. Funds know how they will be assessed ahead of time, and they understand what happens when they fail. This makes the regime enforceable and enhances the effectiveness of the regulator,” Grattan Institute said.
“Introducing subjectivity into the test – such as allowing APRA greater discretion in applying the test – would compromise its integrity and risk recent gains to super fund members. Funds can always find an excuse for their under-performance or high fees, and regulatory risk-aversion suggests this could lead to the policy being toothless. When the regulator does make adverse judgments, these would be exposed to perpetual legal challenges.”
It added that the impact of any changes to the performance test must be weighed against its benefits, noting that all funds that failed the first test have taken steps to merge or reduce fees. Only one that failed that test also failed the second, AMG Super, and is now closed to new members but with lower fees. fs
There's been some pearl clutching in the media recently regarding super funds and the valuation of unlisted assets.
The fact that the super fund with possibly the highest allocation to unlisted assets also topped performance tables for the year to June (Hostplus in case you were wondering) was enough to bring out some of the haters in the audience.
But it isn't just about Hostplus. The dramatic fall in public markets investments in 2022, and the benign to positive returns in in unlisted assets such as private debt and private equity has led to a global debate on the topic.
If you are an investor in unlisted assets, the debates have uncovered two points that you should consider carefully.
The first is the arbitrage argument. If there are two assets with essentially identical investment risks, one would expect the price to be the same. If one is higher than the other (the unlisted version) the rational investor would sell that one and buy the cheaper one (the listed variety).
One major difference between the two assets is ownership. Owners of unlisted assets have a closer relationship with the management of those assets than do owners of listed assets. When things go wrong, they have much greater say in how those assets are managed for the future.
Owners of listed assets have much
less power in the management of those assets. While there are rules around public disclosure, the value of these assets can be more effected by what economists call "externalities". These are factors outside of the control of management and owners, such as contagion in credit markets or a general bear market in tech stocks.
The other argument is that not knowing the "true" price of unlisted assets is a benefit to owners. It's a feature of the unlisted market. But how could a deficit of information be a benefit?
As human beings, we tend to act on new information. Not all action is good for us. Consider the hot new actively managed equities fund with great performance, but high management fees.
Investors pile in, leaving less well performing products (which may consequently recover). The new fund starts to underperform. Returns might still look good over the longer term, but the return to actual investors is lower than the reported returns. This is the difference between the timeweighted rate of return and the money-weighted rate of return. Is there a table out there that shows the difference? I haven't seen one.
Maybe not knowing about the new fund would give investors better returns. Maybe if they only had cheaper index funds to invest in they would be better off in the long run?
It's no surprise that the Hostplus default option has the highest autocorrelation of any default super option.
We all look at an issue from our own perspectives based on our experience, our knowledge and our belief systems.
My investment belief system is based on statistics. I believe that investment returns are characterised by the shape of the distribution of returns. It can lean to the left, it can lean to the right. It can have fat tails. All of these things mean something and I personally have a lot invested in the time and effort it took to understand those meanings. Maybe that's why I value them.
Unlisted assets, however, have an additional feature brought on by the fact that assets are valued at a point in time (always in the past). They have autocorrelation. This means that the latest valuation price is dependent on previous valuations. Put another way, today's valuation price is predictive of future valuation prices.
With a high proportion of unlisted assets, the autocorrelation of the total portfolio (which is still dominated by publicly traded and priced securities) is affected in a profound way. It's no surprise that the Hostplus default option also has the highest autocorrelation of any default super option. fs
Five MySuper products failed the second annual MySuper performance test, with four of them failing for a second time.
The product that failed the performance test for the first time is Westpac Group Plan MySuper. Westpac must now identify the causes of underperformance and set about working to correct it. It must also assess the potential implications of the failure on the fund and its sustainability, developing a plan to close the product and move members to another, if it becomes necessary.
Meanwhile, BT's MySuper option was one of the four to fail the test for a second time. The others were Australian Catholic Superannuation and Retirement Fund's LifetimeOne, EISS Super's MySuper - Balanced and AMG Super.
All but AMG Super have already made moves to merge with other funds. ACSRF is currently undertaking a merger with UniSuper, EISS Super is merging with Cbus and BT's superannuation products will soon move to Mercer.
EISS Super told members it was disappointed to inform them it had failed again, while ACSRF has outlined members' options in the wake of the result.
Combined, the failed products are home to about 600,000 members and close to $28 billion in retirement savings.
Those that failed for a second time have until September 28 to notify their members. They can now not take on any new members and cannot be offered as a default fund for any employers. They must also return any contributions made by new members after today.
APRA said it will be engaging with the four trustees to ensure members achieve better outcomes as quickly and safely as possible. fs
Cassandra
BaldiniChant West has welcomed the proposed pause in the Your Future, Your Super (YFYS) performance test, saying it’s in the best interest of super fund members.
over different timeframes and an administration fees metric. This would provide a much fuller picture of overall performance,” he said.
The test should
a range of different metrics that provide more information on performance over various periods, risk-adjusted returns over different time frames and an administration fees metric.
Chant West general manager Ian Fryer explained there’s been several unintended consequences of the proposed test and many funds have been forced to adopt a shorter-term focus to ensure they pass.
“This has often been accompanied by less portfolio diversification to better track the test’s benchmarks, and unfortunately this is the time in the cycle that diversification is so critical,” he commented.
In addition, Fryer said many Choice products are ill-suited to assessment using the standard benchmarks and believed it would be better to come up with a test that caters to the full breadth of choice investment options.
“The test should include a range of different metrics that provide more information on performance over various periods, risk-adjusted returns
Separately, commenting on the Quality of Advice Review’s proposals paper, Zenith Investment Partners chief executive David Wright said he is not satisfied with Levy's proposal to deregulate general advice.
“As an investment research business, we are supportive of the QAR and its objectives. We remain a strong advocate of the value of quality advice and believe it should be more broadly available to consumers. However, the recommendation to deregulate general advice may have an adverse effect,” he said.
Wright explained while the firm does not provide personal advice it still feels the replacement of best interest obligations with obligations to provide ‘good advice’ may have the unintended consequences of lowering the quality of advice to consumers and the standards of advice across the industry as a whole. fs
Australia’s retirement system has been awarded a B+ by Mercer and the CFA Institute in their 2022 Global Pension Index, ranking sixth overall for the second consecutive year.
The index covers 44 retirement systems around the world, measuring them on adequacy, sustainability, and integrity. Iceland, Netherlands, and Denmark received the top marks, followed by Israel and Finland.
Overall, Australia scored 76.8 out of a possible 100. It scored 70.2 for adequacy, 77.2 for sustainability, and 86.8 for integrity.
“Our system has again ranked very strongly and the policy reforms and reviews that are in flight should continue to improve financial outcomes for retirees and their access to financial advice. The increase in the SGC rate to 10.5%, and the Retirement Income
Covenant partially address our weak link with respect to our adequacy score and will help improve our ranking over time,” CFA Institute Board of Governors member Maria Wilton said.
Mercer senior partner David Knox was the lead author of the study. He said the Australian system needs to shift its culture and focus from accumulation to management of balances in retirement.
“The primary purpose of compulsory superannuation has been, for the past thirty years, focused on accumulation of savings for a healthy retirement. Australia has done this well, and the system continues to perform strongly against global pension systems,” he said.
“But there are opportunities for further improvement, particularly when it comes to retirement income. fs
includeAdrian Stewart chief executive Allianz Australia Life Insurance
We are at an inflection point for retirement investing in this country.
The grey tsunami is coming, with millions of Australians set to transition from the wealth accumulation to retirement phase of superannuation over the coming two decades.
The past two years have been difficult amid the uncertainty of the pandemic and with inflationary pressures rising following the latest ABS data its only set to get tougher for Australians in retirement or looking to retire.
However, it has crystallised Australia's retirement conundrum needs action.
It's time to acknowledge the goals for retirement are different
Transitioning to retirement the focus shifts from performance to generating a reliable, stable income that can be used to finance a comfortable lifestyle.
We need to expand the focus from achieving standardised pre-retirement target figures to giving retirees the confidence that it's going to last.
According to the Association of Superannuation Funds of Australia (ASFA), a couple will need $640,000 in super savings at retirement, while singles need $545,000, to achieve a "comfortable" lifestyle. The targets assume retirees own their home outright and are not paying rent or a mortgage.
Allianz Retire+ research conducted in the second half of 2021 unsurprisingly found that three in four retirees
are not confident about how long their money will last in retirement. Leading retirees to 'under spend' for fear of running out, also referred to as longevity risk.
The research also found a third of Australians in retirement feared the threat of inflation driving down the purchasing power of their savings - a fear amplified over the past six months.
Which is why we need to start measuring success in terms of creating certainty. Certainty in retirement can be defined as having confidence in receiving an income for the rest of your life, or a guaranteed income. This ensures 'lifestyle protection,' removing the fear of spending money once in retirement.
Capital protection and certainty of income are the two key drivers for retirement portfolio management.
In the last 30 years since superannuation was established in 1992 the financial services industry has been led by investment managers focused on performance in accumulation. The next thirty years will be directed by life companies providing guaranteed lifetime income solutions that deliver income certainty and complement the role of the investment manager.
Life companies have a significant role to play in solving the retirement
The economic landscape is shifting, and we need dedicated products to address the individual needs of retirees by creating flexible solutions that remove the current barriers that exist.
problem. Unlike investment managers, life companies can deliver certainty to retirees because they can deliver a guaranteed lifetime income. They have the scale and capital required to deliver a solution that a retiree might rely on for 30-40 years. Empowering Australians to live comfortably and removing the fear of 'outliving their wealth.'
As one of the only dedicated retirement specialists in the Australian market, we support the call to action for life companies to take a more active role in the retirement sector from APRA deputy chair Helen Rowell last year. We also support the need for further development and innovation in the sector.
Flexibility is crucial for next generation retirement products.
The economic landscape is shifting, and we need dedicated products to address the individual needs of retirees by creating flexible solutions that remove the current barriers that exist.
The retirement income covenant has accelerated this shift as we are seeing trustees and superfunds significantly increase their focus on the retirement solutions offered to members.
However there are limited suitable choices in market. fs
The blind rush to consolidate that gripped the $3.4 trillion superannuation sector in recent times may be finally over, according to First Super chief executive Bill Watson.
Instead of seeing big funds gobbling up smaller rivals, Watson expects more considered mergers that make a difference for members rather than rushed mergers that suit the regulator.
Watson believes that with a change of government, there is a change in focus.
Further, he notes that financial services minister Stephen Jones has publicly said there is a place for diversity within the superannuation sector. Jones does not want the superannuation sector to mirror the banking sector by consisting of four dominant players.
“This is a reversal of the previous government policy for fewer funds that were carried out by the prudential regulator,” Watson says.
“Accordingly, there was unrelenting pressure on funds to merge and achieve scale, creating a super system that looked like the banking system.”
The First Super chief executive says
the message is now more nuanced, and APRA chair Wayne Byres is leading the charge.
Still, while the regulator says it no longer has a merger agenda, Watson goes on to say that dealing with sustainability and investment returns will continue to be hugely important.
“Using a metaphor from the maritime industry, Byres says you plot your course. You know where your destination is. You’ve got to ensure your vessel is seaworthy and your crew capable,” he says.
“But if the ship is unseaworthy and your crew is incompetent, Byres is saying you will still encounter the maritime patrol”.
So it all seems a little less crude now, according to Watson, who has demonstrated that being below APRA's $30 billion benchmark does not necessarily mean funds will achieve lower returns than larger funds.
“We’ve seen with fund mergers there’s been a focus on getting larger to achieve better investment returns. Well, we don’t think that’s the case,” he says.
“The regulator telling us that if
We’ve seen with fund mergers there ’s been a focus on getting larger to achieve better investment returns. Well, we don ’t think that ’s the case.
you’re small, you can’t you don’t have the scale for investment opportunities is just not true.”
And the numbers back him up. According to Rainmaker, over the last 12 months, six of the top 10 funds were below $30 billion, underlining that scale does not automatically deliver outperformance.
Moreover, First Super was among the few to end the year in the black. Its default balanced option returned 1% for the current financial year compared to the median industry return of -3.7%.
The fund ranks in the top five for MySuper/default options over one year.
This is confirmed by new data from Frontier Advisors which concludes that asset allocation was more influential for the investment performance of super funds than size and scale. The figures prove that a small fund can trump behemoths.
Watson concedes though that small funds had a good year.
And, that 12 months is just one data point and with current market volatility, it is too early to say whether this will continue.
Watson believes that the long-running bull market has meant that size has potentially created greater returns. But as he sees it, that return differential will shrink in a bear market.
“And, potentially, the larger you are, the greater the risk and volatility that you'll encounter,” he warns.
“In some areas, the bigger you get, the less opportunity there is in Australia. So, you then have to be more agile, which is why we see the large funds opening up offices in London, New York, and Hong Kong. And that's great for their members as it opens up global opportunities that smaller funds can't directly access.”
The chief executive says it isn't just size that needs addressing - it is returns and service.
Unfortunately, he adds, poor performance doesn't belong to small funds only. What needs to be called out is poor performance irrespective of fund size.
Watson says big funds cannot always deliver scale or investment return benefits to their members as they can create diseconomies that retard some types of investment.
“For instance, they can't invest in Australian small-cap stocks because they would distort the market. And given their forecast growth, they won't be able to actively invest in large caps either,” Watson says.
But can't they take an Australian public company private and achieve higher risk premia and a better return?
Watson agrees but points to the downside, which is a loss of liquidity which has its own problems.
“Our system is constructed so members can switch in and out of options daily or even hourly. So there's a tension between being a long-term investor, but having short-term pressures, which limits the ability to take these longer-term bets in illiquid markets,” he says.
“As a small fund, we can fish in Aus-
tralian small caps pond and private equity mid-market sector.”
What's working for First Super is its $200 million private equity mandate.
“We're putting money into mature cash-producing businesses worth around $50 million,” Watson explains.
“There are no J-curve issues, they're mature businesses, but they need institutional money. While their performance has had ups and downs in the short term, they've been the gift that keeps on giving over the longer term.”
Last year, First Super's private equity program returned almost 30% before tax and after fees.
"So that's meaningful returns for our members with $3.8 billion of funds under management,” he says.
Overall, the chief executive says that he watches three key indicators - net investment returns, the cost of running the fund, and, most importantly, the level of service for members.
“Therefore, in terms of any merger opportunity, we want someone capable of delivering better investment returns, lower costs and maintaining the quality of service,” he says.
Watson says the legislative "guardrails" include the performance test and the heat maps. To those, he wants to add a third guardrail which is service quality.
“Being kept on hold by a contact centre for hours isn't an acceptable service,” he says.
Watson feels that First Super is doing a pretty good job for members with returns, service relative to other funds and administration fees, and he's not bothered by the increasing intensity of regulatory scrutiny.
“Those who look after other people's retirement savings should be scrutinised,” he says.
Despite the performance test and heatmaps, First Super has remained true to its conviction with its active management, strategic asset allocation and asset class selection.
“So we have not changed anything because of these tests. We are underweight emerging markets which have been net positive for members and not detracted from performance test outcomes,” he says.
As for service, First Super has a high-touch model that does come with a cost.
“You can go to a bargainbasement Jetstar kind of operation and look good in the APRA heatmaps without any measure of the quality of the service,” Watson says.
Aside from wrestling with service quality, sustainability, costs and stapling, the rollout of ESG remains a challenge.
“We find that not all managers have embraced the integration of ESG into investment processes. However, our private equity program is applying a bespoke ESG evaluation process that our private equity managers have embraced,” he says.
So how do you then grow your membership base without a merger?
First Super is one of the few funds to launch a KiwiSaver initiative a couple of years ago to allow Kiwis to transfer their money to Australia.
While the number of New Zealanders who roll their money into Australia is not huge, for a fund comprising 46,000, it's a big deal.
And First Super is close to its industry groups which have held up its membership. Timber, manufacturing beds, hard and soft furnishing and kitchen cabinets have all been in high demand.
“This means members have worked continuously through the pandemic,” Watson explains.
“So we've had year-on-year membership growth. Our membership growth initiatives may be sub-scale stuff or a rounding error for large funds, but growth from these initiatives is material for us.”
From where Watson sits, smaller funds, close to their members, investing in their industries, low fees, outperforming, and providing more nuanced and bespoke services to their membership, continue to prove that size isn't everything. fs
...our private equity program is applying a bespoke ESG evaluation process that our private equity managers have embraced.
Meat Industry Employees Superannuation Fund has proved size doesn’t always matter, outdoing industry giants with impressive returns. At the same time, chief executive Katherine Kaspar isn’t in denial about what the future may hold. Andrew McKean writes.
Leading a small super fund isn’t for the faint of heart, resources are limited, leaving little room for error, Meat Industry Employees Superannuation Fund (MIESF) chief executive Katherine Kaspar says.
“Essentially, every decision to do something in a small fund is a decision to not to do something else; so getting prioritisation right is paramount,” she explains.
“Larger funds with larger budgets can have multiple priorities, but we often don’t have that luxury.”
Despite these challenges, Kaspar says being chief executive of a small super fund has been one of the most rewarding experiences she’s had.
“The close-knit and personal nature of a small fund allows you to build a deep connection with members; you can’t help but become a part of their lives,” Kaspar says.
“The benefit being that the closer you are to members, the better you can understand their needs and apply it to an engagement or investment strategy.”
Connecting with members and having a sense of empathy with them is a crucial aspect of Kaspar’s role.
To achieve this, she’s engaged with multiple stakeholders, including members, employers, and unions to understand the unique experiences and challenges of the meat industry.
Kaspar has also spent time unpicking the nature of meat industry work, making sure questions are asked about the presence of labour hire, advancements in automation, and environmental factors like climate change, as they all play a role in shaping the experience of MIESF members.
The meat industry also faces challenges like language barriers and low financial literacy..
“My approach is to take all the insights and experiences from our stakeholders and apply it to supporting each member in the simplest way possible, helping them to be their best selves in retirement,” she says.
“Our strategies are crafted with the goal of not just helping our members reach retirement with a great financial outcome, but also so that they understand their journey and feel confident about where they’re going.”
The support of Australian Meat Industry Employees Union (AMIEU) in improving workers lives is also essential in this regard.
“By law, union representatives have access to work sites and are able to report back to us issues that are happening to, or for, our members, which helps us better understand what’s going on for them,” Kaspar says.
“For example, in the case of a higher number of TPD claims, we can work closely with our union representatives on site to determine the root cause and then share this with our insurer, TAL as well as their employer. By bringing attention to these issues and working towards a resolution, we strive to improve the lives of our members.”
Kaspar says MIESF’s insurance offering is simple and tailored to meet the needs of its members.
“Members require straightforward coverage that protects them on the job, without the added cost of unnecessary and expensive insurance like income protection,” she says.
“Our focus prioritises TPD and life insurance, as they are essential in the case of injuries or accidents that may occur on the job. This aligns with our goal of ensuring members have the necessary coverage to address potential accidents and injuries, while also avoiding account balance erosion.”
We continuously work to align our insurance offerings with the needs of our members in the meat industry, she adds.
Accordingly, approximately 98% of insurance premiums have been paid back to membersas benefits.
“TAL is going to kill me for saying this, but there’s a very close alignment between the premiums members are paying and the member benefits that are being paid out,” Kaspar says.
“This shows that the arrangement we have with TAL is in members’ best financial interests; we’re not charging them for things we’re not giving to them.”
MIESF has achieved exceptional investment performance, ranking second on the annual Your Future, Your Super (YFYS) performance test in 2022. The fund surpassed its annual return benchmark by 1.56%, only beaten by UniSuper (1.59%).
APRA heatmap data also showed that MIESF delivered a 7.54% p.a. eight-year net investment return, ranking sixth. Furthermore, it’s the second highest-returning fund over five years (7.69% p.a.) and three years (6.49% p.a.).
Kaspar highlights that the fund’s eight-year net investment returns relative to the strategic asset allocation benchmark was 1.71%, second only to First Super (1.73%) Whilst over the shorter periods of three and five years, the alpha is even stronger relative to the SAA benchmark by 3.51% p.a. and 2.58% p.a.
“Investments are our main focus, we don’t get distracted by other things; it’s what we do,” she says.
“Our core role is about delivering better retirement outcomes for our members and that predominantly has a financial focus; we know investments are our bread and butter. We don’t have many of the bells and whistles that many of the other funds have, we’re a very simple fund with a very simple offering that’s aligned with who our members are.”
MIESF’s investment strategy aims to prioritise the financial security of its members, considering that many of them are low paid with smaller than average retirement savings.
“We knew our members had their phones in tea rooms and locker areas, so we used QR codes to make it easy for
Inevitably, there will be a point of time, as our members’ needs increase, that we will need to consider a partner, whether it’s a shared services or a merger partner.
them to let their employer know they wanted to join the fund,” Kaspar says.
“It’s been an incredible tool for onboarding and engaging with members.”
This defensive tact has resulted in relative outperformance during challenging market conditions, while also protecting the limited funds of its members from unnecessary risk.
Moreover, MIESF maintains a highly diversified portfolio to help mitigate risk and achieve steady returns for members.
“We pulled back on equities last year while building up our position in cash and adding to government bonds,” Kaspar shares.
“We’ve also been making investments of as little as $10 million in unlisted property, including shopping center funds.”
Looking ahead, Kaspar says that the fund has identified some new investment opportunities, particularly focusing on quant-focused international players with a strong track record in the US. Due to the nature of the fund, it has the liquidity to explore these non-traditional investment opportunities.
Kaspar attributes MIESF’s investment success to MIESF’s directors and chair Chris White and Antipodean Capital founder Craig Ferguson, who acts as an investment advisor to the fund. She also credits chief
investment officer Chris Artis, and direct property management by chief financial officer Chris Salamousas and fund accountant David Gamvrellis.
MIESF is a closed fund, only able to accept employees within the meat industry, which comprises of approximately 60,000 workers at any given time.
Despite the small pool of potential members, the fund has attracted 16,000 members who come from the meat industry; it has just under $1 billion in funds under management (FUM).
Kaspar says to keep in mind that as a closed fund, they can’t make agreements with labour hire companies to attract more members. Fund members need to come through as employees of participating employers in the meat industry (who are generally party to an enterprise bargaining agreement).
Further, the difficulty of gaining members within the meat industry is compounded by competition from other funds like the Australian Meat Industry Superannuation Trust and giant industry funds AustralianSuper and Australian Retirement Trust.
In a bid to get MIESF to stand out from its competitors, Kaspar introduced an “explore-exploit” model at the start of her tenure in March 2021. This approach focuses on maximising current successes and seeking out new op-
portunities. The framework for which was imparted on her by Professor Tushman at Harvard Business School, where Kaspar successfully completed the Advanced Management Program.
In the first year of implementing the model, MIESF introduced a plethora of innovations which Kaspar says haven’t been seen anywhere else in the industry. The first of which was the use of QR codes to enable new members to digitally complete the ATO Choice of Fund application form to nominate MIESF as their fund. This solution enables members to join the fund in the throes of the pandemic when lockdowns restricted personal contact.
“We knew our members had their phones in tea rooms and locker areas, so we used QR codes to make it easy for them to join the fund,” Kaspar says.
“It’s been an incredible tool for onboarding and engaging with members.”
The second innovation MIESF has embraced is a buddy program, which allows members to seek guidance from their peers. The program recognises that MIESF members often seek financial advice from friends and family, and provides a structured, compliant way for them to do so.
“By using the explore-exploit model, we have two unique service offerings that I haven’t seen in other funds. Both of those have paid dividends to help bring our membership to a more stable position.” Kaspar says.
Nevertheless, APRA heatmap sustainability metrics revealed that MIESF had a total account growth rate (three-year average) of -9.23%, the fourth largest decline across all registerable superannuation entities (RSEs).
Also troubling, MIESF had the seventh largest decline in net cash flows (-3.9%) averaged over three years. Over the same period, it also ranked 11th in terms of net rollover decline (-2.8%).
“The fund’s sustainability metrics, as a result of COVID, weren’t great, it’s definitely something we’re cognisant of, and whilst it’s been challenging, we are pleased to see our member numbers stabilise in the past year” Kaspar says.
When it comes to increasing women's representation in superannuation leadership positions, it's important to think creatively and define your own path to success. There's no onesize-fits-all approach or linear path to becoming a chief executive or holding a leadership position, Kaspar says.
Likewise, success is yours to define, so it's crucial to think outside the box and consider alternative avenues to achieving your goals, she adds.
Kaspar continues saying that another important strategy for increasing women’s representation in superannuation leadership is to say yes to the things that scare you.
“I’m not talking about people jumping out of windows or anything crazy like that, but sometimes a bit of fear or discomfort can be a sign that you need to challenge yourself to grow,” she says.
“Don’t discount yourself, be your best advocate; give yourself a push, have a go.”
Another important strategy she imparts is to use your initiative to
take the time to understand the business’ strategy. By proactively seeking out ways to contribute to the company’s goals and to deliver on its objectives, you can demonstrate value and make a tangible impact on the organisation.
“Have some ideas, challenge management, challenge your thinking, other’s thinking, get to work focussed on moving the dial,” Kaspar says.
Finally, she recommends that ambitious professionals surround themselves with people who inspire you to be your best self.
“As the saying goes, you are the average of the five people you spend the most time with,” Kaspar says.
“By surrounding yourself with people who are already where you want to be, you can learn from their experiences, gain valuable insights, and be inspired to achieve your own goals; this is true for success in any industry, including superannuation. Seek out mentors and role models who’ve achieved success in the areas you aspire to, then you can build the confidence and skills to break through the barriers that might be holding you back.”
According to an APRA MySuper Heatmap paper, most RSEs are facing sustainability pressures; more than half of all RSEs experienced backward growth across the all the regulator’s sustainability metrics.
“RSE licensees must take account of growth profiles in their business planning activities and consider the likely effects and risks for member outcomes,” APRA said.
“Sufficient scale is required to support efficient and resilient business models, keep fees and costs low, and financial operational and service improvements expected by members. APRA expects that RSE licensees will consider options to transfer members or otherwise restructure their businesses, particularly where sustainability pressures are significant and/or the growth outlook is weak.”
Regarding the sustainability of its membership base, Kaspar says MIESF will continue to employ a combination of organic and inorganic strategies.
The organic methods include utilising the QR code and buddy programs, as well as engaging with employers. The inorganic growth piece centres on constantly evolving to recognise what’s in the best interest of members, as is a trustee’s fiduciary duty.
“We don’t have a partner, we’re not in discussions with any funds, but I think we should always be thinking, looking, and challenging ourselves to deliver more to our members,” Kaspar says.
When serving as chief executive of Kinetic Super, Kaspar recalls that the fund opted to merge with Sunsuper in 2018 despite not having any regulatory pressure to do so. Instead, the merger was driven by the need to better serve the fund’s young membership base with a more engaging digital experience.
Kaspar foreshadows a similar outcome for MIESF, whereby at some point, the fund may consider a partnership or merger to better serve its members, albeit in the absence of regulatory pressure.
“For us it’s about how we can continue to shift the dial for our members and do more for them, particularly around education and advice including on eligibility for the Age Pension, which will be critically important for most of our members with low retirement savings” Kaspar says.
“Inevitably, there will be a point of time, as our members’ needs increase, that we will need to consider a partner, whether it’s a shared services or a merger partner.” fs
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Worth a read because:
This paper explains the development of the RMetrics assessment model as a means of capturing multiple measures of risk-adjusted return for a product and integrating them into a single holistic risk score. The model is then used to compare relative performance of MySuper products over the three-year period to March 2022.
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Rainmaker Information
Workplace superannuation funds are funds that are available to employers, whether they are private sector companies, public sector agencies or government departments.
A primary feature of workplace funds is that they can take advantage of the business volume that comes from combining the superannuation buying power of many employees. Workplace superannuation funds can offer wholesale discounted fees and are typically cheaper than personal superannuation funds that are available to individual employees.
MySuper products are workplace funds because they can only be offered to employees through their employer. Employers are only allowed to pay default superannuation guarantee (SG) contributions into MySuper products, or funds that offer a MySuper product.
Risk-adjusted return is a term that captures both the level of returns and the quantified risks—such as volatility and other measures—that underly those returns.
They are often combined as ratios so that products with different returns and risks can be compared on a like-for-like basis.
Why RMetrics?
To resolve the multiple ways risk-adjusted investment outcomes are described, Rainmaker developed its RMetrics assessment model to integrate these measures into a unified scorecard. Its purpose is to analyse investment returns, volatility and other standard risk measures and to use these results to tell a coherent story about an investment option or product.
RMetrics shows how investments behaved compared with like-forlike peers. Moreover, each measure, or dimension, of RMetrics, can be assessed discretely or interpreted as part of a composite measure.
By integrating these combined RMetrics measures, Rainmaker can assess a product’s holistic risk score. Investors can then use RMetrics to determine how efficiently a fund’s investment strategy has been implemented.
The RMetrics risk-adjusted performance analysis assessed 673 superannuation investment options offered through 60 superannuation products over a three-year period to March 2022.
The analysis spanned 10 strategic sectors, namely:
• MySuper single strategy or selected lifecycle MySuper products akin to a single strategy
• growth
• balanced
• capital stable
• Environmental, social and governance (ESG)
• Australian equities
• international equities
• property
• fixed interest
• cash.
The RMetrics report analysed each option’s investment performance net of tax and investment fees and gross of administration and member fees.
When a superannuation fund offered more than one option in a sector, flagship options—usually actively managed—were selected to represent that fund.
RMetrics incorporates a variety of risk-return ratios, some of which are dependent on the assumption of ‘normal’ distributions and some that are not. This enables RMetrics to cater for a wide variety of asset classes, investment styles and product types.
The RMetrics assessment model has two core objectives:
• To provide a nuanced view of an investment’s historical monthly returns series matched to its investment objectives.
• To deliver an integrated scorecard that quantifies how an investment has performed relative to its peers.
Sharpe ratio
The Sharpe ratio is a measure of risk-adjusted return. It measures the excess return of an investment over the risk-free rate—in reality, the average bank bill rate for the previous three years, divided by the standard deviation —volatility—of the investment’s annualised return.
The risk-free rate is the rate of return on an investment with no risk, such as a government bond or an equivalent cash rate, with the excess return being the return above that risk-free rate. The standard deviation is a measure of the volatility of the investment’s returns. It does not matter if that volatility was the result of high or low returns as this ratio assumes returns are normally distributed.
The Sortino ratio also measures risk-adjusted returns. It measures the excess return above the risk-free rate of return per unit of downside risk. Downside risk or deviation is the volatility of monthly returns that are negative, or which are below a specified threshold. Two superannuation funds might have the same return and volatility, but if one fund has achieved this with lower downside risk it is, according to this measure, superior.
Another risk-return performance measure that is defined as the ratio of gains above a risk-free rate of return to losses, by
captures both the level quantified risks—such other measures—that underly those returns.
With no agreement on which measure best defines risk-adjusted return, Rainmaker developed this composite measure— CRAR—that combines the rank scores for funds across a range of popular riskadjusted measures.
frequency. The omega ratio disregards the size of the gains or losses. It simply counts the number of monthly returns above the threshold rate and divides this by the number below the threshold. Unlike the Sharpe and Sortino ratios, it does not assume normality of the returns’ distribution.
This ratio measures the proportion of total gains to total losses over a period of time. Gains are the sum of all positive monthly returns over the period, while losses are the sum of all negative monthly returns. The difference is the return that goes to the investor.
The ratio of gains to losses helps analysts compare investments that have different volatility profiles as these
are not dependent on the absolute size of positive and negative returns.
Understanding returns’ distributions
RMetrics places considerable emphasis on comparing the distribution of monthly returns, and so calculates the four moments of the returns’ distribution, namely:
• the average or mean
• the volatility or annualised standard deviation
• skewness
• kurtosis.
Skewness and kurtosis refer to the shape of the tails of a return distribution and determine how normal the distribution is compared with its peers.
Skewness describes the shape of the distribution curve and whether it is ‘skewed’ to the left or right of the mean. Most people are familiar with the so-called ‘bell curve’ of a statistical distribution. In a classic bell curve, the distribution to the left of the mean is the mirror image of the distribution to the right of the mean.
When a distribution has a negative skew, it leans to the
right like a wave about to break. An investor in a product with negative skew would expect to see lots of small positive returns and fewer, but larger in an absolute sense, negative returns.
Investors in products with negative skew get used to positive returns and tend to be surprised when large negative returns hurt the value of their investment.
Conversely, investors in products with positive skew can
The quote Christian Super, BUSSQ and AwareSuper were the top three risk-adjusted MySuper workplace products over the three-year period to 31 March 2022, based upon CRAR.
The quote
Superannuation funds are in effect given points for how many measures they score well in.
expect a lot of small negative returns but are then surprised when the product produces fewer, but larger, positive returns.
Kurtosis
Kurtosis is a measure of how extreme the monthly returns series are compared with what is considered normal. Investments with high kurtosis are more likely to have surprise returns that are larger than what an investor is expecting or become used to. This usually occurs when the investment portfolio has a large position in a single security that that is given a major re-rating by the market, either on the upside or the downside. This gives the returns distribu-
tion a ‘fat tail’, either on the left, the right or on both sides. Some investment managers target securities or companies where they hope to benefit from these re-ratings.
Performance results as at end March 2022
The MySuper sector delivered a three-year median return of 7.9% p.a. to March 2022. As shown in Table 1 on page 26, this placed MySuper returns slightly above the 7.3% p.a. median option return for balanced funds but significantly below those achieved in the growth sector that had a median return of 9.4%
The ESG sector achieved a 7.8% p.a. median return, just under the MySuper return but still between the bounds of the balanced and growth medians. For the single asset class options:
• Australian equities achieved the highest median threeyear return of 10.9% p.a., followed by international equities which returned 10.6% p.a. Australian equities were also the most volatile asset class.
• Property, a mix of Australian and global listed securities and direct property options, achieved a median return of 5.5% p.a.
• Fixed interest and cash had the lowest returns of the mainstream asset classes, each returning 0.5% p.a.
• Australian equities exposure continued to drive the volatility of diversified products. The Australian equities sector had the highest median volatility being 16% p.a.
• MySuper three-year volatility was half that of Australian equities, being 7.9% p.a.
• The volatility of international equities continues to be two-thirds that of Australian equities. In addition, the international equities sector achieved around half the downside volatility of the Australian equities sector, matching the MySuper and balanced sectors.
• The ESG sector achieved volatility close to the growth sector, but lower returns meant its Sharpe ratio was the lowest among diversified sectors.
Lower returns in 2022 from international equities
meant that sector lost its spot as the sector typically with the highest Sharpe ratio. Capital stable, despite returns less than half of equities and growth, had the highest Sharpe ratio of 0.98, However, with downside volatility higher than regular volatility, the Sortino ratio for the capital stable sector was significantly below that for international equities and only higher than balanced and ESG among the diversified sectors.
Extremely low returns from fixed interest, driven by lower interest rates, saw its risk-to-return ratios plunge with a Sharpe ratio of 0.04 and a Sortino ratio of 0.05.
One measure of comparative performance of superannuation funds is the strike-rate. This is the ratio of times a superannuation fund appears in an RMetrics Top 10 ranking. For example, if a fund achieves Top 10 six times from 10 sectors then its strike-rate is 60%.
By applying this measure, across all 10 sectors, the top risk-adjusted superannuation fund was CareSuper followed by AustralianSuper and Aware Super. Figure 1 on page 26 illustrates the ranking of the 30 superannuation funds for which Rainmaker had sufficient data to run the analysis.
In contrast to the analysis that compares the performance of superannuation fund products across all 10 sectors, the following analysis focuses on the performance of MySuper workplace products.
Thirty-one superannuation funds—with MySuper product options—were compared in terms of 12 alternative measures of performance over the same three-year period to March 2022.
In Table 2 on page 27, 31 funds analysed by Rainmaker are listed in alphabetical order along with actual outcomes for each of 12 performance measures identified across the top of the table—first 12 columns to the table.
The three remaining columns on the right-hand-side of Table 2 records a relative ranking for each the of the superannuation products within the analysis based on three additional measures of performance: Returns; Volatility or SD—standard deviation of returns; Combined risk-adjusted rank.
The measure in Table 2 that warrants specific attention is the asterisked measure termed combined risk-adjusted rank or CRAR.
With no agreement on which measure best defines risk-adjusted return, Rainmaker developed this composite measure that combines the rank scores for funds across a range of popular risk-adjusted measures.
Superannuation funds are in effect given points for how many measures they score well in. The concept here is that Rainmaker
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1. What was the purpose behind building the RMetrics assessment model?
a) To compare MySuper product performance with superannuation products across all sectors or asset classes
b) To integrate a variety of risk-return ratios each based upon the assumption of normal distribution of returns
c) To consolidate various measures of risk-adjusted returns into a single holistic measure
d) To analyse investment performance of all superannuation fund products net of all tax and fees
2. The Sortino ratio is a measure of the:
a) excess investment return over the risk-free rate
b) excess return over the risk-free rate per unit of downside risk
c) proportion of total gains to total losses over a period of time
d) distribution of monthly returns on an investment
3. Investors holding one or more investments with high Kurtosis are more likely to experience:
a) unusually large positive or negative returns
b) frequent positive returns but surprise at the potential size of any negative returns
c) many small negative returns along with infrequent larger positive returns
d) a greater number of monthly returns above the risk-free rate of return than below it
does not advocate any one measure but if a fund scores well on, say, five of them, it indicates that it is a good risk-adjusted fund. The composite measure is the mechanism that captures this superior performance.
A snapshot of the top 10 risk-adjusted MySuper products across five of the alternative performance measures over the three-year period to 31 March 2022, is provided in Table 3.
Looking at the top five ranked MySuper products under each of the first four measures: Highest 3yr returns; Lowest SD—standard deviation p.a.; Highest Sharpe; Lowest sum [of] neg[ative] returns, Christian Super is the only product that appears in the top-five under three of the four measures. Not surprisingly this is captured by the composite measure—CRAR— that ranks Christian Super as the top risk-adjusted MySuper workplace product.
Further, as shown in Table 3 on page 28, Christian Super, BUSSQ, AwareSuper, CareSuper and Vision Super were the top five risk-adjusted MySuper workplace products over the three-year period to 31 March 2022, based upon the composite measure or CRAR, developed under the RMetrics assessment model. fs
4. Which of the four moments of a return’s distribution relate to the shape of a distribution’s tails?
a) Volatility and kurtosis
b) Mean and skewness
c) Kurtosis and skewness
d)Both the average and the standard deviation
5. Christian Super was ranked as top risk-adjusted MySuper workplace product (CRAR) on cited data because it scored:
a) highest three-year returns and the lowest volatility in returns
b) a top-five ranking in each of the applied measures of performance
c) highest CRAR and the lowest return volatility
d) a top-five ranking for its Sharpe ratio, sum of negative returns and returns volatility
6. Over three years to March 2022, the MySuper sector provided a marginally higher median return than the median option return for balanced funds.
a) True b) False
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The nature and importance of bilateral investment treaties in terms of the protections they offer to individual and corporate entities when investing in territories other than their state of nationality. Some potential implications for investors holding investments in territories facing geopolitical conflict are reviewed with particular focus on the outcomes of cases arising from the Russian annexation of Crimea.
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Nastasja Suhadolnik, Cara North, Caitlyn Georgeson, Madelyn Attwood
When investing internationally, individuals and corporations enjoy protections under investment treaties in force between the state of their nationality and the state in which they invest—the Host State. That protection usually extends to investment in the ‘territory’ of the Host State.
The notion of a state’s territory typically equates to a geographical area that is subject to the sovereignty of a nation state. This is at least how ‘territory’ is defined under international law. Many investment treaties also define the term ‘territory’ and, by reference to that definition, circumscribe the spatial scope of application of the protections afforded to investors under the treaty. The definition of ‘territory’ in many investment treaties extends to areas over which the state exercises certain sovereign rights and jurisdiction but not full sovereignty, for example the state’s exclusive economic zone and continental shelf.
The location of an investment in the territory of a Host State is usually uncontroversial, but there are situations which complicate matters. Increasingly companies invest in offshore natural resources projects which may be located in areas beyond a state’s territory in the conventional sense. Offshore natural resources may be located in areas where
maritime boundaries are unsettled or in maritime zones claimed by two or more states. As recent history sadly reminds us, foreign investments may be impacted by war and end up under the control of an occupying state that claims the occupied territory as its own.
These situations heighten the risks for the investor. This is because such situations may disentitle the investor from relief under an investment treaty against expropriatory or otherwise harmful Host State acts or omissions, simply because the investment is not located within the area defined in the investment treaty to comprise the Host State’s ‘territory’.
Recent investment treaty jurisprudence has shed light on these matters and this paper investigates protections available to investors in territories under unlawful occupation, drawing from recent cases arising from Russia’s annexation of Crimea.
A key component of most investment treaties is that they protect investments made in the territory of the respondent or Host State.
Consequently, prior to the merits of an investor’s claim being adjudicated, the investor must establish the arbitral tribunal’s jurisdiction over their claim by demonstrating, among other things, that their investment was made in the territory of the Host State.
As recent history sadly reminds us, foreign investments may be impacted by war and end up under the control of an occupying state that claims the occupied territory as its own.
In determining if this condition is met, arbitral tribunals will typically have regard to the physical bounds of the Host State’s territory—the area over which the Host State exercises its sovereign jurisdiction. The question is complicated where the territory of the investment is subject to a territorial dispute, unsettled boundary lines or competing claims to sovereignty.
Until recently there has been relatively limited investment treaty jurisprudence on these matters. This has changed with the surge of investment treaty disputes initiated in the aftermath of Russia’s unlawful occupation and subsequent annexation of Crimea, in relation to investments located in the annexed territory.
On 22 February 2014, the then-Ukrainian President Viktor Yanukovich departed Ukraine following protests against his administration. On 27 February 2014, armed individuals seized control of the Crimean parliament and ministerial building and raised the Russian flag above the building. The leader of the Crimean Russian Unity Party, Sergei Aksyonov was named Prime Minister of the Crimean territory. Russia passed legislation on 1 March 2014 granting President Vladimir Putin’s request for use of Russia’s armed forces on the territory of Ukraine.
On 16 March 2014, a public referendum on the issue of ‘incorporation’ was held on the Crimean Peninsula. The results were 96% in favour of ‘incorporation’, despite widespread allegations of electoral fraud.
On 18 March 2014, the ‘Republic of Crimea’ and nowcalled ‘Federal City of Sevastopol’ signed an incorporation treaty with Russia, which was subsequently ruled constitutional in Russia and approved by both Russia’s houses of parliament.
By 17 April 2014, Russia had consolidated control over the Crimean Peninsula and President Vladimir Putin stated that Russia had established conditions for “the free expression of the will of the people living in Crimea and Sevastopol”.
Since Ukraine’s annexation of Crimea in 2014, at least 10 cases have to date been commenced by Ukrainian investors in the territory of Crimea against Russia under the 1998 Agreement on the Encouragement and Mutual Protection of Investments between Russia and Ukraine—the Russia-Ukraine bilateral investment treaty, or the BIT. These cases seek to hold Russia accountable for the loss and damage to their investment following Russia’s assertion of control over the Crimean Peninsula.
Like many other bilateral investment treaties, the RussiaUkraine BIT protects investments made by investors of one state party in the territory of the other state party from expropriatory and other unlawful acts by that State party.
Some of these cases have resulted in awards but many remain pending, and all were confidential until recently. That changed when two awards issued in Stabil LLC et al v Russian Federation, UNCITRAL, PCA Case No 201535 (Stabil )—a dispute commenced by 11 Ukrainian corporations over investments in several petrol stations in Crimea—surfaced in enforcement proceedings brought against Russia in the US.
The Stabil awards are interesting as they reveal how the tribunal tackled the thorny issue of jurisdiction to hear a dispute brought by Ukrainian investors in relation to investments in a territory which, under international law, still belongs to Ukraine. The awards also illustrate when an investor caught in inter-state hostilities may have a treaty claim against an aggressor state.
Beginning on 22 April 2014, paramilitary forces and officials of the self-declared ‘Republic of Crimea’ seized control of a number of petrol stations and storage facilities controlled by several Ukrainian petrol companies— the claimants.
Despite enacting legislation guaranteeing pre-existing property rights in Crimea on 25 and 31 July 2014, the State Council of the Republic of Crimea issued decrees nationalising the claimants’ properties on 3 September 2014. The actions against the claimants resulted in the complete loss of their investments in Crimea.
In 2015, the claimants commenced proceedings against Russia under the Russia-Ukraine BIT seeking compensation for their lost investments. They alleged that Russia breached its obligations under the BIT, including by unlawfully expropriating or discriminating against foreign investments without compensation.
The claimants submitted that their investments were seized and discriminated against because of their connection to Ukrainian businessman Igor Kolomoisky, who the Russian administration sought to target. Members of the claimants were given the choice to either work for the newly appointed Prime Minister of Crimea or leave the territory immediately.
Under the provisions of the Russia-Ukraine BIT, the tribunal could only exercise jurisdiction over the dispute if, relevantly, the claimants had made an investment in the ‘territory’ of Russia.
The BIT defines ‘territory’ to comprise “the territory of the Russian Federation or the territory of Ukraine and also their respective exclusive economic zones and the continental shelf as defined in conformity with international law.”
Having regard to that definition, the question of whether Crimea fell within “the territory of the Russian Federation” at the relevant times was central to the tribunal’s decision on jurisdiction.
Russia refused to appear in the proceedings. Ukraine intervened as a non-disputing party. Neither the claimants nor Ukraine contended that Crimea no longer formed part of Ukraine’s sovereign territory. They also expressly steered clear of asking the tribunal to determine the legality of Russia’s annexation of Crimea. Rather, the claimants submitted that what constitutes Russia’s territory comprises “all territories which are ‘controlled and administered’ by” Russia.
The tribunal agreed with the claimants that it did not need to express a view about the legal status of the annexation and of Crimea under international law. Instead, it relied on what it considered to be the ordinary meaning of the term ‘territory’, which it found included “areas over which the contracting parties exercise jurisdiction and de facto control, even if they hold no lawful title under international law”.
While the interpretation of an investment treaty’s spatial scope of application will ultimately depend on the specific terms in the treaty, including its definition of the term ‘territory’, the tribunal’s approach may nonetheless have general relevance to the interpretation of the ordinary meaning of the term ‘territory’.
That meaning, according to this tribunal, was broader than the traditional meaning of territory under international law, the latter being inextricably connected to the concept of state sovereignty. The tribunal’s interpretation indicates that a state may be liable for actions occurring in a territory over which it exercises de facto control, despite that territory remaining part of another state under international law.
On the merits of the dispute, the tribunal found that
Russia had breached its obligations under the BIT by unlawfully expropriating the claimants’ investments without providing prompt and adequate compensation.
The tribunal ordered Russia to compensate the claimants for the expropriation of their investments, with interest calculated from the date of the expropriation. In addition, the tribunal ordered Russia to bear 75% of the arbitration costs and the costs of the claimants’ legal representation and assistance.
The findings and conclusions of particular note in the tribunal’s award on liability were:
• In order to determine whether Russia could be held responsible for breaches of the BIT, the tribunal was first required to determine whether the actions of the State Council of Crimea and paramilitary forces in the region could be attributed to Russia. Relying on rules of customary international law regarding attribution of internationally wrongful acts the tribunal found that the State Council of Crimea had been created as a structural part and an organ of Russia, and its actions could be attributed to Russia.
• As for the actions of the paramilitary forces, those too were attributable to Russia, given that, as the tribunal found: the paramilitary forces had been expressly authorised to exercise governmental authority in Crimea; they had been empowered under the internal law of the ‘Republic of Crimea’ to exercise government functions and police powers; and alternatively, Russia had acknowledged and adopted the paramilitary conduct as its own.
• Under the BIT, Russia was permitted to nationalise or expropriate foreign investments only if the expropriation was: in the public interest; not discriminatory; in accordance with procedures established by law; and accompanied by prompt, adequate and effective compensation.
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1. Under international law, the strict definition of a territory is:
a) a state’s exclusive economic zone and continental shelf
b) an area over which contracting parties exercise jurisdiction and de facto control, without lawful title from international law
c) a geographical area subject to sovereignty of a nation state
d) determined by way of public referendum
2. According to the article an important first step for any entity making a claim under an investment treaty between their nation and the State in which the investment was made is to:
a) confirm investment(s) are all held in personal names only to qualify for protection under the treaty
b) establish that the investment was made within the ‘territory’ of the Host State
c) ensure that the investment was considered in the public interest at the time it was made
d) Both a) and b)
3. The tribunal in the Stabil LLC v Russian Federation case determined that:
a) Russia’s actions were not in the public interest
b) Russia unlawfully seized claimants’ investments without offering adequate compensation
c) Crimea did not form part of Ukraine’s foreign territory
d) Both a) and b)
4. What types of investments were claimed to be seized by officials of the self-declared Republic of Crimea in the Stabil LLC v Russian Federation case?
a) Petrol stations and storage facilities
b) Investments considered outside of Russia’s territory
c) Investments owned by Ukrainian businessman Igor Kolomoisky
d) Offshore natural resources
5. A key purpose of an investment treaty is to protect foreign investments from loss due to unlawful actions in or by the respondent territory or Host State.
a) True b) False
6. The location of an investment within a Host State’s territory can typically be contentious.
a) True b) False
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In breach of these requirements, the tribunal found that the nationalisation of the claimants’ assets:
• was not in the public interest
• was discriminatory, as it had been targeted specifically at the claimants’ investments because of their connection to the Ukrainian businessman Igor Kolomoisky
• failed to meet the requirements of due process, as the claimants were not afforded a real opportunity to challenge the nationalisation of their investments or petition for their right to continue operations, and their complaints were ignored by the Crimean and Russian authorities
• was not met with adequate and prompt compensation, despite the claimants’ properties having retrospectively been listed by the State Council of Crimea as being entitled to compensation under Crimean Property Law, because according to the tribunal, it was reasonable to conclude that any attempt to obtain compensation would have been futile.
The claimants also alleged, among other things, that Russia breached other BIT provisions, including the prohibition on discriminatory measures and substantive guarantees imported through the BIT’s most favoured nation clause, that is, the requirements that investments be accorded fair and equitable treatment and full protection and security. However, having found Russia liable for unlawful expropriation, the tribunal did not consider it necessary to decide on these further breach claims.
The publishing of the awards in Stabil LLC et al v The Russian Federation is timely due to the escalation of the ongoing conflict between Russia and Ukraine.
The awards will likely embolden other investors to seek compensation from Russia for Russian activity in any occupied or annexed territory, or territory over which Russia is exercising de facto control, which detrimentally affects their investments. Issues relating to attribution for loss of investments may be more easily resolved by reference to the decision, particularly considering the Russian military’s now-direct involvement in Ukrainian territory.
The decision may also bear relevance to investors operating in other disputed territories or maritime areas that remain undelimited under international law, who seek greater security in protecting and obtaining compensation for the loss of their investments.
As a key takeaway, individuals and corporations investing in areas that are impacted by geopolitical conflicts should take note of the Stabil tribunal’s novel approach to interpreting the notion of ‘territory’ in an investment treaty context, as well as its analysis of the circumstances in which the state exercising jurisdiction and de facto control over a particular area might be found liable for breaches of investment treaty protections. fs
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To assist Australian financial services businesses with managing regulatory change this paper offers a framework that can be applied to build a sustainable approach to change. One of the most important steps is to build a business culture that improves staff engagement and motivation to implement change before regulatory breaches occur.
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Many Australian financial services organisations report that they are struggling to meet increased regulatory burdens. Prominent examples include the extensive breach reporting regime introduced by the Australian Securities and Investments Commission (ASIC) in October 2021. There are also COVID-19 related work health and safety issues; design and distribution obligations; and challenging rules designed to protect consumer data rights.
Regulatory compliance is clearly critical for organisations, and its implications are widespread. Effectively managing compliance protects organisations from material reputational damage, fines, remediation and distraction from core strategy objectives.
According to MinterEllison’s annual survey of the industry, governance and conduct requirements were the chief concern of businesses last year. In terms of specific regulations, for this year, some 55% of respondents identified breach reporting as their biggest challenge as shown in Figure 1, on the next page. Almost half of respondents feared that increased regulatory demands would hurt their organisation’s recovery from the pandemic, just as many aspire to resume normal operations or reactivate deferred growth projects. The impact of the ructions from 2019 also remains apparent: 36% of those surveyed said their organisation had increased their focus on implementing the recommendations of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) since the pandemic began.
The constantly evolving regulatory and strategic environment makes sustainable compliance challenging. Businesses need to ensure that strategic change appropriately considers compliance obligations, processes and controls to ensure that compliance is sustained.
Change is a constant in any business, whether stemming from market forces, competitive pressures or new regulations. However, it is hard to dispute there has been a paradigm shift in financial services since the Global Financial Crisis of 2008/09. Previously, firms in the financial sector could place profitability before customer need. However, public expectations have changed particularly since the Financial Services Royal Commission.
“The past 10 years has seen a significant step change with industry being expected to take on greater responsibility for the appropriateness of products and how they actually work in practice,” Batten said.
The pace and volume of regulation is unrelenting, Batten adds, with companies facing increasingly prescriptive burdens and “always needing to react to the next thing coming down the pipe.”
In 2020, the government and regulators paused several regulatory changes to enable organisations to manage through the COVID-19 pandemic. A number of these have since restarted, which is has upped the pace and intensity of the activity.
Different regulations can sometimes overlap or contradict each other. They can also spring in uncoordinated fashion from different sources, including ASIC, the Australian Prudential Regulation Authority and the Australian Securities Exchange.
Sometimes, as with consumer data right (CDR) obligations, a gap can exist between regulators’ expectations and what businesses being regulated can realistically de -
liver. This is making it hard for organisations to implement large and consistent reform programs.
According to Lawson “many of our clients are saying that they are struggling to do regulatory change at scale well”.
The key for financial services organisations – as stated by Worthington – is “responding to the tsunami of regulation and understanding that community expectations have changed”, while balancing the reality of running a profit-making business.
No silver bullet can make regulatory burdens vanish. Instead, the goal should be to institute a consistent process across the business to manage change. It is important to take the time to understand the full extent of new regulatory schemes instead of jumping straight into implementing new solutions.
“The more you front load and plan, the better it is from an implementation standpoint,” Worthington said.
A sustainable approach involves building changemaking capacity across the business, supported by clear accountabilities. This can be hard when different units might wish to avoid responsibility for budget imposts. Understanding where the principal obligation lies can be like a game of ‘pass the parcel’ between product teams, legal and compliance functions. Nevertheless, it is important to think strategically about different risk events. For example, what happens in the organisation when a customer complains, or a data breach occurs.
“What are the things that could absolutely impact
Richard is
Donna
The quote
With any regulatory change project, the stakes are high if you get it wrong. So, the time spent to embed change in the organisation and ensure compliance is pretty critical.
your ability to operate?” Worthington said.
Such an exercise allows organisations to prioritise strategic risks while downplaying issues that can be ‘kicked a little down the road’.
A regulatory change framework—that incorporates the following steps—will help organisations on this journey:
• Monitor landscape
– understand the regulatory landscape
– advocacy activity
– regulator relationship
• Establish organisational awareness
– business structure
– business strategy
– risk and compliance
– existing and new initiatives
• Review regulatory change and determine impact
– determine requirements
– determine gap analysis
– perform impact analysis including stakeholder mapping
– determine sponsorship
• Project planning and governance
– determine project strategy and approach
– develop project plan
– determine project resourcing and governance
• Business change readiness
– change management
– communication initiatives
– business readiness assessment
• Implementation
– project activity
– monitoring and reporting
• Assurance
– internal and external assurance activity
– reporting
At their best, regulatory change initiatives allow financial services organisations to rethink how they deliver their mission from first principles. The downsides of such projects are normally easy to quantify. However, emphasising the revenue and growth potential is “when you start to get people’s ears pricking up to do more than just compliance”, Worthington said.
For example, new CDR obligations provide an opportunity to create new ways to impress customers with tailored financial products. Such proactive management of regulatory burdens offers a way to restructure the business and “get ahead of the curve”, claimed Batten.
It’s hard to move into that proactive space because of shareholder and market pressure, but it’s the best way to ensure regulatory issues are addressed before they become more serious, Batten further explained.
Among the financial services organisations planning to invest in new technology, 57% of respondents to MinterEllison’s survey said their aim was to create easier or
streamlined compliance. Many businesses are investing in governance, risk and compliance systems to centralise the management of their regulatory obligations, reporting requirements, and internal policies and procedures. This can help unite information strewn across different spreadsheets or locked away in various silos.
Other regulatory technology applications can help businesses satisfy know-your-customer obligations, such as verifying income and identity. Of course, any use of external technology creates its own financial, privacy and integrity risks requiring due diligence.
You can’t use it as a solution without considering the prudential management implications of relying on a regtech [regulatory technology] company that is a thirdparty supplier, Lockhart explained.
The demands on the financial services industry are only likely to grow. This is due to changing public expectations, and an increasingly populist political and media culture. Upcoming areas of regulation will include cybersecurity, management of customer data and payments and cryptocurrency regulation. Financial services organisations accordingly face high stakes in a fast-changing area. Regulatory breaches can incur heavy fines or embarrassing reputational damage. Some key challenges for organisations include:
• having clear accountabilities and role clarity across the organisation for compliance leadership
• aligning strategy, products and services to regulatory change
• managing the volume of the regulatory reform pipeline and regulatory compliance requirements, whilst balancing business-as-usual activities
• implementing new ways of working
• having access to external regulator feeds and systems, which then need to operationalise and integrated into risk and compliance frameworks. For any organisation managing regulatory change, the more planning they do upfront to understand the original requirement, the easier the process will be further down the line if they run into breaches or remediation issues.
Building more resilient organisations and focusing on culture is a priority. The industry has never been static, and so organisations need to be in a position where they can evolve as needed. Having a culture that encourages staff to proactively identify and prepare for change will help organisations build resilience.
Organisations need to take a sustainable approach to change through building capability and a system that is flexible.
Batten encourages financial services organisations to look honestly at the ‘friction points’ that can drive problematic behaviour, with remuneration incentives or unclear accountabilities being two obvious exam -
ples. It is also important, he said, that businesses do not fall into a pattern of jumping into line, only to drift back into discredited patterns when regulators are no longer focusing on the issue.
A true commitment to change needs to be permanent. “Often there are cultural drivers that cause issues not to be identified or confronted,” Batten notes and provides further insight:
There are barriers around raising issues with senior executives to avoid looking bad or being seen to raise difficult issues without easy solutions. These dynamics can require an external eye to work with an organisation to identify and change how these issues are addressed.
Organisations should seek to build a culture that looks to imple -
ment regulatory change holistically, rather than tactically. Taking a holistic approach will, in the long term, decrease change load that organisations need to manage, and improve staff engagement and motivation to make the changes.
Worthington offered the example of the numerous customer protection changes that commenced in October 2021:
Organisations that did not take a holistic approach to the introduction of the design and distribution obligations, anti-hawking measures, deferred sales model for add on insurance and internal dispute resolution changes, would have placed unnecessary change burdens on their teams who were likely already suffering from change fatigue. fs
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1. According to the cited data, the two regulatory issues presently of most concern to businesses are:
a) breach reporting and implementing Royal Commission recommendations
b) design and distribution obligations and COVID-19 related WHS
c) COVID-19 related WHS and breach reporting
d) governance and conduct regulations and Consumer data rights
2. Which of the following outcomes can an organisation protect itself from by putting in place an effective compliance regime?
a) Fines and or remediation
b) Operational focus diverted away from core objectives
c) Reputational damage
d) All of the options.
3. What fundamental shift in the financial services sector do the authors claim has occurred since the GFC?
a) Companies having to meet unrelenting demands from performance-based regulation
b) The application of external technology helping firms to minimise privacy and integrity risks
c) Public expectation upon companies to prioritise product suitability over their profitability
d) Enhanced regulatory co-ordination by the key regulatory entities
4. According to the paper, building a sustainable approach to cultural change within a business can often be impeded by:
a) pre-existing remuneration incentives
b) the realities of running a profitable business
c) unclear employee accountabilities
d) Both a) and c)
5. Organisations that adopt a holistic rather than a tactical approach to regulatory change typically suffer prolonged change fatigue.
a) True
b) False
6. Populist political and media culture is putting increasing demands upon the financial services industry.
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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To complement recent legislative reforms aimed at making insurance in superannuation more effective, this paper investigates how better collection, access to and analysis of member data can lead to the better alignment of default life, TPD and IP insurance policies offered to superannuation members with their individual needs.
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John O’Mahony and Ben Lodewijks
This paper comprises excerpts from Deloitte Access Economics paper The future of insurance through superannuation.
An important feature of Australia’s system of superannuation is the provision of default insurance policies to members on a group insurance basis. Almost 10 million superannuation accounts have insurance provided through their superannuation such as life insurance, total and permanent disability insurance (TPD) and/or income protection (IP). Australia’s community-rated, default insurance through superannuation is mostly provided on an ‘opt-out’ basis.
Insurance in superannuation has undergone a number of reforms in recent years to make the system more effective, as recommended by a 2018 Productivity Commission report Superannuation: Assessing Efficiency and Competitiveness. The report found that not all members received good value from the insurance in their superannuation because of duplicative policies, and thus premiums, and excessive retirement balance erosion for low-income earners and those with intermittent participation in the labour market. It found that the re -
tirement balance of the average worker could be reduced by $35,000, or 4%, due to premiums paid for insurance.
The Protecting Your Super (PYS) and Putting Members’ Interest First (PMIF) changes that introduced a shift to opt-in arrangements for younger members and those with low balances or no recent contributions, addressed some of the Productivity Commission’s issues. In addition, the stapling introduced in the Treasury Laws Amendment (Your Future, Your Super) Act 2021 (YFYS) changes could greatly affect the occupational mix in group insurance products, the full impacts of which are unclear. What it has again highlighted is the opportunity for additional actions that can be taken so member data can be better used to target the benefits of insurance through superannuation.
While default insurance can generate benefits in aggregate terms, the current approach to assigning insurance cover is broad. Individuals are assigned to groups based on few characteristics such as age, gender and, much less often, occupation type, which for many Australians will be a general basis to determine their level of insurance need. While the purpose of default group insurance has never been to fully meet a member’s insurance needs, this particular issue was identified by the Productivity Commission as a source of sub -
optimal outcomes for a large share of members.
This paper explores the potential to create improvements to group insurance by using richer data to better define default groups. With small changes to default characteristics, insurance cover will better meet the needs of the individual and reduce instances of underand potentially over-insurance.
Just as reallocation could occur between members because of better data, reallocation could also occur across types of cover for a given member. While this paper has not considered this approach for modelling purposes, it is considered in the discussion on reallocation of sums insured.
This paper refers to the concepts of under- and overinsurance. For purposes of this paper, these concepts refer to the amount of insurance that would be required in the event of a payout, based on an individual’s characteristics.
Consider two persons—Person A and B—who are the same age, income and occupation, however Person A is single and has no dependants, whereas Person B is married with two children. The risk levels of these individuals are the same—one is no more likely to die or experience permanent disability than the other—although their needs for insurance are different. If both these individuals are under the same insurance contract, one of them must be either over or under-insured. Either Person A is paying for additional insurance cover they do not need, or Person B is not sufficiently insured for the additional needs of their dependants in the event that they need to make a claim.
Default insurance is in place to provide a basic level of cover for those that might otherwise not have it. If necessary, individuals can engage with their superannuation provider to adjust their individual cover, however, the reality is that few members take action to tailor their insurance cover to better suit their need.
In December 2020, research by the Australian Securities and Investments Commission (ASIC) Default insurance in superannuation: Member value for money Report 675 estimated that 86% of superannuation members have default insurance settings.
Inefficiencies in current default insurance cover
While group insurance provides a cost-effective way of providing basic cover, default cover only matches the ‘average’ consumer. In aggregate terms, this can be represented by a mismatch between default insurance cover and insurance need. This is illustrated in Figure 1 where a subgroup of the broader population is selected into a single default group with an approximately normal distribution of insurance need. Although the average member within a cohort is suitably insured, those
with less/more need than the average member are over/ under-insured.
Although it differs between funds, insurers and policies, the typical characteristics of grouping cohorts together in group insurance is age, gender and, less commonly, occupation. While these characteristics, particularly age and occupation, might represent risk levels, they do not necessarily reflect factors that influence need for insurance. These factors or more likely to include characteristics such as marital status, number of dependants, homeownership and income.
What does better access to data in insurance look like?
There is a trade-off to tailoring insurance to better fit the individual circumstances. Partly, the reason group insurance can be offered at low cost is by pooling risk from a larger population and by minimising administration.
If the dial shifts too far the other way, the system will reflect individual, retail insurance which might mean better targeted cover but also cover that is more costly to insure and administer. Another appeal of group insurance is that it is ‘low touch’, and requiring more onerous data collection processes are likely to reduce overall participation as individuals become discouraged and disengaged by the process.
Better data access can help balance costs and efficiencies of group insurance. By targeting a small number of characteristics that have a significant influence over an individual’s insurance need, improvements could be made without onerous data collection. Figure 2 on the next page illustrates this concept whereby the previous group is subdivided to better meet the needs of members in the tails of the distribution.
As noted above, the current system of insurance relies mostly on the age of individual members to determine insurance need. While age is associated with key life stages that influence need, there is great disparity between age cohorts depending on other factors, such as income levels, debt and children.
John is
Ben is a director at Deloitte Access Economics who focuses on microeconomic policy analysis specialising in education policy, tax reform, finance and tourism.
With small changes to default characteristics, insurance cover will better meet the needs of the individual and reduce instances of under- and potentially over-insurance.
In the case of life, TPD and IP insurance, the factors most associated with need are:
• income—determines the amount of insurance needed to offset the financial losses associated with death, permanent disability or loss of income and impacts capacity to pay premiums
• number of dependants—determines the number of people reliant on insurance to substitute or supplement income in the event of death, permanent disability or loss of income
• debt—determines the amount of insurance needed to pay down existing debt in the event of death, permanent disability or loss of income.
The benefits associated with incorporating the first two of these factors into group insurance is explored next—with debt excluded due to data availability.
This section of the paper estimates the benefits of moving towards a system of better use of data, and in particular, the benefits associated with including the following characteristics in the determination of default insurance cover:
• Age
• Income
• Marital/de facto status
• Number and age of children. Other characteristics, such as debt levels would ideally be included in this analysis, however, the paper has excluded these from the modelling due to unavailability in actuarial estimates. Occupation is another characteristic sometimes used in the design of policies. It is usually included as part of risk analysis more so than coverage levels so it is not included in this analysis, but it could be part of better policy design in the future.
The modelling approach uses group-level data provided by a sample of insurers to model the current distribution of insurance across age cohorts. The analysis then compares the current allocation of default cover against a new distribution based on insurance need obtained from actuarial modelling previously conducted by RiceWarner—now part of Deloitte.
The RiceWarner modelling determines the level of in-
dividual insurance need across the Australian working age population using detailed cameos based on the 2016 Australian census data. The analysis assumes that the level of insurance, or sum insured, in the system is static across scenarios; better data access does not increase or decrease the total level of sum insured, only reallocates proportionally in accordance with need.
Using this approach, the reallocation of insurance in accordance with need has a significant impact on the distribution of sum insured. As shown in Table 1, Deloitte found that across the three types of insurance the inclusion of income and dependants would reallocate approximately 1.2 trillion or 34% of total sum insured. This reallocation occurs both within and between age cohorts.
The largest reallocation in both nominal and percentage terms, occurs in life insurance. In its report, Deloitte estimates that 800 billion, or 42% of sum insured, would be reallocated across cohorts and members. In percentage terms, the change in life insurance is almost twice as large as the reallocation that occurs in TPD (23%) and IP (29%) insurance. This is unsurprising since life insurance has little or no benefit to an individual with no dependants, while TPD and IP are valuable to the affected claimants as discussed further under Figure 3 on the next page.
The results presented in this section are measured in terms of the total amount of sum insured that is reallocated between members under the proposed system. Sum insured refers to the total amount payable to members in the event of a claim, and since the benefits of sum insured are only realised (in a financial sense) by those who need to make a claim, the monetary values presented below should not be compared to metrics such as GDP.
Instead, the results of this section seek to demonstrate that significant efficiencies could be realised through small changes to the operation of group insurance. This would alleviate some of the concerns with the current system while preserving the broader safety net provided by insurance in superannuation.
The exercise presented is based simply on reallocating the current total sum insured within each of the three insurance types. It does not presuppose the current
level of insurance is optimal (in fact, it may be less than optimal). Nor does it propose any shift of total coverage between the three streams of insurance, which could be another improvement opportunity.
The reallocation of life insurance sum insured by age cohorts is presented Figure 3. The darkest shaded area shows the current distribution of sum insured based on data obtained from insurers for 2020 financial year whereas the mid-grey shaded area represents the new distribution with income and spouse dependants considered. The columns show the absolute value of the total reallocation under better data access for that age cohort. For example, in aggregate terms, the 30–34 age cohort only has a $44 billion increase in total sum insured, although movement within this cohort results in the highest total reallocation of $149 billion.
For life insurance, the younger age cohorts where fewer cameos have high income and dependants, benefit least if at all, from life insurance and therefore have the largest decline in sum insured under better data access. For the 18–24 and 25–29 age groups, sum insured is almost halved—45% and 48% respective reductions— compared to current insurance. On the other hand, the analysis finds that the age groups that are most underinsured in the current settings are those members between the ages of 40–49, consistent with expectations about numbers of dependent children within this age cohort.
Better data access default cameos—life insurance
Reallocating life insurance based on age, marital status and dependants could result in changes to insurance cover and premiums.
Consider the situation of two members:
Member 1: married and in their mid-50s with two dependent children
Member 2: in their early 30s with a partner and no children Member 1 with an additional $30,000 could receive 20% extra coverage by taking a payout value from $140,000 to $170,000 in the event of their death. By contrast, Member 2 could reduce their cover by 22% and benefits from paying approximately $36 less in annual premiums—22% reduction on current premium cost— from $166 to $130.
There are several ways that this reallocation could manifest within the current system. For new members, they could simply be offered the new default levels of cover. Changing coverage levels
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1. According to Deloitte, for purposes of grouping member cohorts for default insurances, the two most commonly applied member characteristics are:
a) age and occupation
b) gender and age
c) gender and income
d) number of dependants and debt
2. Which type of group insurance did Deloitte find to be most in need of reallocation between members, when based on their individual needs?
a) Income protection
b) Trauma
c) Life insurance
d) Total and permanent disability
3. What do the authors claim is a potentially detrimental effect from superannuation stapling upon group insurance cover?
a) Members are ‘locked into’ default cover with their original group insurance provider
b) Unintended altering of the occupational mix in group insurance products
c) The average workers’ retirement balance could fall by 4% after premiums
d) Employees who change employers more often will find their default cover less-and-less suited to their needs
4. The types of data that Deloitte considers should be accessed to improve future design of default group insurance cover include:
a) number and age of children
b) occupation, income and level of debt
c) age and marital status
d) All of the options
5. Default insurance under Australian superannuation is available to all members mainly on an ‘opt-in’ basis.
a) True b) False
6. In 2020, approximately 85% of superannuation members held default insurance cover according to ASIC.
a) True b) False
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for existing members would require a transition process. For some members, it will decrease their coverage levels and lower premiums. These could be adjusted automatically, or members could be given the option to change coverage levels. For some members, there will be the opportunity to increase coverage levels for certain products. This could be implemented in various ways, such as a shift in coverage levels between products, or members could be given the option to change coverage levels.
Moving towards a system with better data access and use is not straightforward. Collecting the data required to better match insurance coverage to need requires careful policy design and cooperation between government, trustees, insurers and members.
Some information would be easier to obtain than others. For example, individual income could be reasonably approximated through a person’s employer contributions to superannuation without additional data gathering. On the other hand, information such as number of children, marital status and debt levels would be difficult to acquire without requesting data directly from individuals. Although this data is available in theory—the Australian Taxation Office, for example, currently holds information on occupation, marital status, partners and relatives, income, debt and assets as part of taxpayer records—insurers will not be able to access this information without carefully considered and significant amendments to the Privacy Act 1988 and the Australian Government Agencies Privacy Code 2017.
Another potential solution is that trustees need to regularly obtain the required information from members in order to keep insurance coverage aligned with insurance need. This could involve amendments to the superannuation standard choice form submitted by employees to elicit more information regarding individual characteristics and requirements. However, recent changes to the system, for example, the introduction of the ‘stapled super fund’ rules under YFYS might in fact reduce the overall contact with members. While a relatively simple solution, this would likely only benefit employees who regularly change employers, while members who do not change jobs will have insurance need determined by potentially outdated information.
These implementation challenges should not discour age insurers, trustees and policymakers exploring further opportunities to develop the data capabilities of default insurance in superannuation. As demonstrated, improvements in the collection of information can provide material benefits to members through better aligning insurance with need. Such a system could address issues relating to the appropriateness of default cover and avoid removing or undermining a system that provides an important safety net to a significant number of Australians who may not otherwise hold an insurance policy. fs
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What, when and how to document key decision-making processes and their outcomes is a critical issue for all trustees, including SMSF trustees. For individual trustees, the guiding document will be the fund’s trust deed while for a corporate trustee the company’s constitution will provide direction including whether documentation is in the form of minutes of a trustee and directors meeting or via a circular resolution.
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If a tree falls in a forest and nobody hears it, did it really fall? or if a trustee makes a decision and does not write it down, did it really happen?
One of the things that is asked quite consistently is when should a trustee document a decision? This usually arises when a trustee wants to do something and is unsure if they need to minute it. As usual with most things SMSF, the answer to this question is that it depends.
This paper will consider three issues:
• How do trustees document a decision?
• What decisions do trustees need to document?
• When do trustees need to document decisions?
When determining how a decision is documented, one first needs to consider what type of trustee structure exists because this will determine what documents will govern the rules of decision-making.
If there is a corporate trustee, then the starting point will be the company's constitution. This document will outline a set of steps necessary to make that decision. This can occur either at a meeting of directors or by passing a resolution.
If the fund has individual trustees, the guiding document will be
the fund's trust deed. Again, this document will provide instruction on whether decisions are dealt with at a meeting of trustees only or can be by passing a trustee circular resolution.
As there are some critical differences between these two potential methods, the key issues for each method will be compared.
In the event of meetings between trustees and directors, the proof of these meetings is the minutes of the meeting—so what does a minute of a meeting mean? The minute of a meeting acts as a record of an event that occurred and documents the relevant issues of that event, namely who was at the meeting, when did it take place, what was decided at that meeting and finally, a formal sign-off by the chairman that the information in the document is true and correct.
• Some meetings require an advance notice period, such as annual general meetings, but that does not mean that some meetings cannot be called without notice.
• Determine who attended the meeting versus who was eligible to attend.
• Confirm if there were sufficient people at the meeting to allow a decision to be made as a quorum is required. If there are insufficient people at the meeting to form a quorum, then the meeting cannot make any decisions.
• The final element is what items are raised, discussed and decisions made.
Each of these considerations will be documented within the minutes of the meeting.
Now the alternative is the use of a resolution, sometimes referred to as a circular resolution. The key difference with these is that there is no requirement for a gathering of the relevant parties to occur; instead, a document defining the recommended decision/s, or resolutions is prepared and circulated to all the trustees or trustee directors for approval.
It is important to note that:
• Each party does not need to sign the same document but can sign a separate version of the document, meaning that they do not need to be all together at the same time.
• The effective date of the resolution is the latest date at one of the required parties signed the resolution.
• All the signed resolutions from all the relevant parties are required to be kept.
The most significant difference is that minutes require a meeting to occur, and at least a certain number of people must attend. In contrast, circular resolutions do not require a gathering but generally need all parties to agree and confirm the decision.
The answer to this really hinges on the quality of other documents and procedures the trustee uses to operate the SMSF.
In terms of the significant activities and the extent to which they need to be documented, trustees would be looking at acceptance of contributions, payment of benefits, and investment decisions. So, what are the considerations for each of these types of actions?
For contributions, there are two areas to consider; one is the receipt rules, particularly concerning the work test and classification of contribution types for instance, concessional versus non-concessional.
From a work test point of view, the main issue—up until recently—was verification that the person/member met the work test before the trustees could accept the contributions; thankfully, after 1 July 2022, this responsibility does not rest with the trustees.
The classification of contributions can generally be traced to information sources that come with the payment. If the contribution is made via SuperStream, then data is provided that will mean the trustees have a source of classification. If the contributions are personal contributions, the trustees can generally rely on the use of an Australian Taxation Office (ATO) Notice of intent to claim a tax deduction to determine whether a personal contribution is a concessional contribution or not.
This means the main place where additional information may either be sought by the trustees or needs to be provided by the contributor will be spouse contributions. This is because there is no standard mechanism for informing the trustee that the contribution is of that type.
Other types of non-concessional contributions such as downsizer, CGT small business concession contributions, and personal injury amounts have specific ATO forms that are required to accompany these contributions. This means there is no need for the trustee to specify any decision about these contributions.
The other consideration for contributions is the use of so-called contribution reserving. Because contribution reserving requires the trustee to decide not to allocate a contribution on the date it is received, and this is generally different from the treatment of all other contributions, there will need to be documentation showing the trustee made this change to their normal procedure. Not only will there need to be the trustee's decision to reserve the contribution on the receipt they will also need to be a documented decision on the allocation of the contribution to the member from the reserve.
For benefit payments, the critical issue is that these are not necessarily frequent events and because the Superannuation Industry (Supervision) Act 1993 (SIS Act) requires certain events to occur prior to a condition of release being met and an amount paid from an SMSF, the trustees need to collect that information from the members asking for a benefit to be paid.
The trustees then need to decide that the evidence they have received is accurate and meets the SIS Act requirements, and therefore, they will pay the benefit. Hence this becomes a decision that should be documented.
For pensions, this is a little bit more complicated because generally it is not about a single payment, and so there needs to be supporting material that allows the trustee to make not just the initial pension payment but any subsequent payments to the member in a pension form.
The final element to consider is investment decisions.
One of the questions is: Do I need to document every single purchase and sale of investment? The answer to that question is driven by other paperwork the trustee has completed, particularly the SMSF's investment strategy.
The more quantifiable the investment strategy content is, the easier it is to rely on that document for future investment decisions. Nevertheless, some investment decisions are still probably worth documenting and these would include:
• Acquisition of direct property, particularly as there may need to be other documents signed on behalf of the trustees such as rental agreements, agent appointments and service providers selected to handle repairs and maintenance.
• Implementation of any limited recourse borrowing arrangement as there would be investment strategy considerations as well as additional documents to be executed such as custodian trust deeds and loan agreements.
• Any collectable which then may need to have documentation relating to insurance, storage and possible leasing.
• Loans by the SMSF to non-related parties would require a written loan agreement specifying terms and conditions applicable to the loan.
• Any 'in specie’ contribution or acquisition from a
The quote Minutes require a meeting to occur, and at least a certain number of people must attend. In contrast, circular resolutions do not require a gathering but generally need all parties to agree and confirm the decision.
Philip La Greca, SuperConcepts
Philip is an accomplished SMSF technical expert and soughtafter media commentator on SMSF technical issues. He has over 30 years' experience working in specialist administration, technical and compliance roles with a variety of organisations, including AM Corporation and William Mercer.
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1. For SMSFs with a corporate trustee initial guidance on how trustee decisions should be documented is found within the:
a) agenda for each meeting of trustees and directors
b) company’s constitution
c)trust deed of the fund
d) SIS Act
2. Trustees typically need to document any information relating to their decision to accept contributions into the fund that are to be classified as:
a) Spouse contributions
b) Employer contributions
c) CGT small business concessional contributions
d) Personal concessional contributions
3. Which of the following investments should SMSF trustees document?
a) Artworks
b) Listed overseas assets
c) Loans to non-related parties
d) Options 1 and 3
4. Which of the following statements is correct about trustee decisions documented using a circular resolution?
a) Trustee/directors must first achieve a quorum agreeing to the use of a circular resolution
b) All trustees must sign the same single copy of the resolution
c) The date of the last party to sign the resolution determines its effective date
d) Funds with individual trustees may only use a circular resolution
5. From 1 July 2022, fund trustees are relieved from responsibility for ensuring members satisfy a work test prior to accepting fund contributions.
a) True
b) False
6. Any decision involving contribution reserving must be fully documented by the fund trustees.
a) True
b) False
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member of the SMSF or a related party, as this would need to be tested against the SIS acquisition rules and possibly the 5% inhouse asset limit.
• Any non-public asset investment to confirm it is not an acquisition from a related party or is within the permitted SIS related party acquisition and in-house asset rules.
• Any in-house asset acquisition should be documented as the 5% testing of the amount needs to be verified at the time of acquisition, as well as outlining how the continued monitoring of the limit will be conducted.
In effect, the easiest way to summarise when trustees should document decisions comes down to whether they need to prove to someone else the basis for a decision or can they rely on other documents that already exist. fs
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With trustees responsible for paying superannuation death benefits as per their fund’s governing rules this paper provides a checklist of practical, ordered steps for SMSF trustees to follow to help them meet the deceased member’s wishes while also complying with superannuation law and ensuring that the ongoing trustee structure remains compliant.
This paper covers the role trustees play in paying superannuation death benefits on a member’s death. However, it does not review the taxation of death benefit lump sums or pensions to the beneficiary of the deceased or to the deceased’s estate.
As with all decisions involving the superannuation fund, the trustees are responsible for paying death benefits as provided in the fund’s governing rules.
However, if the fund has only one trustee/member who passes away, the fund’s trust deed will usually have provisions on what is to occur where there are no trustees, or the fund is unable to satisfy the trustee requirements for a self-managed superannuation fund (SMSF).
The fund’s governing rules will usually include information on the payment of a death benefit which may include who can receive the death benefit and the type of benefits that may be paid. Most trust deeds allow fund members to direct the trustee in the payment of the distribution of death benefits under a valid binding death benefit nomination.
When considering the payment of a death benefit, the trustees should review the trust deed and any other governing rules for any special death benefit payment provisions or rules. One example could be that prior to deciding on who should receive a death benefit,
the deed may require that the legal personal representative of the deceased, usually the executor of their estate, is appointed as trustee or director of the corporate trustee.
The superannuation legislation requires that death benefits are paid to the dependants of the deceased for superannuation purposes, the legal personal representative of the deceased or a combination. A dependant for superannuation purposes will include the spouse of the deceased, their children of any age, anyone financially dependent on the deceased at the time of death and anyone in an interdependency relationship with the deceased.
The legal personal representative of the deceased is responsible for ensuring that the superannuation benefit is distributed as required under the last Will and testament of the deceased. Where the member has died without making a Will, it may be necessary to apply to the court to have a person appointed under letters of the administration who can be appointed as a trustee and will be responsible for distribution of the death benefit in terms of the fund’s trust deed.
A member may make a death benefit nomination which directs the trustee to pay death benefits to dependants and/or the member’s legal personal representative. In addition, where an SMSF is involved, the member may include additional conditions, including the type of benefit to be paid.
To be valid, a death benefit nomination should be binding on the trustee, which is in writing, nominate the relevant dependants and/or legal
personal representative and signed by the member. However, the governing rules of the fund may provide a template nomination or indicate the types of information that should be included in the nomination. It may also include the format, form and procedures that the trustee is required to follow. It is also sensible for the trustee to acknowledge receipt of the nomination in writing.
Death benefit nominations can be binding or nonbinding on the trustee and may also lapse after a predetermined time or be non-lapsing. Whatever type of nomination a member wishes to put in place, it needs to be clear and unambiguous to ensure their directions can be carried out at they intended.
Where the member has been in receipt of a pension prior to their death it may include a reversion to a surviving dependant to continue to receive the pension. The name of the reversionary pension beneficiary will usually be nominated at the time the pension commences but the terms of the pension may be amended after it has commenced to include or exclude a reversioner.
Document Type Purpose
Death Certificate Necessary to confirm the passing of the member and date of death
Trust Deed Outlines the responsibilities of the remaining trustees in relation to the payment of the benefit
Will/Letters of Administration/ Identifies the member's legal personal representative
Grant of Probate and is only required where the legal personal representative is to be appointed as trustee or trustee director
Member benefit nominations Confirms the directions of a deceased member, which are provided in their death benefit nomination form. There may also be the nomination of a reversionary beneficiary which could be included as part of any pension agreement payable at the time of the member's death
Change of trustee/ Updates the trustee structure if required as a result of director nomination the death of an existing trustee director of the corporate trustee
Trustee Resolution/Minute Documents recognising the passing of a member which would include the decisions of the trustees in relation to the beneficiaries of the benefit and how it is to be paid.
Graeme Colley, SuperConcepts
Graeme is executive manager, SMSF technical and private wealth, SuperConcepts. He is a wellknown figure in the SMSF community with a long-standing reputation as an accomplished educator, technical expert and advocate for the sector. Graeme has held senior roles at the Australian Taxation Office, worked as an assistant commissioner for the Insurance and Superannuation Commission, and most recently held the role of director, technical and professional standards at the SMSF Association.
If a member has not made a nomination or, for some reason the nomination is invalid then the fund’s trust deed will usually require that the trustee exercise discretion to determine who will receive the death benefit.
Documentary evidence to support the payment of a member’s death benefit should always be prepared to clearly show the information trustees relied upon in making their decisions.
The most important documents to obtain, and their purpose when determining the payment of the death benefit, are set out in Table 1.
When considering the member’s death benefit directions and the fund’s governing rules, the trustees will need to consider whether the death benefit can be paid as a lump sum, death benefit pension or as a reversionary or nonreversionary pension.
Payment of a death benefit as a lump sum, is done by transferring either cash and/ or assets out of the fund to the beneficiary. Once this has occurred, the death benefit has left the superannuation environment.
When the death benefit is paid as a new pension, commencement documents must be prepared. If the nominated beneficiary is not currently a member, they will be required to become a member and trustee or trustee director. The death benefit will remain in the fund, subject
to the beneficiary’s transfer balance cap. The minimum pension is calculated based on the pension commencement date and the age of the beneficiary.
If the death benefit is paid as a reversionary pension, the existing pension of the deceased simply continues to the new beneficiary. New pension commencement documents are not required as no new pension is established, and the original pension is considered to simply continue. The death benefit will remain in the fund, subject to the beneficiary’s transfer balance cap. The minimum pension in the year of death is calculated based on the age of the deceased and subsequently based on the age of the beneficiary.
When the pension being paid is a non-reversionary pension, there is no requirement to make any further pension payments as at the date of death. The remaining amount of the non-reversionary pension will be added to the amount of the deceased member’s accumulation account. This amount will then be available for distribution to the member’s dependants and/or legal personal representative as determined by the member’s death benefit nomination, including the trust deed provisions.
As dealing with the death of a member can be overwhelming, trustees should consider the following key steps:
1. Review the death benefit provisions of the trust deed for any relevant considerations.
2. Check if the deceased member has a valid death benefit nomination in place.
3. Document the decision in relation to the payment of the death benefit in writing.
4. Determine how the death benefit is to be paid—lump sum or pension or combination, and to whom it is to be paid.
5. Review any direct debit arrangements in place for payment of pensions to the deceased. Once the member has passed away, they can no longer receive pension payments. Where a reversionary pension is payable, make the necessary arrangements for it to be paid to the reversionary pensioner.
6. Organise payment of the death benefit, where the death benefit is paid as a reversionary pension; trustees may need to update the bank account details for the pension payments.
7. Register the fund for SuperStream purposes, where the death benefit will be rolled over to another superannuation fund
8. Consider if any changes need to be made to the trustee structure of the fund.
9. Consider if any changes need to be made to authorities in relation to existing fund investments.
10. Update the death benefit nominations of existing fund members, if required.
11. Ensure the fund auditor has access to the death certificate, any nominations the deceased member had in place, that the decision to distribute the death benefit has been made by authorised parties—the SMSF trustee(s)—and that the ongoing trustee structure remains complying. fs
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1. Who is responsible for making certain a member’s superannuation death benefit is distributed as required under their last Will and testament?
a) The trustee(s) of the member’s fund
b) The legal personal representative of the deceased member
c) The auditor for the member’s fund
d) The deceased member’s nominated beneficiaries
2. Which document records the trustee’s decisions concerning how and to whom a member’s superannuation death benefit is to be paid?
a) The trustee resolution or minute
b) The trust deed
c) The letters of administration
d) The member’s death benefit nomination
3. Which of the following statements is correct? When a member’s death benefit is to be paid as a non-reversionary pension then:
a) the balance of the non-reversionary pension will be added to their beneficiary’s accumulation account
b) the deceased member’s existing pension transfers to and is now paid to the new beneficiary
c) any requirement to make pension payments is removed from the date of the deceased member’s death
d) the deceased member’s pension will cease with all supporting assets transferred out of the fund to beneficiaries
4. Prior to his death, Karl could direct the trustees of his superannuation fund to have his death benefit paid to:
a) one or more of his de-pendants as defined under superannuation law
b) his legal personal representative
c) one or more of his grandchildren if they were financially dependent upon him at the time of his death
d) All of the options
5. A superannuation pension currently paying benefits to a member can have a reversionary beneficiary either added or removed.
a) True b) False
6. Upon an SMSF member’s death, their legal personal representative automatically assumes the role of trustee or director of the corporate director.
a) True b) False
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Worth a read because:
With greenwashing attracting significant attention from ASIC, trustees are under increasing pressure to ensure that in promoting the green credentials of their investment products they provide a clear and accurate representation of the funds’ ESG-related investment practices, goals and targets in all communications with potential investors.
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The risks of greenwashing have never been so apparent for superannuation fund trustees.
Good intentions are not enough to protect from the legal minefield and reputational quagmire that may await trustees that are not proactive in understanding and addressing their fund’s greenwashing risk exposure.
The raid of the DWS Group head office in Frankfurt in relation to environmental, social, and governance (ESG) investment related greenwashing allegations, and legal allegations against the trustees of major superannuation funds aptly demonstrate this point and have prompted the Australian Securities and Investments Commission (ASIC) to release an information sheet on how to avoid greenwashing when offering or promoting sustainability-related products.
Trustees of superannuation funds have played a leading role in the global development of investment practices that place greater emphasis on the impact that ESG practices have on valuation and performance over time, and the impact that investments can have on environmental, ethical, and social issues.
In many instances, this holistic approach to integrating both ESG factors as valuation inputs and promotion of environmental, ethical, and social investment goals and objectives has led to well-intentioned yet fundamental risks of greenwashing. Confusion remains as to
what greenwashing is and what rules apply, let alone what the best approach is for mitigating the risks of greenwashing.
In June 2022, ASIC issued a media release 22-141MR detailing how entities can avoid greenwashing when offering or promoting sustainability-related products. In its guidance ASIC considered ‘greenwashing’ as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.”
This definition will be briefly reviewed in the context of superannuation trustees and consider how the associated risks and obligations are best managed.
The concept of ‘ESG investing’ has changed over time and can be incorporated into investment decision making in different ways.
Ethical considerations have probably played a role in the decision making of investors for as far back as it is useful to consider. However, since the 1960s institutional investors have been applying negative screens to investments that are considered to be unethical.
In the early part of this century, ESG risks started to be factored into the assessment and valuation of an investment, alongside the more traditional financial risk-factors, to determine whether an investment was a ‘good’ investment. The investment decision would still be anchored to risk and return objectives, but the prominence of ESG risks
was increasingly seen as a leading indicator for risk and return. This was seen to make the integration of ESG factors in investment practices well suited to investors with long term horizons such as superannuation funds.
Whilst this practice is still prevalent, what is becoming increasingly common is the assessment of an investment against a loftier goal or set of objectives around providing a social good or positive impact. Even in cases where an investment might otherwise produce a strong financial outcome after factoring environment, social and governance risks into the valuation, certain investments may be screened out—or held with the intent of influencing— based on the nature of the investment and/or industry.
Both approaches incorporate sustainable investment into the investment decisions of a fund, however, they operate independently of each other and should not be conflated. The conflation of ESG risks as valuation inputs and ethical or sustainable investment objectives is a significant contributor to the risk of greenwashing by well-intentioned trustees of superannuation funds.
Greenwashing activity is prohibited through various statutory mechanisms, primarily in accordance with the general financial services disclosure obligations within the Corporations Act 2001 (Corporations Act) and associated regulations, in addition to the Australian Securities and Investments Commission Act 2001 (ASIC Act) and supplementary guidance.
The misleading and deceptive conduct provisions within the Corporations Act provide a basis upon which any disclosure should be viewed. This is a particularly risky provision for trustees as, setting aside the significant penalties that may apply, the standard applied is that of a reasonable person and does not require anyone to have actually been misled. Further, a genuine mistake or inadvertent representation may also be found to be in breach.
The misleading and deceptive conduct provisions extend to the disclosure of future objectives and goals, as these must have a reasonable basis or otherwise risk the representation being taken to be misleading. Considerable risk exists here as the burden of proof is reversed, requiring the trustee to prove the statement to be reasonable.
There are obligations to ensure that product disclosure is not defective, and the disclosure obligations of a trustee’s investment activities are relatively complex to navigate. Specific obligations apply in relation to the sustainable investment activity of a trustee. There is nuance in the application of this legislation that may not be immediately apparent.
For example, a Product Disclosure Statement (PDS) must state the extent to which labour standards, environmental, social or ethical considerations are taken into account in the selection, retention or realisation of an investment. Note the inclusion of ‘labour standards’ which may not be otherwise considered by a trustee. Further, there is no reference to ‘governance’ which is a common consideration given the tendency of trustees to consider sustainability in relation to the acronym ‘ESG’.
Finally, trustees should also remain wary of the ‘efficiently, honestly and fairly’ general obligation. There has been a spike in enforcement activity by ASIC when using this provision, and any greenwashing accusations sit fairly in the scope of this provision. ASIC has been very successful in its enforcement activity against superannuation fund trustees under the misleading and deceptive representations, and efficiently, honestly, and fairly obligations.
There are several areas that pose greatest risk to trustees of misrepresentation in this regard.
Misleading labels and headline claims in relation to an investment product carry significant risk that an investor misinterprets the sustainability of a particular investment. The need to grab a potential investor’s attention must take a backseat to ensuring an accurate representation of the financial product or service being displayed.
The disclosure of fund investment practices within any communication material must be accurate, including fund policies and processes, such as responsible investment policies, stewardship and proxy voting. However, any form of public communication—to promote the green credentials of investments such as shown in Figure 1—must accurately reflect investment practice, including website content, advertising and even social media posts.
A commonly noted issue is the use and importantly, the extent, to which screening and other forms of risk analysis play a part in the investment practices of the trustee and investment managers. This is particularly prevalent in statements that indicate a blanket approach to investment but in practice there are limitations or thresholds that are not otherwise disclosed. Any discrepancy may be considered misleading and not a true representation of practice.
Investment goals and targets must be based on reasonable grounds and be accompanied by a specific plan to achieve the stated target. Consideration should be given to setting a quantifiable target that is measurable, along with timeframes and milestones to achieving the target, as well as any assumptions that may be used to support these activities.
The risks of greenwashing are becoming increasingly prevalent and appropriate management of these risks requires input, commitment and training across all areas of a trustee’s operations. An understanding of how sustainability and responsible investing
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1. ASIC has defined greenwashing as the practice of:
a) mispresenting a financial product or investment strategy as unethical or unsustainable
b) falsifying the extent that a financial product is environmentally friendly, sustainable or ethical
c) presenting the extent that a financial product is appropriate to investors seeking ethical investments
d) misrepresenting the extent that a financial product or strategy is economically sustainable
2. What issues must a PDS contain disclosure on the extent to which they were explored in the selection or retention of any investment?
a) Environmental, social and governance considerations
b) Labour standards along with ethical, social, and governance considerations
c) Environmental, social or ethical considerations and labour standards
d) Environmental, ethical and governance considerations
3. Under which Acts of Parliament are disclosure obligations that prohibit greenwashing activity primarily found?
a) ASIC Act and the Corporations Act
b) The Corporations Act and the SIS Act
c) APRA Act and the Corporations Act
d) ASIC Act and the AFCA Act
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has been incorporated into the trustee’s investment decision making is a basic requirement for all staff to ensure any representation made is clear and accurate. Penalties for non-compliance are considerable and even a sniff of greenwashing brings about significant media scrutiny and associated costs to the trustee, both financial and reputational. fs
4. Which of the following statements correctly represent the authors’ guidance to superannuation fund trustees regarding the risks from greenwashing?
a) Good intentions can prove effective in limiting the risks of legal action or reputational damage
b) Integrating ESG factors as valuation inputs and ethical investment objectives contribute to greenwashing risk
c) Broad promotion of an investment’s green credentials will likely raise ASIC concerns on misleading disclosure
d) Both options b) and c)
5. Institutional investors began applying negative screens to investments as far back as the 1960s.
a) True
b) False
6. The way ESG investing is incorporated into investment decisions has changed over the years even though the concept itself remains unchanged.
a) True b) False
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Worth a read because:
This paper looks at the ramifications for superannuation fund trustees of recent and proposed legislative reforms. One particular focus is upon key considerations for trustees following YFYS reform that reversed the evidential burden of proof in civil proceedings against them in respect of breaches of the new best financial interests’ covenant.
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Changes to the trustee and director indemnity provisions under sections 56 and 57 of the SIS Act.
Trustees, by their nature, are the sole responsible decision-making entity for superannuation funds. They undertake to act for members and are responsible for administering and investing the fund assets for ultimate purpose of providing for retirement. It is an onerous role and one which understandably comes with intense accountability.
Since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission), there has been there has been an increasing focus on trustee governance and accountability within the superannuation industry, which is reflected in the tone, purpose and onerous requirements imposed, or to be imposed, through recent and proposed legislative reforms.
The most relevant reforms include:
Re-framing one of the central trustee and director covenants from the best interests duty to the best ‘financial’ interests duty, as well as the reversal of the evidentiary onus of proof in civil penalty proceedings under the Superannuation Industry (Supervision) Act 1993 (SIS Act).
Proposed introduction of the FAR regime, under the Financial Accountability Regime Bill 2021 (FAR Bill), that is intended to replace and extend the existing Banking Executive Accountability Regime (BEAR), with a specific extension to insurance and superannuation.
Best financial interests' covenant
A central tenet of the Your Future Your Super (YFYS) reforms was to replace the best interests covenant with the best ‘financial’ interests covenant under the SIS Act for both trustees and directors.
Prior to 1 July 2021, the best interests duty was very much viewed as a decision-making duty that focused on the ‘inputs’ into the trustee's decision, and the decision-making process. The time for testing a trustee's decision was the time the decision was made, having regard to what the trustee knew at the that time, and not with the benefit of hindsight. The duty was also bound by the terms of the trust deed, and the law including the purpose of the trust and the concomitant sole purpose test.
Interestingly, in interpreting the meaning of the best interests duty, the courts had adopted a stance of stating that the best interests of the beneficiaries was determined by the purpose of the trust. In turn, where the purpose of trust was to provide financial benefits for the beneficiaries, then the best interests of the beneficiaries is in turn usually, their best ‘financial’ interests.
The re-framing of the covenant as the best financial interests covenant does not, in KPMG’s view, change these general principles. The focus remains on the trustee's decision-making process and the inputs to the decision of the trustee and its directors. However, the addition of the word ‘financial’ in the expression of the duty does clearly sharpen the focus on financial inputs.
The upshot is that financial interests are the determinative factor. The question then arises – ‘can non-financial interests ever be considered?’. In KPMG’s view the answer is that non-financial interests can be considered, but they cannot be prioritised over the beneficiaries financial interests, nor compromise those interests. Trustees should clearly focus on the data and metrics used as the core inputs into their decisions.
In addition to the re-framing of the best financial interests covenant, the YFYS reforms also reversed the evidential burden of proof in civil penalty proceedings against trustees in respect of alleged breaches of the best financial interest covenant.
This means that as from 1 July 2021 where civil penalty proceedings are instituted against a trustee by a regulator the following evidentiary steps are followed:
1. The starting point is that it is presumed that the trustee did not perform the trustee’s duties or exercise the trustee’s powers in the best financial interests of beneficiaries unless the trustee adduces evidence to the contrary.
2. Attention then turns to the trustee to adduce or point to evidence that there is reasonable possibility that it complied with its best financial interests duty.
3. If the trustee can adduce this evidence, the attention turns to the regulator to prove on the balance of probabilities, that the trustee did not perform its duties, or exercise its powers, in the best financial interests of the beneficiaries.
A critical issue for trustees and directors is to ensure that they have a strong decision-making process. This starts with ensuring the right scope of a question to be asked or proposal to be considered.
Then, there is a need to ensure that the right people in management are involved in the process of the proposal, and that the right evidence and data is collected and considered. This includes any potential external evidence such as benchmarking or external review. The evidence and data collected needs focus on the financial impacts, both positive and negative, to members.
It is also important to remember that a well-run fund, consistent with the obligation of trustees and directors to exercise care, skill and diligence of a prudent superannuation trustee, is fundamentally in the best financial interests of members. In considering a proposal, trustees should also consider whether all appropriate alternative options have been considered and compared. This is a particularly apt consideration where payments are made to third parties, where there is a potential or perceived conflict of interest, or at a higher level where a trustee is considering the strategic direction of a fund.
Finally, and critically, it is imperative that trustees clearly document their decisions, ensuring that the core reasons for the decision and the steps that a trustee has gone through in making that decision are recorded—including the identification of any conflicts of interests, and how those conflicts have been avoided or managed.
In light of the sharpened focus on financial interests, paired with the reversal of the evidential onus of proof, KPMG recommends that trustees consider:
• Governance review of the decision-making process, both at the trustee board level and management level (for decisions under delegation).
• Further develop the data points and metrics to assist in decision-making (having regard to the link to the business plan and member outcomes assessment).
• Development of best interests guidelines on how to practically apply the best financial interests obligation to different scenarios.
• Development and implementation of a trustee decision-making framework.
• Review of board paper templates and approach to minutes.
• Board and management training on best financial interests obligations and conflicts.
• Review of the expenditure framework and financial delegations framework.
• Development or review of management decision-making templates and records of decisions.
• Reviews of processes and controls.
A contentious issue among many superannuation fund trustees, that has been the subject of public attention, are the changes to indemnity sections 56 and 57 of the SIS Act.
Before the changes came into effect, a trustee or director could not use trust assets to meet liabilities arising from a breach of trust in certain circumstances or certain penalties imposed under the SIS Act. This has now been extended to prevent trustees and directors from using fund assets to pay any criminal, civil or administrative penalty—from 1 January 2022—incurred in relation to a contravention of any Commonwealth law.
In practical terms, the changes mean that trustees and directors will have to use their own financial resources, rather than fund assets, to pay statutory penalties imposed for breaches not only of the SIS Act, but of any
Commonwealth law. For example, if a trustee was found liable for not reporting a breach in time under Chapter 7 of the Corporations Act 2001, it cannot have recourse to fund assets to pay any resultant penalty—as it may have had under the former section 56 of the SIS Act.
These changes have required trustees to review the financial resources available to them in both their trustee and corporate capacities.
In particular, trustees of not-for-profit funds have explored ways to raise capital, to be held in their corporate capacity, for the purpose of meeting those liabilities. In many cases, the trustees have settled on charging a fee to members for their professional services to build up a capital reserve that will then be used to meet those liabilities. If this power was not already available, the trustee has had to amend the fund trust deed to introduce a trustee remuneration clause.
In recent months, we have seen trustees apply to the courts for judicial advice or approval to amend their trust deeds in order to ensure that the amendment to introduce the remuneration clause complies with their statutory and general law duties. So far, eleven trustees of notfor-profit funds have had their applications heard and decided by courts in various jurisdictions.
While the trustees took different approaches in the setting of the fees and the drafting of the remuneration clauses, the reasons for the courts allowing the trustees to introduce the remuneration clauses have included:
It would not be in the members' best interests for a trustee to be exposed to the risk of insolvency by reason of their inability to meet any liabilities that could not be paid out of the assets of the fund.
It would not be in the members' best interests for a trustee to be exposed to the risk of insolvency by reason of their inability to meet any liabilities that could not be paid out of the assets of the fund.
There is a high degree of responsibility and complexity in running a fund and trustees should be reasonably protected from any associated risks.
The risk of a trustee's inability to pay a penalty may mean that the trustee may not be able to attract suitably qualified and experienced directors.
If a penalty is levied against a trustee, the trustee will need to ensure that it is able to draw from available sources of funding to pay any such penalty or infringement notice. As a starting point, trustees should explore whether there are alternative sources of funding available to them, including trustee liability insurance or an injection of shareholder capital.
The quote
In addition to the re-framing of the best financial interests covenant, the YFYS reforms also reversed the evidential burden of proof in civil penalty proceedings against trustees in respect of alleged breaches of the best financial interest covenant.
If a trustee decides to build up its financial resources in its corporate capacity by charging a fee for its services to members, it will need to ensure that any reserve built up for this purpose is clearly identified and managed as being held by the trustee in its own corporate capacity. When doing so, the trustee should develop policies and processes to manage the capital reserve.
The FAR Bill was introduced to implement a recommendation by the Hayne Royal Commission. The FAR proposes to extend the BEAR—that only applies to banks— to all APRA-regulated entities, including superannuation trustees that are registrable superannuation entity licensees.
The purpose of the FAR is to provide a strengthened accountability framework for APRA-regulated entities called accountable entities (AEs) and accountable persons (APs), through the following four sets of core obligations.
Accountability (AEs & APs)
• to take reasonable steps to conduct their business with honesty and integrity, and with due skill, care and diligence
• to take reasonable steps to deal with the regulator in an open, constructive and cooperative way
• to take reasonable steps in conducting responsibilities to prevent matters arising that affect the AE's prudential standing
• for APs to take reasonable steps to prevent material contravention of a prescribed list of laws
• for AEs to take reasonable steps to ensure that its significant related entities (SREs) comply with the accountability obligations.
Key Personal
• require entities to APs to be collectively responsible for all areas of their business operations
• to ensure that no AP of the AE or SRE is prohibited from being an AP
• to comply with a direction of the regulator
• for AEs to take reasonable steps to ensure that it’s SREs comply with the direction of a regulator and does not have prohibited APs.
An AE must control payment of an AP’s variable remuneration such as bonuses and incentive payments in various ways as follows:
• requiring AEs to defer at least 40% of the variable remuneration of an AP for a minimum of four years
• have a remuneration policy that requires the variable remuneration of an AP to be reduced for non-compliance with their accountability obligations
• not pay the portion of variable remuneration that has been reduced
• take reasonable steps to ensure that their SREs comply with the above requirements.
Notification
Notify the regulator if:
• a person ceases to be an AP
• an AP has been dismissed or suspended because of failure to comply with person’s accountability obligations
• an AP’s variable remuneration is reduced because of failure to comply with accountability obligations
• an AE has reasonable ground to believe that:
– the AE has failed to comply with an accountability obligation or a key personnel obligation
– the AP has failed to comply with the person’s accountability obligations.
The FAR will be administered and enforced by APRA and ASIC. However, ASIC will only exercise its regulatory and enforcement powers in relation to an accountable entity that has an AFSL as well as significant related entities and accountable persons of those entities.
If FAR is enacted as proposed, it will apply to superannuation trustees from the later of 1 July 2023 or 18 months after the FAR Bill receives Royal Assent.
With the FAR expected to commence in the next year, trustees should undertake a review of their governance structures to determine what changes will need to be made to ensure that they will be ready to comply with the FAR.
A central tenet of the FAR is placing obligations on AEs. While trustees are named as AEs there will be some corporate groups where a subsidiary or related party is also an AE. Trustees will also need to determine who is an AP. This includes, but is not limited to, directors, chief executive officers and certain key executives.
A significant issue for trustees will also be to consider what other entities are caught by the broad definition of an SRE of an accountable entity. SREs include 'connected entities' and an entity where its business or activities have—or are likely to have—a material and substantial effect on the accountable entity or the business or activities of the accountable entity. This is broader than subsidiaries and may even extend to asset structures used by trustees to manage the risk of investment assets.
While SREs are not directly regulated, AEs must take reasonable steps to ensure SREs act in accordance with certain FAR obligations. These steps would include:
• How to identify APs (having regard to delegation frameworks, roles and responsibilities and decision-making authorities), including aligned with responsible persons (RPs) under the superannuation prudential standards.
• Dealing with trustee governance roles, such as the Office of the Trustee.
• Adequate training on compliance with FAR and demonstrating the taking of reasonable steps and for APs mapping the obligations they must proactively monitor.
• Dealing with cross-functional roles and ensuring accountability is not inadvertently reduced for line 1 roles.
• Ensuring that there are suitably qualified directors and senior executives with expertise that covers all aspects of the business.
• Review of relevant policies and frameworks for consistency with FAR, including remuneration (and where AEs and SREs do not have variable remuneration policies, to consider how best to manage consequences for APs who fail to meet their obligations).
• Determining what other entities are caught by the net of the SRE definition.
• Where required, accountability statements and accountability maps.
• Review of relevant accountabilities and associated key performance indicators (KPIs).
Other overarching issues for trustees to consider are:
• how the obligations under the FAR align or overlap with the significant obligations in the SIS Act, particularly the trustee and director covenants
• what new frameworks will be required to assist the trustee and its APs.
With the recent and proposed law reforms outlined above, it is clear, now more than ever, that trustees and their directors and senior executives are subject to a higher degree of responsibility and accountability. With some law reforms already in effect, and others expected in the coming year, trustees should have already undertaken a review of their current risk management practices, along with their governance structures, to ensure that they comply—and will comply—with the reforms. fs
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1. A fund trustee can potentially source funds required to pay any penalty levied against it from:
a) trustee liability insurance
b) a fee charged to members for its services
c) raising additional shareholder capital
d) All options
2. Owing to the introduction of the best ‘financial’ interests duty on 1 July 2021, KPMG believes that the non-financial interests of superannuation fund beneficiaries:
a) cannot be considered following the reframing of the best interests covenant
b) cannot compromise or be prioritised over beneficiaries’ financial interests
c) are considered as important as the members' interests.
d) must be prioritised over members’ financial interests at the specific direction of members
3. What action must be taken by trustees and directors of super funds in response to amendments to sections 56 and 57 of the SIS Act, effective 1 January 2022?
a) Amend fund trust deeds to remove any clause that permits charging members a fee for their professional services
b) Implement reasonable steps to ensure SREs comply with accountability obligations
c) Avoid using fund assets to pay any penalties incurred due to contravention of Commonwealth law
d) Clearly document core reasons for their decisions and how any conflicts of interest were managed
4. As currently proposed, the FAR will:
a) apply to all registrable superannuation entity licensees
b) come into effect on, if not before, 1 July 2024
c) be co-enforced and administered by APRA and the RBA
d) direct trustees on the appointment of accountable persons
5. Trustees, by definition, are singularly responsible for decisions made for and on behalf of a superannuation fund.
a) True b) False
6. PGIM claims that cryptocurrencies will in time replace most, if not all, fiat currencies.
a) True b) False
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