T H E L E A D I N G I N D E P E N D E N T J O U R N A L FO R T H E S U P E R A N N U AT I O N A N D I N S T I T U T I O N A L F U N D S M A N A G E M E N T I N D U S T RY MAY 2010
Volume 24 - Issue 4
Push for ERF reform gathers speed Calls for the rationalisation of the eligible rollover fund sector have been delivered new momentum, with the latest Heron Partnership research revealing a serious divergence between the best and the worst.
10 PROPERTY Investors decide they’re better safe than sorry
14 ADMINISTRATION It won’t be smooth sailing in wake of GFC
18 IUS/SR SURVEY
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Industry gives backing to SG increase
19 ROUNDTABLE Industry suffering from acute reform fatigue For the latest news, visit superreview.com.au MANDATES
here are too many eligible rollover funds (ERFs) and too many charging excessive fees, according to the latest research released by The Heron Partnership. The Heron Partnership research has once again named AUSfund as its toprated ERF along with seven other ERFs, which were assessed as justifying five and four-star ratings, but pointed to a need for consolidation in the sector, stating that the five largest ERFs represented 90 per cent of assets at an average size of about $900 million. Apart from AUSfund, the ERFs to gain Heron’s coveted five-star rating were ISPF ERF and SuperTrace ERF, while the four-star rating was awarded to AERF, AMP ERF, NPT and Super Safeguard. However, at the same time as pointing to the best of the best in the ERF arena, the Heron research pointed to the high fees being charged and the fact that these fees were higher than the average charged by retail funds “offering all the bells and whistles”. 3
The logic of paying more for less continues to astound us. Chris Butler
“Fees vary between funds and the size of a member’s balance, but on average it is well over 2 per cent,” Heron Partnership executive Wendy Barton said. “By way of comparison, a retail super fund with all the bells and whistles, including investment choice and regular contributions with the full support of call centres, would have an average fee of around 1.15 per cent of assets. “The logic of paying more for less continues to astound us,” she said. Heron Partnership managing director Chris Butler also pointed to the fact that the impact of the global financial crisis combined with improved ERF practices had served to reduce the combined assets in ERFs, which peaked at $5.7 billion as at June 2007. 9
He said since then assets had been steadily decreasing, principally due to the global financial crisis and increased and improved relocation activities undertaken by more ERFs, with the result that membership growth was at an historical low of just 1.8 per cent a year after peaking at 15.8 per cent at the end of June 2004. As well, he said average account balances had fallen from $1,030 in 2001 to $850 in 2009. Seeking to define the manner in which ERF fees were impacting members, Barton pointed out that scale had its benefits. “The five largest funds for average balances have fees below the average overall fee, thus demonstrating in a meaningful way that scale can deliver efficiencies,” 19
SR GOLF DAY
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Mandates Recieved by Towers Watson Concise Asset Management Man Investments IOOF Spectrum Super Credit Suisse
Type of mandate Strategic Asset Allocation Australian Equities Managed Account Employee Super Insurance Linked Securities
Issued by ACT Treasury JANA Implemented Consulting Universities Super Scheme Bendigo & Adelaide Bank Mercer Multi-Manager
Amount $3.5 billion N/A US$1 billion $250 million N/A
MySuper just one option, says ASFA THE Association of Superannuation Funds of Australia (ASFA) has made clear that the MySuper proposals generated by the Cooper Review represent just one option that might well have limited appeal to many fund members. In a response to the release of the latest interim report of the Cooper Review, ASFA chief executive Pauline Vamosdescribed the
MySuper strategy as “one piece in the super structure puzzle”. “It relates to those members who do not want to exercise investment choice,” she said. “Their decision, whether made consciously or by default, is that they want the fund’s trustee to have full responsibility as an investment fiduciary.” Vamos said the MySuper proposal almost
codified many of the duties of a traditional investment fiduciary and represented a first step in clearly articulating a super fund trustees’ duties where a member did or did not make an investment choice. She said the next step in the debate would be around the possible unintended consequences flowing from the review recommendations. SR
ACCC decision has few implications for super platforms WHILE the competition regulator, the Australian Competition and Consumer Commission (ACCC), has blocked National Australia Bank’s (NAB’s) bid for AXA Asia Pacific on the basis of retail platform consolidation, analysts are suggesting the decision has few implications for the superannuation sector.
Citi analysts Nigel Pittaway and Mark Tomlins claimed the ACCC decision to oppose the NAB bid had focused on wraps and there appeared to be few implications with respect to superannuation, insurance or banking. The consensus among analysts is that the ball is now in
NAB’s court and that it has a number of choices, including seeking to address the concerns raised by the ACCC or challenging the regulator’s decision in the courts. However, a court challenge would likely take months and would leave the future of AXA Asia Pacific in prolonged limbo.
The chairman of the ACCC, Graeme Samuel, told ABC radio that the regulator’s decision was based on its concern about the removal of competition in the provision of retail investment platforms. He specifically referenced NAB’s ownership of the Navigator platform and the compet-
itive potential of AXA’s North product. “We were concerned that, if NAB were to take over AXA, then that drive, that incentive for competition and innovation would be removed and that would have substantially lessened competition in that market,” Samuel said. SR
Bravura to provide software for Australian Ethical
End trails, says Cooper TRAILING commissions relating to superannuation products would be banned and super trustees would be obligated to manage the costs imposed on members under the MySuper proposals, which form a central element of the latest preliminary report issued by the Cooper Review. The report builds on many of the private briefings and statements recently issued by the review chairman, Jeremy Cooper. Releasing the preliminary report, Cooper said MySuper would be a simple, cost-effective product that redefined what Australians should be able to expect from their super in the 21st century. He said some of the proposed features of MySuper included: the ban on trailing commissions; the elimination of contribution fees; a new duty on trustees to manage the overall cost to members; a default post-retirement product; and a trustee duty to focus entirely on looking after members. The preliminary report is underpinned by research commissioned from Deloitte, which Cooper claimed showed that if the MySuper
proposals were introduced, some default fund members could expect to pay less than half what they are paying for their super now. “The panel emphasises that, if the MySuper proposals were implemented, those Australians who elect to have a fund that offers more choices and options, or want to manage their own self-managed super fund, would be entirely free to do so,” Cooper said. He said MySuper would be just one offering in the super landscape but he expected that MySuper features such as the ban on trailing commissions would be recommended to apply across the board. SR
BRAVURA Solutions has signed a five-year agreement to provide investment management software for Australian Ethical, a specialist fund manager in ethical and sustainable investing. Bravura’s Garradin investment management system will replace Australian Ethical’s existing software which manages investment portfolio assets and unit pricing. “We selected Bravura as our preferred software vendor after extensive market analysis conducted by advisory firm First Treasury to ensure our specific requirements would be met,” said Australian Ethical’s chief financial officer, Gary Leckie. “We believe Bravura’s Garradin software is the most suitable on the market based on its functional strengths and its strong
client experience in relevant markets,” he added. The Garradin software caters for investment management and client administration, according to Bravura. It can be deployed across multiple sectors such as retail wealth management platforms, wholesale investment management, registry and mutual funds, custody and private banking. Bravura group chief executive Simon Woodfull said “the project would deliver substantial cost savings through a consolidation process and would create streamlined, improved management processes and efficiency. We are extremely pleased to welcome another new client to our expanding portfolio this year and look forward to working with Australian Ethical to deliver this project.” SR
APIR extends directories offering CONTINUING financial services product rationalisation has seen the Canberra-based company which issues identification codes, APIR, move to issue a new directory dealing with terminated and archived codes. The new directory, to be known as the BlackBook, is being described by APIR as a single repository of archived and terminated codes capable of providing
valuable information to various groups within the industry to streamline processing. Commenting on the new product, APIR managing director Andy Hutchings Broso said development of the BlackBook had come in response to increasing demand for the company’s services – something it expected to rise in the face of product rationalisation and demand for increased efficiency. SR
ASFA appoints Pillar CEO to board THE Association of Superannuation Funds of Australia (ASFA) has announced the appointment of Peter Beck, chief executive of Pillar Administration, to the ASFA board. Beck replaces Linda Elkins as the representative for service providers. Elkins stepped down from the board due to ASFA’s sectoral representation rules when she left her role at Russell Investments to join Colonial First State. Beck has 33 years SUPERREVIEW
experience in the financial services industry having worked in the areas of banking, insurance, investments and superannuation. He has previously held the roles of head of strategy and actuarial at Colonial, chief executive of CommInsure and director of JMIFA (now Superpartners). ASFA chief executive officer Pauline Vamos said Beck’s “extensive experience in the super industry … and his deep knowledge of
super administration will be a great asset to the board and benefit the ASFA community”. SR
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Winning the inaugural Super Review Service Level Provider of the Year Award acknowledges our commitment to delivering consistent market-leading service, including claims service, to superannuation funds. As you might expect, we intend to further extend our market lead. We will do so by continuing to provide our superannuation clients with outstanding risk insurance products, each of which are supported by proven service excellence. Three examples of how our strong service focus is applied to claims management: Our claims consultants are only empowered to pay claims, not decline them. Only our management team can decline a claim. Claimants always speak to a ‘real’ person - not a voicemail system. We survey claimants to ensure our claims service is consistently excellent. These are just some examples that support our claim to service excellence. There are others, so why not call us to decide if we are as good as we say we are?
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Super funds headed for positive growth year SUPERANNUATION funds are headed for their first year of positive growth since 2006-07, according to the latest Chant West data. The rebound in listed markets might now slow but unlisted investments, primarily in property and infrastructure, could start to add value to the typical fund’s diversified portfolio, according to Chant West principal Warren Chant. “The median growth fund is Warren Chant now up 23.8 per cent from the
trough towards the end of February 2009. That’s largely on the back of a strong recovery in listed share and property markets,” Chant said. Unlisted markets have yet to show the same recovery, but in the March quarter some funds began reporting positive returns from unlisted investments, he said. “The average growth fund now has 12 per cent of their total assets in unlisted property, unlisted infrastructure and private
equity, and the percentage is much higher among industry funds than master trusts (21 per cent against 2 per cent). So if we see a return to positive performance from these unlisted assets it will help the overall performance of industry funds in particular, and perhaps provide a buffer if listed markets ease off,” he said. The median growth fund returned 3 per cent for the month of March, which lifted the return for the March quarter to
Remove excess super contribution penalties: SPAA THE Self-Managed Super Fund Professional’s Association of Australia (SPAA) has urged industry and the Government to work together to remove harsh penalties for super fund investors who mistakenly make excess super contributions. The chief executive of SPAA, Andrea Slattery, said the Government should redraft the Superannuation Industry Su-
pervision (SIS) regulation to allow excess super contributions to be refunded without tax penalties. Currently, the refund option available under the SIS Act only applies in situations where the non-concessional contribution is itself in excess of the cap. Slattery recently called for transitional relief for self-managed super fund (SMSF) trustees caught up in an in-
advertent breach of the concessional contribution caps. The call came in response to an alert by the Australian Taxation Office warning SMSF members not to use trust clauses in SMSF trust deeds that attempt to restrict super contributions in excess of the current super caps. Penalties can be as high as 93 per cent for excess super contributions.
“A long-term solution to the issue of excess super contributions tax requires a package of legislative reform and calls on the industry to join together to push for this reform,” Slattery said. Slattery also called for concessional caps to be returned to their pre-2009 levels, allowing taxpayers to increase their retirement savings. SR
1.8 per cent, while the return for the financial year to date was 14.7 per cent. This was the 11th time in the past 13 months that master trusts outperformed industry funds due to their higher exposure to listed shares and listed property, according to Chant West. In the 13 months from the end of February 2009 to the end of March 2010, the median master trust rose by 29.2 per cent against 20.5 per cent for the median industry fund. SR
ASIC proposes changes to infrastructure disclosure
IFSA welcomes super fund recovery Big UK mandate INVESTMENT and Financial Services Association (IFSA) chief executive John Brogden has welcomed the latest Chant West research which suggests superannuation funds are headed for their first year of positive growth since 2006-07. The median growth fund is up 14.7 per cent for the nine months to the end of March and 23.8 per cent from the trough towards the end of February 2009, including 3 per cent in the month of March alone, according to Chant West data. “Members who took the advice of their financial adviser and hung in throughout the market downturn should be breathing easier at the release of the latest Chant West findings,” Brogden said. Brogden also welcomed news that for the 11th time in the past 13 months, master trusts outperformed industry funds, in some cases by almost 9 per cent. SUPERREVIEW
“From February 2009 to March 2010, the median retail master trust topped 29.2 per cent as opposed to 20.5 per cent for the median industry fund,” he said. “Seventy-three per cent of all assets in retail funds are not in a default investment option, which means that these retail investors have made an active choice about their superannuation asset allocation.” SR
MAN Investments has been awarded a key mandate by one of the United Kingdom’s largest pension funds – the Universities Superannuation Scheme. Man announced the winning of the US$1 billion managed account mandate in April with its Australian institutional team spokesman, Kit Cherry, claiming it highlighted the attractiveness of Man’s well-established managed accounts platform. Under the mandate, the pension fund will start allocating funds in the first half of this year, with the arrangement lasting a minimum of three years. The mandate sees Man provide advisory services with respect to operational due diligence, manager take-on and risk management oversight, while the University Superannuation Scheme will have sole responsibility for manager selection and portfolio construction. SR
INFRASTRUCTURE entities are the next in line for a shake-up by the Australian Securities and Investments Commission (ASIC), with the release of a consultation paper aimed at improving disclosure to retail investors. The paper proposes that a benchmark-based disclosure model apply to all listed and unlisted infrastructure companies and registered managed investment schemes. ASIC also released a consultation paper earlier this month concerning disclosure in agribusiness schemes. ASIC commissioner Greg Medcraft said the changes aim to give investors a better understanding of the “key characteristics and risks associated with investment in an infrastructure entity”. The benchmarks will focus on key issues like corporate structure and management, funding, assumptions in models and sensitivity analysis of those assumptions, valuation, distribution, withdrawal and diversification. The deadline for comments on the paper is 30 June, with the proposed release set for September this year. SR
Equipsuper and Vision Super to merge Rob Brooks
INDUSTRY funds Equipsuper and Vision Super have announced their intention to merge in 2013. The two funds, which had been rumoured to have been in talks for some time, confirmed the move today saying a merged
entity would boast over $8 billion in funds under management and a membership of more than 150,000. The merger proposal is subject to a range of conditions and regulatory requirements.
A joint announcement said that once necessary licensing requirements are completed, the two funds would focus on pooling their investments in a pooled superannuation trust within a newly formed company,
Pooled Super Pty Ltd. Vision Super’s chief executive, Rob Brooks, and Equipsuper’s chief investment officer, Michael Strachan, would fill the roles of chief executive and chief investment officer of Pooled Super. SR
SIA launches Social Impact Property Fund
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SOCIAL Investment Australia (SIA) has launched the Social Impact Property Fund to provide wholesale investors with direct exposure to risk managed properties accommodating community sector organisations (CSOs). SIA executive director Peter Aubort said the fund would provide long-term property leases to CSOs and build their capacity to purchase property at lease maturity, while giving investors a target return of 5.5 per cent. The fund would invest in commercial property in metropolitan and major regional centres in Queensland, New South Wales and Victoria, which will then be used as office premises for CSOs. According to the Productivity Commission Report of January 2010, there are over 5,800 CSOs at present, with the sector growing at an average rate of 7.8 per cent in the seven years to 2006-07 – more than double the real growth of the Australian economy for the same period. SIA is a subsidiary of Foresters Community Finance, which was created to address “failures in existing capital markets and provide sustainable futures for Australia’s notfor-profit sector”, according to Aubort. SR
Sound and fury signifying nothing Those participating in the Cooper Review could be forgiven for reflecting on a quote from Shakespeare’s Macbeth – “It is a tale told by an idiot, full of sound and fury, signifying nothing”.
he strategic briefing and inspired leak are the stock in trade of Australian politicians. They represent tactics designed to float ideas and form the foundations for policy agendas. Thankfully, we do not often see the same tactics adopted by the people chosen to head up Government inquiries. One wonders, then, how the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, must feel about the spikes in debate that have occurred at virtually every stage of the Cooper Review and the suggestions by some sections of the media that whatever Cooper recommends will, by default, become Government policy. Such media suggestions are, of course, nonsense. The Government will take from the Cooper Review’s recommendations precisely what it wants to
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take – nothing more, nothing less. It will undoubtedly embrace those recommendations going to technological improvements in the back-office of superannuation, but there can be no guarantees with respect to the uniform default fund formula (MySuper) or the axing of smaller funds. Jeremy Cooper should know, as Bowen certainly knows, that there is no industry unanimity around either the MySuper concept or the notion of forcing fund amalgamations in the interests of scale. Indeed, there are plenty of smaller superannuation funds that can lay claim to better performance than some of the industry’s giants. A Federal Minister is clearly too busy to read the scores of submissions that have been lodged with the Cooper Review, but his staff might be well-served in seeking to weigh some of the review panel’s recommendations against the actual evidence received. It is likely they would detect a sizeable mismatch. What the Government and, indeed, Cooper need to understand is that the Australian superannuation industry has been and
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still is highly successful. It follows that any change must, of necessity, be capable of gaining the support of all stakeholders. The problem with many of the notions thrown up by Cooper is that they have simply not reflected the tenor of the submissions his panel has received and have therefore never been likely to gain the broad industry support capable of having them translated into government policy. Of course, the various tangents pursued by the Cooper Review and the resultant media speculation can hardly be deemed healthy for the superannuation industry in circumstances where fund members have already been made nervous about the likelihood of further policy changes in the May Budget. Superannuation in Australia is too important to become either a political football or an object of policy experimentation. The compulsory nature of the superannuation guarantee and the need for Australians to have confidence in the regime dictates that the Government and the people it appoints to oversee sector reviews should have as their priority
The problem with many of the notions thrown up by Cooper is that they have simply not reflected the tenor of the submissions his panel has received.
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the encouragement of confidence and stability. If there is a common, underlying theme within the submissions filed with the Cooper Review it is while Australia’s superannuation system is not broken, it can certainly be improved. That theme is consistent with the view of the former Minister for Financial Services, Superannuation and Corporate Law, Senator Nick Sherry, that the (super) house warranted some “renovation”. Another theme common within the submissions is that the Australian superannuation industry has evolved significantly over the past 20 years and, in doing so, has become the envy of many other developed economies. It is worth noting that the evolution of the Australian super industry took place without any significant structural interventions on the part of government. The Cooper Review is scheduled to hand down its final set of recommendations at the end of next month and, given the exigencies of the political calendar, it seems highly unlikely that the Government will choose to act on its findings before it calls the next Federal Election. Given the level of sound and fury generated around Cooper and the varying tangents pursued, there will be many in the super industry who will welcome a reflective pause. SR
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Banking on stability Listed investments might have helped retail master trusts ride the recovery faster than industry funds but, as DAMON TAYLOR reports, there remains a strong preference for the underlying stability provided by unlisted assets. s the financial services industry heads towards the end of the 2009-10 financial year, the name of the game continues to be recovery. Where 12 months ago investors were experiencing their fair share of nervousness, investment markets have been buoyant in their comeback and according to Stephen Hayes, managing director of Perennial Real Estate Investments, while gains made by property might have been less dramatic, it is nonetheless an area in which super funds should be reassessing their options. Reflecting on what the property story had been over the last 12 months, Hayes said Australia had witnessed an economic slowdown without actually seeing a recession. “On the physical real estate side, which is obviously reflective of the unlisted property market, if assets have been well located then they’ve probably stabilised,” he said. “Generally speaking, buildings have also remained very well let,” Hayes continued. “There haven’t been too many supply concerns, and I’d say most prime commercial properties have proved very cash flow resilient.”
Hayes said the exception to the rule was Brisbane, where an office market turnaround wasn’t expected any time soon. “But overall, valuations have been pretty reasonable and I’d say we’re around mid, or just below, mid-cycle prices.” Leigh Gavin, senior consultant and head of property research for Frontier Investment Consulting, also held a favourable view of unlisted property and its performance through financial crisis turbulence. “Our clients have had a pretty strong preference for unlisted property for five to six years now,” he said. “At that time, we were attracted to the more stable earnings it could provide and we could see the LPT [listed property trust] sector becoming more and more like another sector of the ASX [Australian Securities Exchange]. “We made the decision that we would look for a ‘long road’ payoff and we certainly got that in 2008 and 2009,” Gavin continued. “But even through the global financial crisis [GFC] we felt the valuation policies for most assets were dealt with pretty reasonably. “Unlisted property, espe-
cially lowly geared unlisted property, fell pretty gracefully – particularly when compared with LPTs.” Looking at the listed side of property, Hayes said that investment in LPTs had offered an unbelievably rocky ride. Fortunately, having come through the crisis, he could now see some pretty compelling pricing. “Within listed property we’re really talking about the top 10 stocks because anything below that isn’t investment grade,” he said.
“But these stocks are now pretty well placed with regard to their balance sheets. “There’s not a lot of refinancing going on and they’ve got pricing that looks reasonable compared to 12 months ago,” Hayes continued. “The majority are trading at discounts to our own private market values, so you could almost argue that these top, 10 stocks are offering better opportunities than can typically be found on the unlisted side.”
Providing a bit of historical context for his comments, David Hartley, chief investment officer for Sunsuper, said that if you looked back to February 2007, LPTs were trading at around an 89 per cent premium to net asset value. “Obviously 2006 was a fantastic year for LPTs and 2007 was when they peaked,” he said. “But in the course of changing offices recently, I found a statement about why that was happening, about
why LPTs were trading at a premium to unlisted. “It was all about gearing and flexibility and so on, but I thought it was interesting that if you look back now, a lot of those practices were what brought listed property unstuck,” continued Hartley. “At that time, LPTs were really only surviving at the indulgence of the banks but you could argue that the business model that justified them trading at a premium was really what brought
about their downfall.”
THE HERE AND NOW Switching focus to the here and now, Hartley said while listed property was not without its problems, people were conscious of recent history. “From here, there are still some LPTs with issues but I think banks are encouraging them to pay down some of their debt,” he said. “Some of the stronger ones sold down stock last year and now
have capital as a consequence. And I guess the weaker ones are still struggling along. “There’s a natural cycle through both sides of property, but when there’s no debt, it’s a completely different story,” Hartley added. “It’s a completely different pattern of returns.” Yet while investment markets might again be in positive territory, the property situation was a lot grimmer 12 months ago. At that time, both the listed and unlisted sides of property were receiving a hammering and the question was whether super funds were able to not only weather the storm but also take advantage of opportunities as they were presented. With the benefit of hindsight, Gavin said Frontier would definitely have liked to take more profit at the top of the unlisted market. “But the thing with unlisted property is to do that, you have to be up a bit over the curve,” he said. “In saying that, if you look at 2007 and the opportunities across all asset classes, there wasn’t a lot of value, just a lot of chasing the few opportunities that did come up, and then in 2009 that reversed – there were a lot of opportunities out there, but not a lot of money. “Unfortunately, despite the opportunities in other asset classes, there just wasn’t a lot in the way of property bargains.” Gavin said that if he’d been asked last year, he would have said that Australia was set to see good
Premium assets were rare and there wasn’t a lot of opportunity to take advantage of distressed pricing.
property at low prices for two to three years. “But those sort of bargains never really came,” he said. “We thought there might have been opportunities in the LPT sector as they were forced to sell, but most chose to raise equity instead. “And while that wasn’t good for shareholders, it was probably a good thing for the market,” Gavin continued. “There were a handful of transactions in 2009 at prices we thought were pretty generous, but even they didn’t involve local institutions. “Most were already overweight unlisted property and doing their best just to hang in there.” Echoing some of Gavin’s thoughts, Hayes said super funds would have taken advantage of as many property opportunities as possible. “Ideally, they would have been buying with their ears pinned back,” he said. “But premium assets were rare and there wasn’t a lot of opportunity to take advantage of distressed pricing. “Where there was the occasional asset that came up funds would have been buying, but you have to remember that at that point, we were in the depths of the GFC,” Hayes continued. “The world was in a pretty dire place and it was a pretty fearful time. “It would have taken being one of the very few with cash available and, more importantly, a lot of conviction to be buying at that point.” Offering the super fund perspective on what the best Continued on page 12 ☞
Banking on stability ☞ Continued from page 11 approach might have been over the last 12 months, Hartley said Sunsuper had done its best to take advantage of buying opportunities as they came around. “We looked at some of the capital raisings and we also put money into our unlisted portfolio as well,” he said. “We increased investment in both sectors, but to be fair, there were probably opportunities in the credit area that we were pursuing with greater interest.” Hartley said a joint venture Brisbane office development between Sunsuper and AMP had also been completed earlier this year. “That building, within Brisbane’s Coronation Drive Office Park, was completed this year and is already pretty much fully let,” he said. “I think the only thing left to be leased is the coffee shop down the bottom. “So we’re pretty happy with that, but we’ve also got the feelers out looking for other opportunities as the market improves,” Hartley continued. “That’s the point here though, I think there’s been a lot of people out there looking to take advantage of distressed holders, but with the support of the banks and some refinancing they’ve managed to survive. “By hook or by crook, they’ve managed to hold on.”
DOMESTIC EQUITIES Yet in the aftermath of this financial crisis, it seems most institutional investors continue to retain a partial focus on what could be learned from the experience. SUPERREVIEW
Within the realm of property, that experience has given rise to some strong arguments that listed property could no longer be seen as the ‘look-through’ vehicle it might have been in the past. The proposition is that LPTs should be treated in the same manner as domestic equities, yet for Gavin, this isn’t quite so simple. “If you look at what happened through this crisis, listed property behaved very differently to how it had in other crises,” Gavin said. “In other downturns, LPTs generally held up quite well, but they didn’t this time because of high levels of gearing, nonproperty income and so on. “Then when things did get tough and they tried to raise capital, many chose to offer shares at a 40 per cent discount to the current share price instead of selling an asset at a 5 per cent discount to current valuation,” he continued. “If you participated then that might have been a good result for you, but otherwise that wasn’t the case. “From our perspective, selling an asset would have delivered the fairer outcome and we’re not fans of [the] companies that chose not to do that.” With stronger views on the matter, Hayes said anyone putting listed property in the same boat as domestic equities had little understanding of property securities. “Listed property fell during the GFC because it was liquid and because of panic selling on the back of refinancing risk,” Hayes said. “If you’re a commercial real estate landlord and you have debt on your bal-
ance sheet, then generally you’re going to be refinancing a portion every year due to commercial debt having a reasonably short duration. “This refinancing process isn’t overly problematic in normal markets, but what happened within property investment markets happened through no fault of Australian landlords,” Hayes continued. “It was on the back of poor lending and product packaging practices abroad. “The credit crisis meant refinancing became problematic and it’s very difficult to value refinancing risk.” Hayes said at that point, the market assumed the worst. “And if you can’t pay back your debt then you’re at the mercy of your lenders,” he said. “That’s what the market was responding to.
“In saying all that, Australian commercial real estate landlords chose to carry the debt and should have been more prudent in understanding the risks.” Most importantly, Hayes pointed out that such an unusual set of circumstances had all but disappeared from quality listed property securities. “Balance sheets for the top 10 are in really good shape and refinancing isn’t carrying the same risk,” he said. “So rental cash flows and commercial real estate type returns, which are the sole purpose for being in listed property in the first place, are being priced on that basis. “I’m expecting listed property to behave and react as it should over the medium term, and that will be reflected in shareholder returns over time.” Alternatively, Hartley ques-
tioned the role of listed property trusts within an overall allocation. “Going back 10 years, these trusts were that kind of ‘lookthrough’ vehicle, but they now operate to a very different model with a different risk and return profile,” he said. “Not so long ago, a fund might have had a 10 per cent exposure to listed property, and if it had all been in Australia, that would perhaps have entailed a 5 per cent exposure to Westfield – a significant exposure to a single stock. “Compare that to say a 25 per cent allocation to international shares,” Hartley continued. “Within that, you might have 10 per cent allocated to the UK and Japan, so we’re talking about a fund having the same exposure to listed property trusts as they have in all of their UK and Japan shares.
“It’s just too concentrated and I wouldn’t be surprised if more and more funds look to having their listed property as a global mandate as a consequence.”
GEARING Still only a short way into its recovery, the other element of property investment investors could now usefully take stock of is gearing. Obviously, different investment strategies and risk appetites call for different approaches and that shall remain the case, but with poor property gearing policies raising concerns recently, it is pertinent to ask what is currently the optimum approach. Gavin said that within the unlisted sector, gearing at below 30 per cent was what he considered to be appropriate. “But for the most part, our clients are well below that and often below 20 per cent,” he said. “LPTs are somewhat different and they’re on or around about 30 per cent, which I’d consider moderate gearing. “Both sectors have gearing about where it should be now.” On the other hand, Hartley said gearing strategies really depended on the super fund’s cash flows. “It’s going to be different for every building and every opportunity out there,” he said. “Some gearing does make sense, particularly within international investments, where you can borrow money to minimise tax burdens, but it has to be appropriate. “Twenty to 30 per cent is probably reasonable right now.” For his part, Hayes said he had never been an advocate of gearing with respect to commercial real estate.
“Within Australia, the reality is that it doesn’t make sense to have debt on a tax basis due to trust tax transparency,” he said. “We’ve got an environment of relatively high interest rates that will probably remain that way for some time into the future, and while the margins on that debt will move up and down, carrying debt on a weighted average cost of capital basis simply doesn’t stack up. “If you’re going to use debt (God forbid!) then the time to draw on unused lines of credit is when the market is in massive distress and at the bottom of its cycle and the cost of equity is prohibitive,” Hayes continued. “But everyone seems to do it the other way around... “The simple reality is that debt is risky. At the end of the day, it’s not your money and at some point you’re going to have to pay it back.”
LIQUIDITY So with property making steady gains from its financial crisis lows, the last impediment before investment is perhaps investors’ need to retain liquidity. But while liquidity was an obvious concern for unlisted property through the GFC and an impediment to many super funds taking full toll of property bargains that were available, Hayes believes it is a constraint that has lessened and allowed funds to flow back into property as equity markets and other asset classes have rebounded. “We’re probably seeing a little bit of that,” he said. “I think we’re seeing some of the unlisted property funds
Australia is pretty well placed in a global sense and our commercial real estate is looking reasonably healthy.
looking to raise money, and many have been well supported by super funds. “With current commercial real estate pricing, the returns for these long duration assets look compelling,” continued Hayes. “The investment stacks up at the moment, especially in the listed market. “So I can understand it if funds are looking to increase their allocations at this point in the cycle.” Similarly, Gavin said that while transactions in the secondary markets were at 5 per cent to 15 per cent discounts not so long ago, those discounts were rapidly disappearing. “Those discounts are now well below 5 per cent,” he said. “And in some cases they’re pretty close to unit prices. “The sector certainly looks like it’s going to be well supported this year.” Providing the proof for Hayes and Gavin’s reasoning, Hartley said he was confident that a lot of the stronger listed property trusts had cash now as well. “Previous potential sellers are no longer as keen to sell,” he said. “They’re not selling anymore, they’re buying. “It certainly seems as though liquidity has come back.” As always, the key question is where to from here. Property, as with all investment markets, has begun a long period of recovery, and according to Gavin that recovery is tracking well. “I think the property sector is reasonable value now,” he said. “On the fundamentals
side, the sector’s probably reasonable without being super compelling, and the cost of debt is a bit of a hindrance, with the four main lenders making it pretty uncompetitive. “But property is benefiting from a few foreign probes that are likely to put upward pressure on prices, and on the unlisted side we’re recommending a gradual return.” Hartley reiterated that Sunsuper would continue to have its feelers out looking for reasonable purchases. “And we’ve identified a few of those,” he said. “Overall, we’re reasonably comfortable and currently a little bit underweight unlisted. “We’re certainly looking at opportunities as they come up.” For Hayes, the launch pad for a property recovery is already in place. “It all looks fine,” he said. “Australia is pretty well placed in a global sense and our commercial real estate is looking reasonably healthy. “I think we can expect a year of moderate to low growth in cash flows in line with inflation,” Hayes continued. “And I expect office and industrial assets to maybe do a little better due to improving tenant demand. “It may be a slightly tighter year than last year on account of government stimulus rolling off and higher interest rates, but I’m not expecting vacancy rates to rise, so I think we’re pretty well placed – valuations are pretty good, fundamentals are pretty good and so the outlook is pretty good as well.” SR MAY 2010
Clouds on the horizon With the Cooper Review still on foot and with the Henry Tax Review findings yet to be implemented, DAMON TAYLOR writes that administrators fear it is just the calm before the storm. he last 12 months have undoubtedly been a period of recovery for Australia’s super industry, and not just with respect to investment markets. Despite various reviews set to have a significant impact on superannuation, continued discussion on fees associated with financial advice and a constant need to monitor investments, the focus for most funds has been getting the house back in order and, according to Peter Beck, chief executive officer of Pillar, that focus is one shared by administrators. “We [are] on a change program here at Pillar and despite the events of the last 12 months, that program hasn’t really changed,” Beck said. “We still have to do the things we have to do. “But what has changed within the industry is the amount of discussion,” he continued. “With Henry [Australia’s Future Tax System Review led by Secretary to the Treasury Ken Henry] and Cooper [the Super System Review led by former Australian Securities and Investments Commission deputy chairman Jeremy Cooper] and various submissions, there’s been a lot of contribution going on and it’s almost as though we’ve reached the point where it’s the calm before the storm. “Of course, the thing is – it’s
not really that calm.” For Beck, discussions being prompted by both the Cooper Review and the Henry Review were more about change that would take place in the future rather than change set to take place in the here and now. “As administrators, we’re at the end of the chain, so it’s a bit of a waiting game,” he said. “Hopefully all the changes that come through will be positive for the industry and for Pillar as well, but in the meantime, we’ve been doing a lot of productivity work and a lot of project work seeking to improve our service and efficiency. “Despite what else may be going on, our focus and priorities remain the same.” Asked whether the last 12 months have been unique compared with years past, Greg Camm, chief executive officer of SuperPartners, said every year was unique in Australian superannuation. “This time around, it’s been unique in the amount of public discussion and scrutiny around super,” he said. “And that, of course, is courtesy of Henry and Cooper. “For administrators though, it’s probably been a less unique year,” Camm continued. “In the aftermath of the global financial crisis [GFC], it was exciting – there were lots of member en-
quiries about investment options, about switching and so on, but in the 12 months just past, it’s been much more peaceful. “Anyone worried about their investment options has worried already and anyone wanting to switch [would have] done so by now – it’s really been a fairly typical and peaceful year.” Interestingly, Phil Marshall, chief executive officer of technology and administration provider Financial Synergy, saw the experiences of the GFC continuing to have an impact on superannuation and the administration business.
“The GFC seems to have made trustees far more cautious than they needed to be,” he said. “Revenues were down for those funds which live on asset-based fees, rather than a cocktail of fee types that can protect a fund on the down as well as upside. “Fortunately, some trustees saw the light and invested to reduce ongoing costs by way of process improvement, and that’s something we just love doing.” As a consequence of trustee caution, Marshall said administration tender activity was also down.
“In our view, the number of tenders was down,” he said. “Any decisions tended to be conservative or not thought through regarding what is longterm value for money as distinct from short-term cost savings.” However, for Camm, reduced tender activity was not in evidence. “I’d say it was a normal year in that respect as well,” he said. “The only thing different there is probably continued quiet discussions around potential or proposed mergers. “The whispers have been around for a while but they’ve
probably accelerated since the GFC and some of Cooper’s announcements.” Beck agreed that tender activity had been about the same for Pillar as well. “We’ve seen a fairly continuous flow of tenders,” he said. “Some have been for corporate governance reasons and others for people who genuinely want to move. “But stemming from that, our view is that the super industry is over-serviced with respect to administration,” Beck continued. “We feel there is definite room for consolidation, and
while we can’t see it happening right away, we’re aware that when it happens, it tends to happen quickly. “We’re hopeful that these reviews will create the right environment for it to occur though because we have no doubt that a degree of consolidation would be good for members.”
INTRA-FUND ADVICE Yet outside of what might come from Cooper and Henry, the administration business has had other changes within the super industry to deal with. The Australian Securities and
Investments Commission’s (ASIC’s) intra-fund advice relief has been significant for a number of parties, but while many trustees have chosen to fall back on their existing financial planning services, Beck believes this is a key area in which administrators could add value. “I’d point out that the offer of intra-fund advice is an exemption only trustees can get at the moment,” he said. “So what we’re offering is single-issue advice, and I think it’s a gap in the market that administrators can fill very well. “As things stand, fund members go to financial planners for full financial advice and to contact centres for information,” Beck continued. “But there’s a gap there where people want information or advice on one issue at a time – so things like how much money to save when they’re younger, what insurance cover to have when they’re older and how best to deal with the pension when they’ve reached retirement.” For Beck, there’s a kind of logic to people having questions they’ve wanted to ask and phoning in for the information that answers those questions. “But when that happens right now, they’re handed on to financial planners when they quite often don’t want full-scale financial advice,” he said. “There’s a great opportunity there. “Pillar has probably been a bit slow in delivering this kind of service, but in some ways that’s been beneficial,” Beck added. “It means we can leap frog the offerings already in the market and provide members with what we hope will be an improved single-issue advice service.” Marshall said Financial Synergy currently works with both financial planners and software
designed to support existing call centres. “We don’t offer advice to members but we do work with the financial planners who sponsor a fund which we administer,” he said. “For other funds the trustees are in the process of implementing wealthsense, which offers support to call centres in responding to member enquiries.
“Wealthsense will enable their members to access a level of information, at their leisure, without requiring the administrator to detract from their core service, and call centres can refer members to the appropriate section,” continued Marshall. “It is a licensed, webbased software product comprising online financial information and supporting tools designed to assist users to understand, plan and enhance their financial security towards improved outcomes. “It could be used to help provide ‘limited advice’ and should result in more satisfied members, who will help to grow the fund, and thus enhance the value or profitability of the fund.” Adding to indications that an advice-delivery platform is rapidly becoming part of the core services super funds are looking for in their administration,
Camm said SuperPartners currently offers single-issue advice solutions for two of its largest clients and it had a third client’s service ready to go. “We stick to single-issue intra-fund advice, and once it goes beyond that we refer members to Industry Financial Planning,” he said. “We have approximately 30 people in our call centre dedicated to that service and it’s been excellent to hear that one of Cooper’s recent proposals mirrors what we already have in place. “Efficiency and cost-effectiveness are cornerstones of everything we do but beyond that, we are very focused on member interactions,” Camm continued. “We’re in the business of volume phone interactions with members already, so doing it with a higher level of content and professionalism is simply an extension of that business.”
CLEARING HOUSE Also on the radar for administrators in the last 12 months has been the Government’s superannuation clearing house initiative. The common view seemed to be that it would have limited direct impact, but according to Beck, administrators remained very interested in its longer-term repercussions. “In my view, the entire initiative is around e-commerce, or what they used to call business-to-business,” Beck said. “And clearly super is ripe for improving efficiencies in those areas. “As an administrator, we’ve taken the view that rollovers are something that we should be able to develop e-commerce solutions for easily,” he continued. “And getting together with the Continued on page 16
Clouds on the horizon ☞ Continued from page 15 other two large administrators in SuperPartners and AAS (Australian Administration Services), we think we’ll have the size and traction to get those solutions happening. “The clearing house is similar but at the same time, it’s much more complex.” Beck said with so many players and so many options involved in the superannuation clearing house, it was imperative that the final offering satisfied all parties involved. “At that point, we’re going to want to look at all the clearing house offerings out there and then recommend the best solution for our clients,” he said. “I’d say we’re taking a considered view on the clearing house because when all is said and done, we want to back a winner here.” Alternatively, Marshall said that while he approved of the efficiencies that a national clearing house could provide, the jury was still out on how effective the final solution would be. “In theory, having a central repository for superannuation contributions is a good thing and has the potential to create administrative efficiencies,” he said. “However, as the scheme is still in its infancy, there is a long way to go before the results can be assessed. “There is also the risk that by adding another party into the process it increases the scope for administrative error,” Marshall continued. “If employers can deposit employees’ net pay into their exact bank accounts, why can they not deposit employees’ various contributions into their superannuation bank accounts with the appropriate information attached?” Marshall pointed out that financial technology company SUPERREVIEW
Payment Adviser was already able to provide such a solution. “At Financial Synergy we’ve developed Translator and Acurity Online, which interfaces with numerous payroll systems, can edit contributions as they’re made and make important corrections on the spot,” he said. “On the other hand, training employers is like herding cats. “A clearing house will have difficulty unless it operates in real-time and can provide reatime edit facilities, and they’re only really available if you link to back-office systems.” More optimistic about what a national clearing house could deliver in terms of ‘knock-on’ effects, Camm said that it was a very good thing that employers could only deal with the superannuation clearing house electronically. “What I like about it is that it’s sending a huge signal to the whole market that electronic dealings are the way to go,” he said. “They’re certainly the only way employers are going to be able to deal with this clearing house. “Here at SuperPartners we receive nearly 100 tonnes of paper every year and we bank between 5,000 and 10,000 cheques every day, and it simply isn’t necessary,” Camm continued. “The signal that the clearing house is sending is that the industry doesn’t want to be doing that. “We simply have to stop using paper in this game.”
TAX FILE NUMBERS At this stage in proceedings, it seems clear both Cooper and Henry remain on the periphery of the superannuation operating environment. For the time being, the business of super remains unchanged. Yet while the reviews’ findings might take months, if not
years, to be put in place, some of the more topical discussions have related directly to super administration, and for Camm, the use of the tax file number (TFN) as a member identifier is chief among them. “In my opinion, this is the single most positive development to come from the entire Cooper Review,” he said. “The issue of lost super, of money floating around the super system, is huge, and it’s ridiculous that as administrators we’re provided with members’ tax file numbers [but] aren’t allowed to use [them]. “At the moment, there’d be an average of three super accounts for every Australian, and in most cases that would be an accident,” Camm continued. “Even at SuperPartners, we have 6 million accounts that we administer and 100 people across our business whose only function is chasing up lost money and lost members.
“I doubt those 6 million accounts belong to unique individuals, so being able to positively match people would be a huge boon.” Echoing Camm’s thoughts, Beck said it was absolutely critical for administrators to have a unique identifier for fund members and that the use of the TFN was undoubtedly the most logical solution. “When someone joins a fund, if we have their TFN then we can identify them immediately,” he said. “It helps track their contributions, their rollovers, any lost super they may have – it helps everything. “If the industry has use of the TFN, we don’t end up with lost members and we can do so much more,” continued Beck. “And it makes sense – super is already a tax-advantaged system, so it is logical to have the TFN, a number generated by the ATO [Australian Taxation Office], attached to it.
“This could be the one factor enabling a quantum leap forward for the super industry.” Less enthused about the gains to be had from use of members’ TFNs, Marshall said that while an industry standard was required, privacy remained a concern. “Clearly there is the need for an industry standard, unique identifier by which all administrators can identify members,” he said. “However, this needs to be weighed up against the privacy of members and the resulting increase in risk of identity theft and fraud. “We don’t have a problem identifying members as we have enough information to connect to them,” added Marshall. “Tax file numbers would simply be another identifier. “For us there would be minor gains.” However, according to Camm, the privacy concerns causing reluctance in TFN implementation
are fast disappearing. “I think those concerns are historical and I think they’re fading away,” he said. “It’s probably the ghost of the Australia Card of a few years ago, but the fact that you can jump on Google and find out just about anything about anyone is proof people are getting over it. “It may also be a political concern with respect to associating the superannuation guarantee with taxation, but I think people are over that as well.” Providing a sideline to TFN discussions has been a joint submission to the Cooper Review by Pillar, SuperPartners and AAS. Calling for an administration licensing regime and standards of minimum competency, the logical question is whether the points raised – professionalism, risk management and capital adequacy – were ever in any doubt. However, according to Camm, its intent is more practical.
“It’s more about recognising the reality of what we already have,” he said. “As administrators we’re not regulated by APRA [the Australian Prudential Regulation Authority], but in spite of that they visit us on a regular basis because we’re effectively an outsourced arm of our client funds. “They come in and they ask questions, but without them being a regulator it’s an informal process.” Camm explained that administrators could even go so far as refusing to answer APRA’s questions, at least until directed to do so by a client fund. “That doesn’t happen but we do think we’ve been presented with a good opportunity to formalise what goes on,” he said. “Hopefully, if we formalise what already happens informally then everyone will have a more complete understanding of where they stand.” According to Beck, the fundamental issue is that APRA has a need to review the work done by administrators and yet has no framework with which to do so. “The funds we administer are all APRA-regulated,” he said. “And they often ask if they can come in to review our work, but at the moment there’s no framework with which to conduct that review, let alone regulation. “There’s a need to define APRA’s interest in administration at a regulation level.” Beck said it was also necessary to recognise the role administrators played in carrying risk for super funds. “And if we’re carrying that risk, our capital adequacy requirements need to be made very clear,” he said. “But the most important thing is clearing all of this stuff up so that trustees understand their responsibilities and
we understand ours as well. “It’s imperative because the failure of an administrator could be disastrous for the industry.”
EFFICIENCY Related to both the Cooper Review and an ongoing need for industry efficiency, early March saw the same three players in super administration announce a set of principles and protocols that would govern certain electronic transactions. Commenting from the sidelines of this initiative, Marshall said any gain in efficiencies through technology was a good thing.
“Historically, the superannuation industry has been very ‘paper based’ and therefore electronic solutions should be actively sought,” he said. “This is a start, but the problem could also be in funds efficiently releasing members account balances and data to new funds in a timely fashion, and in members not using automatic rollover facilities available for some funds.” As an orchestrator of the initiative, Camm said that the development of these electronic standards had been prompted by a desire to be proactive. “We decided that instead of everyone saying ‘we’ve got to do
something’, we’d get about the doing,” he said. “There are an awful lot of members and money held between the funds SuperPartners, Pillar and AAS administer and the whole idea is to prove this concept across three funds administered by three different administrators. “We’re restricting our view to superannuation rollovers, but if successful, the move could be widened to all funds before inviting other funds and administrators to join,” Camm continued. “It’s all about getting rid of the paper, really.” More recently, the change that seems to be in the wind for Australia’s super industry has also impacted administrators, but according to Beck, keeping up with that change is just part of the challenge. “I think the answer is that as the market shifts, we need to ensure our service offering keeps up with it,” he said. “Limited advice, for instance, I think that kind of service is pretty innovative, but it has almost become a basic requirement. “At one point, clearing houses were also considered ‘nice to have’ and yet they have also become fairly critical,” Beck continued. “Innovation is likely to continue to come from e-commerce and business-to-business technology that has been around for years, but the hard part is getting the right protocols in place and agreeing on the rules and regulations around them.” For Marshall, innovation is the key. “I believe technology and innovation are the two key priorities going forward,” he said. “There are three key questions which can be addressed by both in what we can do to offer a better service to our members [and] superior points of
differentiation to our competitors in a cost effective manner. “We regularly review processes to achieve even greater efficiencies, reduce risk and improve service to members,” Marshall continued. “For example, straightthrough processing. “Just as other administrators think they are reaching the pinnacle of our success, we’ll roll away the clouds to reveal an even higher peak.” Looking to what SuperPartners’ priorities would be moving forward, Camm said that its first focus would be service. “Firstly, we’ll be focusing on what it is we do best and what it is we want to do – servicing funds,” he said. “And once we get that good platform in place then we’ll start worrying about innovation. “Innovation will come in a range of areas and be a combination of what members see and what products are available,” continued Camm. “And the final thing is having our compliance requirements covered. “With more and more money in super, the risk of fraud and identity theft is only getting greater, so keeping risk management and security up to scratch is vital.” For Beck, the big unknown for the super industry and super administration is change. “Productivity and efficiency is always the name of the game but the unknown quantity is how much change we’re going to have to implement going forward,” he said. “When regulations change, and with these reviews that certainly seems possible, that change becomes a priority and everything else goes on the back burner. “The key question is what change and when.” SR MAY 2010
18 IUS/SUPER REVIEW SURVEY
Industry backs SG increase The latest IUS/Super Review Survey has confirmed the industry’s strong views on increasing the super guarantee
Fund CEO salaries
Binding policy position on super
Funds spending millions on TV advertising
Advice in super making planners redundant
s the Federal Government gears up to hand down the Budget in the context of the recommendations of the Henry Tax Review, industry opinion continues to favour lifting the superannuation guarantee. The latest IUS/Super Review survey, conducted during the Conference of Major Superannuation Funds (CMSF) in March, revealed more than 90 per cent support for lifting the superannuation guarantee beyond its existing level of 9 per cent. What is more, the majority of respondents to the survey (61.6 per cent) favoured lifting the guarantee to 15 per cent. A further 4.1 per cent of respondents believed the guarantee could be lifted as high as 18 per cent. While some members of the Government and major superannuation industry organisations have canvassed the possibility of lifting the guarantee to 12 per cent, this was favoured by just 32.9 per cent of respondents. However, if the Government were to again baulk at approving a lifting of the guarantee to 12 per cent or 15 per cent, the survey revealed that the industry would be supportive of a form of ‘soft compulsion’. Asked whether they would support ‘soft compulsion’, 90.4 per cent of respondents said ‘yes’. The survey responses recorded at CMSF were more positively in favour of lifting the super guarantee beyond 12 per cent than those recorded at the Association of Superannuation Funds of Australia conference, held last November. However, there was strong support for a form of soft compulsion recorded at both conferences. SR
No place for super funds in sports sponsorship SUPERANNUATION fund executives and trustee boards approving major expenditure on television advertising campaigns and sporting sponsorships would seem to be treading dangerous ground, according to the findings of the latest IUS/Super Review survey. The survey revealed only line-ball majority support for television advertising campaigns and a significant level of disapproval where major sporting sponsorships were concerned. Significantly, the survey was conducted nearly two months’ before the scandal that erupted in the National Rugby League over salary cap breaches. The Melbourne Storm was, at that time, sponsored by both Hostplus and ME Bank. On the question of funding television advertising campaigns, 53.4 per cent of respondents said that it was
justified, with 45.2 per cent arguing that it was not. However, on the issue of sporting sponsorships, a significant 60.3 per cent of respondents believed super funds should not be involved, with just 37 per cent favouring such initiatives. Significantly, superannuation fund trustees and fund executives made up more than half of the respondents to the IUS/Super Review survey and the responses indicated that trustees were particularly sceptical about the value of both major television advertising campaigns and sporting sponsorships. By comparison, a narrow majority of those people describing themselves as fund executives were in favour of television advertising campaigns. SR
Concern government inquiries hurting confidence THE superannuation industry wants the Federal Government to stop tinkering with superannuation and to deliver a binding policy position, according to the findings of the latest IUS/Super Review survey. The survey found respondents were concerned that the multiple inquiries initiated by the Rudd Government touching on superannuation were serving to undermine SUPERREVIEW
confidence among fund members. The inquiries in question included the Henry Tax Review, the recommendations of which were made public late last month, and the Cooper Review, which is still on foot. Asked whether they believed the inquiries were serving to undermine confidence in superannuation as an invest-
ment destination, 57.5 per cent of respondents answered ‘yes’, with 42.5 per cent disagreeing with the proposition. However, when asked whether the Government should clarify its position by issuing a binding policy position, 72.6 per cent of respondents answered ‘yes’, compared with 27.4 per cent who answered ‘no’. Despite the industry’s attitudes, at least
some elements of the superannuation regime will remain in doubt as a result of the Government’s proposals with respect to changing remuneration arrangements in the financial planning industry. The changes to the financial planning regime will also see changes to the manner in which advice is provided within superannuation. SR
CMSF ROUNDTABLE 19
Too much, too soon? Present: Mike Taylor - managing editor, Super Review Fiona Reynolds – chief executive, Australian Institute of Superannuation Trustees Russell Mason – global partner, Mercer Phil Collins – chief executive, IUS Life Andrew Bolderman – head of life group, Tower Australia Limited Andrew Barr – head of research, AIST Jocelyn Furlan – chair, Superannuation Complaints Tribunal
In the second part of Super Review’s Conference of Major Super Funds roundtable, key industry players questioned whether the Government’s reform agenda has been as damaging as it has been constructive. REFORM FATIGUE
MT: Well seeing as we’ve moved to the Henry Review, it is a mystery to us all what is in it becausee the Government has delayed for quite some time putting it out there. But clearly it’s going to impact on super in some form, whether it’s contribution caps or the super guarantee. I, like you guys, would be surprised if Ken Henry was in favour of lifting the super guarantee, but with respect to contribution caps and the changes announced in the last Federal Budget, if you look at the latest AP PRA [Australian Prudential Regulation Authority] data, it suggests that the momentum that was theree for people making their own
contributions has been lost. So did the Government fiddle a bit much inn the last Budget for not much effect? FR: Its aim was to say that we need people to spend; we need people out there spending money in the economy, [but] people are putting their money into super. So the question is, are they spending it in the economy or have they put it in some other investment? But if they’re not then I suppose you don’t know the answer to that. But we supported bringing the tax down from 100 to 50 and from 50 to 25 for under 50s; but the whole thing about bringing it down further and making the under 50s and over
50s have the same cap is just stupid, it just does not recognise people’s lives, how they save, about having higher wages and, hopefully, having paid some of the mortgage off ... And a number of our funds whose members aren’t people who earn squillions of dollars, they’re just ordinary workers, have got people in that age group who are putting a lot of money away who recognise [they] haven’t had super for that long; [they] haven’t got enough; [they] really want to focus all of their money, all [of their] spare cash, into super. And if you’ve had a situation where you’ve had one person out of the workforce because they’ve been raising the kids and so you’ve been living off that one salary anyway, they go back into the workforce and try to put all of that money away. ABarr: The whole extra salary into super. FR: I don’t see what’s so unreasonable about someone trying to do the right thing and save for their retirement, and we don’t provide them with the
right incentives. And I spoke on a panel not that long ago with Jim Flannery and we were talking about this issue and Jim makes the really good point that if the idea is to really catch people at the high end and stop them from using the caps as tax minimisation ... for them 15 per cent tax is too much, they don’t want to pay any tax. So they’re not the people who use the tax anyway. RM: The other thing is the ultra wealthy – to say you can increase from $25,000 to $50,000 is still a drop in the ocean, it’s not meaningful. For the average working person that’s quite a bit, and I fully agree with Fiona, everything I’ve seen with funds I’m involved with says there are lots of ordinary working couples who when they get into their early 50s one them salary sacrifices their whole wage – if they can – into super as a catch up. What’s so wrong with that if it’s going to take them off social security? It’s going to allow them to be self-sufficient and, most importantly, it’s going to give them dignity in retirement.
That’s something that we should encourage and allow. ABarr: And most of that money will come straight back to the Government through a higher offset to the age pension when they actually get into retirement. RM: Exactly. PC: And the timing again, apart from everything that’s been said, which was 100 per cent right, [in the aftermath of the global financial crisis people needed] an opportunity to replenish what in some cases was a substantial loss in their super, albeit that it has come back strongly. They’ll never totally recover that debt – that’s gone. A good way to do it was through this mechanism, which was taken away at the worst possible time in my view. I think it was a very ill thought out plan. JF: Most of my colleagues of the female persuasion with multiple children will never be able to catch up now. I know I Continued on page 20
20 CMSF ROUNDTABLE
Industry reform : too much, ☞ Continued from page 19
that’s a progressive thing; it’s nothing that’s going to cut out overnight. But there seems to be a real em mbrace on the part of super funds of the need for advice and planning, it’s just how it’s paid for. So is there a common ground emerging on this or is it really a case of planners are just going to have to give up their trails and everything else and do it overnight to be acceptable to super fundds generally, but more particularly to the industry funds?
won’t be able to because I had a number of years out of the workforce with three children and it’s too late for me now. MT: Which raises the question, and I notice it was one of the submissions actually to Cooper, iff they’re going to fiddle with the caps again, maybe they should fiddle with respect to those sectiions of the community who have been disadvantaged, which includes women and part-timers and everyybody else; people who just haven’t had the full exposure to the super guarantee, such as it is. FR: Make it targeted. Andrew’s done some work on this and some modelling on how you might be able to work this to make it satisfactory to the Government in terms of you’re not letting everybody have the full cap again, but targeting people. ABarr: Would you put RBLs [reasonable benefit limits] back in?
something; we need to be careful, we know what the average account balance is and we know what the average account balance for women is in superannuation. JF: Yes, I suppose some people argue that no one’s got $25,000. FR: It’s not true.
PC: I suppose the RBLs had a lot going for them. ABarr: Everybody hates RBLs, they were horribly complex and they were aimed at the wrong end of the cycle, they were aimed at the benefit end, but I can’t see why we couldn’t have a similar arrangement to allow the people who are affected – and it would be a very small number of people – a higher concession cap that they carry with them through the rest of their working life. FR: The story is a good story to sell because we know what the leveraged account balance is and how low it is. So it’s not like we’re saying we’re in an industry where the average account balance is $300,000 or SUPERREVIEW
JF: And it’s not true, some people don’t … JD: Some people are doing what we’re talking about when you’re a couple and you’re salary sacrificing all of your salary or half of it and making big sacrifices to do that. ABarr: Just a couple on 1.5 or one times AWE [average weekly earnings] has an aggregate income of about $150,000 a year – it’s not a huge amount. RM: No, and they’ve made the sacrifice for the kids’ education or the mortgage or whatever it is and they’re happy with their lifestyle, they want to continue to make that sacrifice into super.
PC: Let’s face it, the age pension isn’t a great amount in Australia and a lot of people are far from being able to fund their own retirement, but if they can have a little bit more – even if it’s $50 a week – from the age pension, I think that’s going to help. JF: I think Russell’s use of the word ‘dignity’ is really important. RM: It’s not simply about number crunching; it’s about allowing people to have a reasonable standard, a lifestyle, in retirement. JF: And if they’re going to be 40 years in retirement, you want them to have some dignity at some point in those 40 years.
FINANCIAL PLANNING AND REMUNERATION
MT: On a totally different issue, and one that’s always controversial, financial planning and remu uneration. Once again I’ve heard the commission’s thing thrown out there and there is a move on in th he financial planning industry to wean themselves off commissions. But on the other hand,
FR: Well I think a lot of funds are moving into being able to give very simple advice to members with intra-fund advice, but obviously there is still going to be a need for financial planners, because you can’t think about your retirement only in terms of superannuation. You’ve got to think about it more holistically than that, so there’s still a need for financial planners, and I think that’s why we still want to see things happen with commissions and trails. It seems pretty certain to me that that’s going to happen anyway. AB: [There’s] certainly a lot of momentum to move away from commissions to a fee-forservice model, but there are a number of points with advice from a fund perspective. There’s an increasing need for middle Australia to be able to access some form of advice. The problem is actually providing advice or being able to provide advice at a level that’s actually efficient or affordable for a super fund – it’s expensive to provide. So there’s a number of issues here that would need to be worked out: how do you get some form of advice for the majority of people and make it affordable to the person actually providing the advice and how do they actually pay that person? Be that whether they’re offering [advice] within a fund, an in-house facility or independently.
RM: To most people the advice for super is pretty simple ... It doesn’t need to be complicated advice, and this is where I think the industry funds in particular have developed a good model, because my experience is that [as people get closer to retirement they start to think more] about traps and a whole lot of other things, then they might need more complicated advice. But I would think for the vast majority of the members we represent in our organisations, the advice is very simple and straightforward and could be delivered in a fairly low cost manner. FR: There’s more money in people’s accounts and funds are now focusing, probably not enough, but they will as account balances grow, more on the post-retirement side. People will be able to stay within their fund and move into this product and – I suppose like Australian Super’s just done, you stay in the balanced fund and move into a more conservative option and draw down or whatever. So maybe you really don’t need a lot of advice on super if that’s the way funds can streamline the different phases without you having to do a lot. And I don’t think people want to think about it too much. JF: But the two easy questions that seem to have caused all the regulatory headaches in this area is should I pay off the mortgage or salary sacrifice into super? And how much insurance do I need? And those two questions, there must be a way for funds to give answers to those two questions without giving [out a] 100-page SOA [Statement of Advice]. And it’s those two issues that seem to cause all of the debate around the problem, because the people who go off and get a financial planner are fine; people who don’t need any advice other
CMSF ROUNDTABLE 21
too soon? RM: A very high proportion actually.
Phil Collins, Russell Mason and Fiona Reynolds
than their [investment options checked] and the things that Russell mentioned, they’re fine. It’s this little area where people are looking for guidance, but it gets us into the personal advice area and, of course, [this is where all the problems are]. And I don’t know what the answer is; I don’t know whether the new current advice model with the RG 200 relief is going to fix that or not. FR: It is frustrating for people. I was speaking to a friend of mine who had come into an inheritance, and it was a substantial sum of money. She didn’t know what to do with the money so she went to see a financial planner. She wanted to put some money into super, but she also wanted to do some other things with the money, so it wasn’t just super. She was in HESTA and [her financial planner] said, ‘Well I can’t advise you on putting more money into HESTA because they don’t disclose their information, so that means
you won’t. What I’ll have to recommend is that you go into this other fund,’ which she didn’t do. So then she felt like [she didn’t know if she could trust her planner]. Then she went to the fund to get some information, but they could only give her information about the super component. And this must be nearly 18 months [ago], and the money is still sitting in the bank because she does not feel she can get the right advice. ABarr: And that’s the paradox with the absolute core of this. We’ve got this system that’s supposed to protect people, and what it’s actually doing is destroying trust. AB: We’re talking about two things here; we’ve started talking about a slightly different issue than whether there’s commission payable. ABarr: To be honest, I think the commission debate is dead. PC: Yeah, I think so too.
ABarr: And, furthermore, I think David rightly won. PC: Yeah, and I’ve always said that I think it’s a nonsense. I think the key to how someone is remunerated is that it’s open and clear and completely understood by the person buying the product. If it’s commission, it’s commission – fine. If it’s a fee, it’s a fee. There are people who would prefer one or the other at different stages of their life or for different reasons. So I’ve never been as hung up on the issue as David might have been. Nonetheless, I think you’re right, I think he probably won ... But I think what’s far more important is what we’ve just been talking about, there is a real problem within the industry getting people the correct advice, which in some cases is very simple and very straightforward and in other cases is quite complex. People who want to get advice on a very large amount of money outside of super as well as within, and looking at negative gearing and
property investments and whatever, you’re talking about a whole different quality of advice and knowledge ... The bulk of people within superannuation just need a bit of guidance as to whether it’s a balanced or growth fund and [whether] they need $200,000 of death and TPD [total and permanent disablement] or should it be [income protection]? That’s what they want to know. And that’s a far more important question that we as an industry should be covering. AB: And there’s that broad issue of what you call guidance or a simplified form of advice, and I agree again that that would add enormous value to most members. PC: And what happens now of course is that people get that advice from friends and relatives and whoever instead of an official… They gather around their dinner table on Friday nights and say, ‘You’re in that industry Phil, aren’t you? Should I put …’
PC: If we go back to something that hasn’t been talked about as much, not literacy per se, but actually understanding the average Australian and their super, [we’re] still seeing low levels of engagement. And a fellow asked a question around [whether we] should implement training in schools – sort of a course, but at the end of the day whether it’s advice or whether it’s guidance, what we’re talking about here is people understanding the options available to them. And it’s not a massive sphere of options, you can make it more complicated and get into more complicated features, but the basics of what investment strategy, how much to contribute, where should it be contributed? They’re the kinds of questions that we really need to focus on as an industry. How do we get the average Australian to understand their choices and how do we give them guidance when they need it most in an affordable way? AB: It’s not with a 120-page PDS [Product Disclosure Statement]. PC: This is where organisations like AIST [Australian Institute of Superannuation Trustees] can be invaluable, because I think one of the other things we want to recognise is virtually no adviser is completely independent. The industry funds do a great job, but their advisers, not surprisingly, recommend that [their clients] go with that particular industry fund. [They] may not take commissions, and I’m sure they act very ethically, but one of the Continued on page 22
22 CMSF ROUNDTABLE
Too much, too soon? ☞ Continued from page 21 dilemmas I think for the average person is to find broad advice that truly is independent ... I think organisations like AIST could fulfil a very valuable role in that area in being an independent in the big picture. ABarr: If you say the adviser works for an industry fund, okay, they’re a salaried adviser, he’s got a job in an industry fund, he likes his job, presumably he’s interested in keeping his job, he’s interested in the financial viability of the fund he’s with, so he’s directing business to the fund. Think about it a bit more broadly, the fund as an organisation actually is in the business of independently choosing fund managers, so out the back it’s actually independently choosing products. And I’ve often wondered [wether there is] a way of looking at the trustee itself as financial planning – as occupying a band in the intermediary space that’s broadly the same as financial planning and is independent. RM: You can say that for a lot of retail products out there that have a similar model, but at the end of the day … ABarr: But they’re not offering a corner shop where you engage in a dialogue with your customer about what he really wants and you package up the product, they’re offering a supermarket. And that’s what Cooper says, they’re offering a supermarket, so their approach to doing business is here’s all the products on the shelf behind me, you pick one, I’m not taking any responsibility.
JF: And they’re completely unaffordable. If you actually go to one of those truly independent [planners], it costs a bomb. FR: Just on that commission issue though, I think you can win the commission debate, but the issue to me is more about the conflict of interest. So if all that happens is the commission becomes some other fee, but the tie to the product and being paid through an adviser paid by a financial institution in some way doesn’t disappear, then we haven’t really solved any problem except a name problem. And I’m not convinced that part is being dealt with. I think there’s too much focus on the actual word ‘commission’ than on the conflict of interest that goes with it. And I spoke at a conference a couple of weeks ago and there were some financial planners who were speaking and it was clear to me they weren’t concerned about any of this at all. They thought – as the number of [financial planners] is quite large – that the Government would need to be quite brave to annoy them as a group and get rid of commissions, asset based fees and something else they were talking about that I’ve never heard of. MT: Volume rebate. FR: Yeah, volume rebates. Unfortunately, I wasn’t really sure what that was. MT: You’d love it if you knew.
RM: I think that’s a little harsh. I don’t think they’re like that, but I just think we need to recognise that to use the SUPERREVIEW
turn up, so if you go to a particular group ... you know you’re getting advice in relation to that fund. If you go to AMP Financial Planning, I guess you know that you’re going to AMP, you’re not getting a multi range. I guess provided people know what they’re paying and they’re only going to one provider, in my mind that’s probably okay. It’s really when people think they’re going to get independent advice on a range of options and they don’t, and then they also have to pay more than what they really think they’re paying, because there are costs embedded in the price …
ASIC [Australian Securities and Investments Commission] definition of ‘independent’, none of us or very few out there truly are.
FR: I knew it was bad. I didn’t understand completely what the volume rebate was, I don’t
know enough about financial planning. So I just thought well there you go then, there’s a lot more to actually go. RM: I think there still needs to be legislation that says [for] superannuation guarantee contributions you do not pay commission, volume bonuses or any other remuneration to a third party other than a feefor-service. I think there still needs to be explicit legislation, otherwise there’ll always be some clever person who will find a way about it or who won’t abide by an industry guideline. JF: Is there not space though for transparent product sellers? I don’t actually quite agree that it’s wrong for people to say I work for XYZ super industry fund and I will prepare your financial planning and all this sort of stuff, but I will recommend XYZ super fund because that’s who I work for and I believe in it. And because it’s unaffordable, I don’t think we can actually
say we can’t have any product sellers in this industry. ABarr: ... It’s not that I work for XYZ; the issue is what’s my interest in XYZ? What additional payment that’s non transparent am I getting from XYZ? [But] if XYZ has a broad range of products that it can access behind the client, behind the planner, what’s the problem? RM: I think the issue is, I can only represent XYZ products, and XYZ may [have] very good products, but if you want me to compare them with AMP or AXA, some other third party or another industry fund, I’m sorry, I can’t do it because I’m paid by XYZ to sell my advice on XYZ. So I think as long as that’s made clear ... most instances people will still be well off, because if we’re talking industry funds for instance, most of them offer very good products. But people need to understand … PC: It’s about people knowing what they’re getting when they
FR: ... People are so vulnerable when it comes to money that they will latch on to the first friendly face. That person will then say, ‘I think you should go down to this particular pier and jump into this particular fund for this particular commission’. And they go, ‘That’s fine. I trust you; you tell me what to do and I’ll do it.’ We’re so vulnerable financially as a society. ABarr: So you’re either completely trustworthy and you believe someone who leads you the wrong way or you’re so anxious about all the bloody sharks out there you don’t do anything. FR: That’s right, which is what my friend’s done. ABarr: Yeah exactly. FR: Yeah, but that’s better than going to Westpoint. JF: Well she knows that it’s in the bank, nothing bad can actually happen... ABarr: Within reason. JF: The problem with Westpoint was there was no diversification. Those people, they put everything into one product, and that’s about vulnerability and no education. SR
SUPER REVIEW CHARITY GOLF DAY 23
Super Review Charity Golf Day The annual Super Review Charity Golf Day saw a changing of the guard as Pillar Administration wrested the title from AMP. 1
here was a changing of the guard at the Super Review Charity Golf Day this year with the team from Pillar Administration breaking AMP’s four-year winning streak. A field of nearly 60 players teed
off at Sydney’s Roseville Golf Club for the sixth playing of the charity event, with all charity proceeds going to the Inspire Foundation. The event was sponsored by Pillar Administration, Australian
Ethical and Australian Income Protection. While Pillar Administration took out the teams event, the winner of the Men’s event was Pillar’s Noel Davis, with Fiducian’s Shree Singh taking out the Women’s event. SR
1. Brent Hudson and Damon Taylor, Super Review. 2. Mike Taylor and AMP’s Barry Sundstrom. 3. Paul Harding-Davis,Australian Ethical; Ros Lyon, QBE; and Russell Mason, Mercer. 4. Shree and Indy Singh, Fiducian. 5. Women’s winner – Shree Singh. 6. Matthew Chambers accepts the nearest the pin prize. 5
THE OTHER SIDE OF SUPERANNUATION
Golf day’s weather bogeyman ROLLOVER knows from long experience that the organisation of corporate golf days is something of a raffle, and the annual Super Review Charity Golf Day was no different. First there was the selection of an appropriate day in an appropriate week of an appropriate month – something that does not clash with the multitude of gigs that mark the Australian superannuation industry calendar. And then there was the selection of a venue. This year, the powers that be at Super Review selected Sydney’s Roseville Golf Club because its traditional home, Manly Golf Club, is undergoing major renovations, with the result that fewer than 18 holes were in play.
Thus, with the day, week, month and venue selected, all the Super Review team had to worry about was the weather on the afternoon of Wednesday, 7 April. There were some furrowed brows when Sydneysiders awoke that Wednesday morning to steady rain, but the Super Review team held their collective nerve and prepared for the great event. However, their confidence in the weather gods was not shared by all participants. Rollover will long remember the urgent text message received from a certain CommInsure BDM enquiring whether the day would be cancelled. That same man was later seen celebrating finishing the tournament with dry feet and a scorecard revealing he had played under his handicap. SR
Gold flush ROLLOVER is not one of those people who believe that just because someone is running an industry fund they should be paid any less than someone running a retail master trust. However, he is still trying to come to terms with rumours swirling around the renovations undertaken by a certain fund, said to have included the installation of en-suite toilet facility for the chief executive. Rollover was so taken by the rumours that he undertook a quick ring around of friendly fund executives to determine whether office en-suites were a common perquisite in the Australian superannuation funds industry. Apparently, perhaps reassuringly, they are not. Indeed, Rollover’s ring-around suggested that even fundies earning seven-figure salaries were happy to rub shoulders when it comes to pointing percy at the porcelain. Just because you’re paid like a king doesn’t mean you shouldn’t share the throne. The question is, of course, how this rumoured expenditure on private plumbing will be noted in the fund’s annual report. SR
Will the Storm blow over? ROLLOVER is wondering which superannuation fund will be next to provide sponsorship for a major sporting team in the wake of the National Rugby League salary cap scandal surrounding the Melbourne Storm. Of course, Hostplus and ME Bank both withdrew sponsorship from the Storm in the wake of the salary cap scandal, but Hostplus’ chief executive, David Elia, seemed to be leaving the door open for future sporting engagements. His statement described the fund’s association with the Melbourne Storm as having been “a successful and long-standing partnership”, but added “the gravity of the reported conduct of the Melbourne Storm made the relationship untenable”.
“Hostplus has at its core a commitment to the highest standards of governance. We believe in rigid accountability and continuous transparency; and the revelations about the actions of some members of the Melbourne Storm management contradict everything we believe in.” However, Elia’s statement finished on the note: “We are confident the Storm can establish the necessary governance practices required. We remain committed to organisations that share our values of honesty, transparency, integrity and trust. These are the sorts of organisations that we will partner with.” Is that the sound of one door closing and another opening? SR
Winners streak shudders to a halt ON the subject of the Super Review Charity Golf Day – the event ended up seeing a changing of the guard, with AMP failing to take out the coveted wooden and plastic trophy for the first time in four years. Rollover wonders whether the
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about people in the superannuation industry?
less than stellar performance of the AMP teams reflected the absence of AMP’s corporate super chief, Greg Healy, now working in Singapore, or whether it was the change of venue to the somewhat tighter and geographically
challenging Roseville. Whatever the cause of the AMP loss, he congratulates the Pillar Administration team, which was ably led by Mark Luciano – a man who had been threatening to unseat AMP for at least three years. SR
Send it to Super Review and you could be raising a glass or two. Super Review is giving away a bottle of bubbly for the funniest story published in our next issue. Email firstname.lastname@example.org or send a fax to (02) 9422 2822.