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 SEPTEMBER 2010
Volume 24 - Issue 8
Time catches up with tardy trustee 10 2010 ELECTION Should the industry be feeling a little green?
A recent determination handed down by the Superannuation Complaints Tribunal should serve as a warning to trustees that they must be up to date with their members’ changing circumstances.
S 11 FRAUD There’s more to super benefits payments than meets the eye
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Riding the wave of technological innovation
18 ADMINISTRATION Navigating a changing superannuation landscape For the latest news, visit superreview.com.au MANDATES
uperannuation fund trustees need to take account of changed circumstances when dealing with the death benefit nominations of members, according to a recent determination handed down by the Superannuation Complaints Tribunal (SCT). The determination saw the Tribunal overturn the decision of a Trustee on the basis that the fund member had signed the death benefit nomination nearly 16 years prior to her death, and it had failed to take account of her changed circumstances (specifically, a marriage). The SCT’s decision made clear that superannuation fund trustees had to be more proactive in seeking to make contact with members over their changed circumstances, and can not simply assume that letters had been received. The case heard by the Tribunal in July revolved around a decision by the superannuation fund trustee to pay death benefits to the members’ parents rather than to her husband because she had nominated the parents as her benefit recipients when she had 3
The SCT’s decision made clear that superannuation fund trustees had to be more proactive in seeking to make contact with members over their changed circumstances.
joined the fund in 1991. The Tribunal panel, which included SCT chair Jocelyn Furlan and leading superannuation lawyer Noel Davis, overturned the Trustee’s decision on the basis that notwithstanding the member’s original nomination, the fund had failed to recognise the husband as a ‘Dependant’ for the purposes of the Superannuation Industry (Supervision) Act (SIS Act). “Under section 10 of the SIS Act, the word ‘Dependant’ is defined as including any person with whom the person in question had an interdependency relationship,” the Tribunal said. “One of the requirements for there to be an interdependency relationship between the deceased member and her parents is that they were living together. That was not the case. Consequently, it
is the Tribunal’s view that the parents were not in an interdependency relationship with the deceased member within the meaning of the SIS Act and there is insufficient evidence that they came within any of the other elements of the definition of ‘Dependant’ in the SIS Act,” the Tribunal said. It said that although the parents had been nominated by the deceased member to receive her benefit, “that nomination was made well before her marriage”. “Furthermore, in order for the Trustee to be able to give effect to the nomination and pay a benefit to the parents, the parents had to come within the definition of ‘Dependant’ in the trust deed. It is the view of the Tribunal that there is insufficient evidence that the parents came within that definition.” SR 23
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Mandates Recieved by
Type of mandate
Acadian Asset Management
Aviva gets top Heron rating
INDUSTRY funds have found themselves left out of the list of top-ranked superannuation funds in the latest Heron Quality ratings. The ratings, released this month, reveal the Aviva – Navigator Personal Retirement Plan as the top-rated offering in the personal products category, with ING Corporate Super leading with respect to corporate products, AMP SignatureSuper topping the list of pension products and AUSfund once again
Cooper’s SMSF asset transfer rules unfair: Hewison By Chris Kennedy COOPER Review recommendations that assets being transferred into a self-managed super fund (SMSF) be sold first then rebought by the SMSF unless no market for the assets exists are unfair and inconsistent, according to Chris Morcom, director and adviser at Hewison Private Wealth. “If you have to sell assets to transfer them into super, you’re going to have a situation where you sell them on the market, wait for them to settle, then you’ve got to transfer the cash into the super fund – it may be a week later you’re buying the cash in the super fund, anything
could happen,” he said. If an investor with a $450,000 contribution cap was looking to transfer the entire amount into a SMSF in the form of equities, that would create a substantial amount of risk that many investors would not be willing to take. “It’s unfair to limit [SMSFs] to that sort of thing when there’s these black pools operating that large organisations can use to facilitate transactions of market related securities without the market knowing what’s going on – it’s outside of market regulation almost. It’s our view that this needs some more attention,” Morcom said. It was also nonsensical that for other assets where no underlying market existed, the
being named the best regarded eligible rollover fund (ERF). Commenting on the findings, Heron Partnership managing director Chris Butler said it was the first occasion on which Aviva’s Navigator Personal Retirement Plan had been crowned as the top-rated personal product, while ING Corporate Super had been named the top-rated corporate product on eight occasions. The Heron process found 54 products
recommendation was to allow those to be transferred provided they were valued by an appropriate valuer, he said. “A commercial property [has] no underlying market but if you get it valued by a valuer you can transfer it in. There are different rules for different assets and that doesn’t seem to make sense,” Morcom said. Morcom agreed the current rules needed to be changed as the transfer window was too large, meaning investors had too much discretion about when they chose to complete the transfer. Theoretically, they could backdate a transfer to when a share price was lower, minimising capital gains tax. He suggested a system of electronic transfers that transferred the assets instantly at current market price could solve the problem, possibly facilitated through the registries or the Australian Securities Exchange. SR
in the personal/retail category warranted its top five-star rating denoting ‘outstanding quality’, while 25 corporate products gained a five-star rating along with 41 pension products. By comparison, just three ERFs earned the five-star rating: AUSfund, ISPF ERF and SuperTrace. While industry funds failed to be ranked as top-rated products, they were well-represented in the five-star categories, representing 19 of the 54 products. SR
Master trusts outperform industry funds A RECOVERING share market in July again helped retail master trusts to outperform industry funds, according to the latest data compiled by Chant West. According to Chant West principal Warren Chant, master trusts outperformed industry funds for the 13th time in 17 months on the back of the stronger performance in listed markets. Despite this, he said industry funds continued to hold an edge over the longer term, outperforming retail master trusts by 1.3 per cent a year. The Chant West analysis revealed that the median growth superannuation fund delivered a return of 2.2 per cent in July, with the main drivers being stronger US markets and a 4.5 per cent rise in the Australian share market.
However, Chant warned superannuation fund returns still had some way to go before they recovered to the levels experienced before the global financial crisis. “While funds have rallied 22 per cent since the end of February 2009, they still need a further 13 per cent return from here to get back to the levels of late October, 2007,” he said. Chant said this might take some time because economic data coming out of the US indicated a subdued outlook. SR
AUSCOAL’s Bruce Watson named FEAL Fund Executive of the Year AUSCOAL Super chief executive Bruce Watson has been named the winner of the 2010 Fund Executive Association Limited (FEAL) Fund Executive of the Year Award. The award, in partnership with AMP Capital Investors, recognises outstanding leadership and achievement by a fund executive within the Australian superannuation industry, according to AMP. Watson was selected by a panel of industry leaders and peers for demonstrating innovative and outstanding leadership in responding to the needs of the
fund and its members during a challenging year, AMP said. AMP Capital Investors’ business director client, product and marketing, Brian Delaney said Watson had shown extraordinary leadership in identifying and responding to the needs of AUSCOAL Super’s 65,000 members to ensure they receive the maximum benefit from their superannuation. “Bruce’s hands on approach together with his passion and commitment to staff and clients make him a well deserving recipient of this award,” he said. Watson will receive a $20,000 educa-
tion grant to study at an internationally recognised business school as part of FEAL and AMP Capital’s commitment to supporting professional development, AMP said. AUSCOAL chairman Arthur Weston congratulated Watson for his leadership, member focus and innovation. “Over the last five years Bruce has demonstrated inclusive, yet decisive leadership. He has devoted his time to a number of important strategic issues, identified significant growth opportunities and achieved breakthrough results by constantly searching for new
and better ways to understand and meet the needs of AUSCOAL Super members and employers,” he said. Watson said it was a privilege to be among such an esteemed group of prior recipients and paid tribute to the work and support of the AUSCOAL Super team. He also credited Weston and thanked him for his nomination, and thanked AMP for supporting the awards. “One of the great achievements in five years as CEO has been to implement and see the rewards of a wonderful leadership training program,” Watson said. SR SEPTEMBER 2010
Ankura shoots down core/satellite approach THE core/satellite equity management approach popular with many super funds has underperformed other active manager styles, particularly in the high volatility environment seen in the past few years, according to Ankura Capital. In a summary analysis derived from the Mercer return database covering the past five years and showing relative over or underperformance of growth, value, core, quantitative and multi-manager strategies, multi-managers populate the lower end of the table, with value and growth dominating the top end. The entire sample of active managers have a better record than the passive option in the analysis, even after the passive approach is given a 30 basis points bonus taking into account the lower fees.
The underperformance of high volatility managers since the onset of the global financial crisis combined with the consistently lower returns of passive management means the core/satellite approach is potentially embracing a “worst of both worlds” approach, according to Ankura Capital managing director Greg Vaughan. “The worst thing you can do, based on this analysis is to have a passive core which suggests you’ll almost definitely underperform everyone, and then put that together with high volatility managers and attempt to compensate for the passive core,” Vaughan said. Funds use passive managers to dilute the higher fees of active managers and that is where they can get into trouble, he said. Because passive managers are almost guaranteed to
underperform, funds with a passive core need to outperform disproportionately to compensate. Many large funds have opted to revisit passive cores because they have been frustrated with the performance of their manager mix, but they would be better served building a core around moderate risk core managers, Vaughan said. “You really only want a core which is performing in line with the active return that’s out there. Having a wider number of moderate volatility managers has been a more successful approach over recent years,” he said. A breakdown of high, moderate and low volatility managers into 66 rolling three year periods showed that prior to September 2007, high volatility managers beat the median in 80 per cent
of the periods, but since then, moderate volatility managers outperformed high volatility managers in 85 per cent of the intervals. Low volatility managers beat the median performance less than 20 per cent of the time across the overall analysis. SR
Mercer launches retirement income calculator Fund manager Mercer has launched a stress test calculator that will help members of Mercer Super Trust assess their superannuation and predict the impact events such as share market volatility and a career break will have on their retirement income. Heather Dawson, partner at Mercer, said retirement income calculators helped increase super fund member engagement. Mercer’s Retirement Income Simulator provides a personalised forecast that takes into account all income sources, contributions, rollovers and investment strategies and allows members to apply various strategies to bridge any gaps, she said. “It’s very powerful for members to see how their contribution patterns and investment strategies can influence the income they will Heather Dawson have in retirement. Mercer’s Retirement In-
come Simulator shows people in very clear terms what they can achieve by working longer or saving more,” she said. The simulator also features a stress test, which helps members to see the impact of stock market movements on their retirement income, she said. “Australians are now more attuned to the impact that share market volatility has on their superannuation balance but we felt it important to help them understand the impact over time and on their actual income in retirement,” she said. The stress test is based on 10 different scenarios for each investment option from Mercer’s Capital Market Simulator investment model, meaning members see 10 possible outcomes ranging from a best-case to a worst-case scenario, Dawson said. SR
Dimensional boosts investment and compliance teams DIMENSIONAL has expanded its investment and compliance teams, adding portfolio manager Thomas Reif and compliance manager Rod Mair. Reif joins Dimensional from JP Morgan where he was director of quantitative research, and brings 16 years of portfolio management experience. He also worked with State Street Global Advisors, Deutsche Bank in New York and Bankers Trust in Sydney. Reif will report to Dimensional’s SUPERREVIEW
head of international portfolio management, Graham Lennon. Mair worked most recently as regional head of risk and compliance at BGI/Blackrock, and prior to this worked with Perpetual Trustees and the Australian Stock Exchange. Mair will report locally to the head of finance and compliance, Stephen Palmer, and internationally to the global head of compliance, Christopher Crossan.
“Rod has built an extensive knowledge of our industry and a real depth of understanding of the contribution compliance makes to the growth and effective operation in the funds management business,” said Dimensional Australia chief executive Glenn Crane. Dimensional manages more than $15 billion for clients in Australia and New Zealand and has approximately $180 billion in assets under management globally. SR
tail wagging super dog
THE funds management industry has again been described as the tail wagging dog of the Australian superannuation sector. Towers Watson’s global head of investment content, Roger Urwin, told last month’s Fund Executives Association Limited (FEAL) conference that the superannuation industry had an old and outdated infrastructure that raised the question of whose interests were really being served by the resultant “expensive machine”. “We do have a funds industry that wags the retirement industry dog,” he said. Referring to the recommendations that flowed from the Cooper Review, Urwin said Cooper might not have played every card skilfully, but did well with a weak hand. “We have many investment products where the costs are too great to come out ahead for the value delivered,” he said. “We account too optimistically and self-servingly for the skills and talents of certain investment segments. “In doing so, we all too often serve the interests of the industry, not the member,” he said. SR
Praemium eyes SMSF market growth PLATFORM providers Praemium are targeting a 10 per cent share of the Australian self managed super fund (SMSF) market in the next three years from its current level of four per cent of SMSFs administered, according to group chief executive Arthur Naoumidis. Praemium will try to attract an in-
Emerging economies a good hedge INVESTORS should look to emerging markets to help counter the negative demographic patterns emerging in the developed economies, according to Barclays Capital’s head of research, Larry Kantor. Addressing the PortfolioConstruction forum in Sydney last month, Kantor said that demographic patterns had turned very unfavourable in developed economies, with ageing populations meaning economic growth was going to be lower for the next decade or two. He suggested that to overcome this issue, investors needed to include emerging markets in their portfolios in circumstances where the demographic issues were not nearly as severe and where the fiscal problems were not so severe. “Most of the emerging market budgets are actually in pretty good shape,” Kantor said. He suggested that investors should also not be in the business of avoiding risky assets, even though volatility is high. SR
crease in SMSF business through a combination of changes to the group’s V-Wrap platform, positional product changes, changes to the investment register and improvements to the interface with the compliance software, Naoumidis said. One of the most important aspects of Praemium’s push into the SMSF
market will be its SMARTwrap product, which will allow the group to target the remaining 90 per cent of the market rather than just advisers whose clients are wealthy enough to invest directly in wholesale or direct equity products, Naoumidis said. With incoming fiduciary duty requirements advisers would have to jus-
tify putting clients into a product that cost twice as much as SMARTwrap, Naoumidis SR
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MySuper not so super SUPERANNUATION fund members would be better off remaining in today’s industry funds than being tipped into the proposed MySuper default option, according to leading superannuation researcher Warren Chant. In an analysis released last month, Chant said MySuper could result in Australian workers receiving lower superannuation payouts rather than the higher outcomes suggested by the Cooper Review. Chant, the principal of Chant West, said while the MySuper concept had a
certain superficial appeal, it failed to recognise that there was a difference between price and value. “In super, as with most things in life, you get what you pay for,” he said. “Sometimes it is better to pay a little more if that means the product performs better and lasts longer – and that’s what you want from super.” Chant said the Cooper Review recommendations had treated superannuation as a homogenous product where the only differentiating factor was price, but this was not the reality.
“There are qualitative differences between funds. The better quality funds, in terms of investment performance, tend to have higher investment fees because of how they invest and what they invest in,” he said. “But there is strong evidence that those higher investment fees pay off because they produce better returns,” Chant said. “In other words, the additional return is greater than the additional fee incurred to achieve it.” He said the forecast cost savings from MySuper were hugely optimistic
and were likely to be eclipsed by the reduction in benefits resulting from reduced returns. SR
Increased SG overshadowed by election A HARD-FOUGHT campaign to raise the superannuation guarantee (SG) is in danger of being lost as a result of the election, according to Australian Labor Party (ALP) strategist Bruce Hawker. “One of the things that differentiates the two parties is the question around superannuation and it all revolves around the issue of the mining tax,” he said at the Association of Superannuation Funds of Australia (ASFA) lunch in Sydney last month.
He described the tax as “an incredibly vexed issue”, which at its heart proposed to provide tax cuts to business, with particular benefit to small business, extra infrastructure and, most importantly, to assist with a phased increase in the SG from 9 per cent to 12 per cent. “I think that’s something which has been lost entirely in other issues like Mark Latham,” Hawker said. A very important aspect of people’s lives going into retirement was at stake, and if Opposition Leader Tony
A dollar each way on recovery INVESTORS appear to have hedged the bets on the question on recovery, according to new research released by Mercer. The Mercer analysis, contained within its Dynamic Asset Allocation report, claims the market has effectively priced in both the prospect of recovery and the risks of it being derailed, with most asset classes rated ‘fair’. Commenting on the research, the head of Mercer’s Dynamic Asset Allocation team in Australia, David Stuart, said the recent choppiness in markets could continue for some time, but that Mercer was not expecting a repeat of 2008. “While there is a talk of a double-dip recession, as we are hearing from some of the bearish commentators, Mercer believes market valuations have priced in big picture SUPERREVIEW
Abbott is elected, there won’t be an increase in the SG, he said. “A lot of people around the country will probably start to think about this issue at some time. Part of signing up to the mining tax is that Australians can get their fair share in various ways, and one of these is the increase in the guarantee. By 2030 something like $500 billion will be injected into the Australian economy in that way.” SR
Aussie retirement incomes influenced by Asia
risks,” he said. Stuart said Mercer’s view had not changed substantially since it released an earlier report at the beginning of the year. “We felt at that time that the road to recovery would be rocky, and that has proved to be the case, particularly for equities, however it continues to trend upwards,” he said. SR
THE retirement income of Australians is being influenced by emerging market economies, but the benefits being gained come with a volatility risk, according to Access Economics director Chris Richardson. Easing economic stimulus from developed nations will slow the currently rapid growth being seen in Asia, and the cheap money that was flowing in may have led to property bubbles that could deflate unevenly, creating a volatility risk for Australia. There is also a big question mark over whether commodity prices will be able to stay at their current levels over the longer term, he said. “China will have a bad year and when that happens Australia will have a very bad year,” he warned. Australia can most likely look forward to strong growth in China for the next 10 years, and in India for the 10 years after that, but he said “India will not be the next China” because it won’t see the same demand on heavy industry.
But with continuing growth and demand for Australian resources, “Asia means prosperity for Australia,” Richardson said. Australia would also be wise to use the benefits being earned now while the markets are strong to plan for the future in the form of an increased superannuation guarantee (SG), he added. From an economist’s point of view, increasing the SG isn’t right or wrong because it makes people better off in retirement at the expense of being worse off now, he said. But with people living longer and retirement likely to go on for longer than people anticipate, that myopia is a reason to consider increasing the SG, he said. The average Australian’s retirement income was currently around 70 per cent of their pre-retirement income, but in 60 years, once everyone had spent their whole lives working under a 12 per cent SG, that was likely to increase to 75 per cent, he said. SR
AustralianSuper recruiting for new internal investment roles AUSTRALIANSUPER will be looking to fill four new internal investment roles that were created to boost the fund’s internal investment capabilities. The positions – head of infrastructure, head of equities, Asian investment expert, and governance specialist – have been in the works since at least 2008 and are part of a longplanned expansion, according to AustralianSuper chief investment officer Mark Delaney. All of the new roles will fit within the existing teams, and will also have overarching responsibility for the teams, Delaney said. Since the establishment of AustralianSuper in 2006 from a merger between Australian Retirement Fund,
Superannuation Trust of Australia and FinSuper, funds under management have grown by 50 per cent, he said. “We anticipate that they will double in the next five years and we need to ensure we continue to be in the best position possible to take advantage of this scale for our members,” he said. The appointment of an Asian specialist was especially significant, Delaney said. “AustralianSuper has long recognised the importance of Asia from an investment perspective and this new role will enable us to benefit from growth in this region. This person will identify and assess opportunities and
investment partners in the region.” The governance specialist role will ensure appropriate governance of the
APRA defends rights on capital requirements THE Australian Prudential Regulation Authority (APRA) has defended its right to impose minimum capital requirements on superannuation fund trustees, even though it would not routinely do so. APRA’s defence of its position has been outlined in the regulator’s response to submissions with respect to a consultation package. In the response, it covered the issue of the adequacy of resources held by superannuation funds, noting that while it “would not routinely impose a specified minimum level of financial resources’ it was open to APRA to do so on a case-by-case basis. It said that one submission had raised concerns that the guidance suggested APRA had unfettered discretion to increase capital requirements for
trustees, and that this was not mandated by legislation or subject to a procedural process of fairness with clear guidelines. APRA responded that it was empowered by the Superannuation Industry (Supervision) Act to impose additional licensing conditions on a trustee where it believed it had prudent reasons for doing so. APRA said it had the power to impose specified minimum levels of financial resources to be held by a trustee as a licence condition – albeit this was something that was not routinely done. “Any decision to specify minimum levels of financial resources would be subject to careful consideration by APRA and any such decision would be subject to appropriate procedural fairness process-
fund’s investments, work to improve corporate behaviour in investment vehicles and integrate active investor considerations in the investment process, he said. The fund had only just begun the recruitment process but would be advertising for the roles, possibly using a recruitment agency and using all available networks to find the best talent possible, Delaney said. The fund also announced two internal appointments. Jack McGougan, investment manager, property has been promoted to head of property and John Hopper has been promoted to head of income assets from his current role as investment manager for fixed income. SR
Metlife retains Statewide mandate METLIFE has secured a renewal of its insurance mandate with South Australia’s Statewide Super. The Adelaide-based fund announced it had decided to continue its 18-year relationship with Metlife after conducting an extensive competitive tender process. Under the new mandate, Metlife has agreed to deliver enhanced death, total and permanent disability and income protection insurance at no extra cost. Commenting on renewal of the mandate, Statewide Super chief executive John O’Flaherty said it had been based on Metlife’s substantial improvement in product offering. SR
FSC queries value of MySuper THERE is no need for the MySuper recommendations to be instituted if the Future of Financial Advice Reforms (FOFA) and the SuperStream recommendations are implemented properly, according to the chief executive of the Financial Services Council (FSC), John Brogden. Speaking prior to the launch of the FSC annual conference in Melbourne, Brogden said the benefits of MySuper couldn’t be compared to the benefits of implementing the SuperStream proposals.
“MySuper does nothing about account consolidation, it does nothing about reducing the costs in the day-to-day administration [of super],” Brogden said. “If you combine SuperStream and FOFA, and the reforms that both of these can bring, it demonstrates there is really no need for MySuper,” he said. In an address to the conference, David Deverall, chair of the FSC, said SuperStream should be top of policy for the government because of the “massive” savings in the recommendations.
SuperStream is estimated to save up to $20 billion over a 10year period, according to an Ernst and Young study commissioned by the FSC. The bulk of the savings would come from mandatory electronic transactions and straightthrough processing. The cost of implementing the SuperStream proposals is estimated at $1 billion for the industry, according to the study. “In terms of the cost/benefit analysis, it is very clear the investment of $1 billion will deliver, in effect, 19 times
savings,” Brogden said. Brogden said the super industry needed to express a “mea culpa” for not instituting administration savings on its own. “I think we’ve spent too much
time bickering over whose system and whose codes and whose processes will be used, and therefore rather than one area changing, we’ve had no move forward,” he said. SR SEPTEMBER 2010
IFM to build profits and focus on flexibility INVESTOR-owned fund manager IFM plans to generate financial flexibility by delivering a profit in spite of reservations from its shareholders, according to new chief executive Brett Himbury. “We are going to make a profit as a business – I’ve told our industry fund shareholders that we’re going to do that. Most of them have said ‘don’t make a profit, we want it in the form of lower fees’, [but] we’ve said we must compete with the Macquarie Banks, Tyndalls, whoever else you want to name, and in order to do that we need financial flexibility,” Himbury said. IFM’s cost base has increased three fold over the past four years as the manager opened offices in London and New York, recruited new staff and improved systems, he said. “I don’t believe there’s a fund manager anywhere in the world that has had the guts, temerity or shareholder
support to triple its cost base because it’s been the right thing to do by its investors … while revenues have gone to hell in a hand basket,” he said. To be competitive, the manager needs to attract and retain talent, potentially open further offices in places like south east Asia, and continue to invest in improved systems and products, he said. IFM benefitted from a unique ownership structure where it is wholly owned by around 35 industry funds that invest in the manager and make up its major clients, Himbury said. The balance of that structure and the culture that is driven by that combined with the fact that the firm wants to compete with the best in the world is a great combination, he said. “We need financial flexibility to compete,” he stressed. “We must never lose sight of the fact that our
responsibility is to perform, there’s a lot of other choice [in the market], and we need the financial flexibility to ensure that that performance comes about,” he said.
“Our focus over the next few years is to make sure we not only bring that industry ethos and that not-for-profit ethos but we absolutely compete with the best in the world,” he said. The funds management industry as a whole needs to make sure the focus is on net return to members rather than just costs, Himbury said. “We’re really worried that in an environment where trustees have a greater accountability, the easiest thing for them to measure is cost and they will make simple decisions that will cost the long-term wealth of Australians,” he said. “If we dumb it down and we have exposure just to listed assets classes on an index basis paying five basis points, it will be a false economy to save investors 10 or 20 basis points at the expense of a potential 100, 200 plus additional basis points they might get per annum by investing in good quality, longer-term assets.” SR
HSBC wins Erste custody mandate HSBC has been appointed custodian for Erste Group Bank AG in Australia and New Zealand. Alexander Schleifer, head of custody and network management of Erste Group Bank, said Erste chose HSBC due to their long standing relationship with the bank in several markets around the world, and appreciated the professional service, experience and global reach that HSBC offers. Andrew Bastow, head of securities services for HSBC in Australia, credited HSBC’s client service, technology solutions and strong position in the securities services market for the mandate win. HSBC is Australia’s largest sub-custodian with more than $500 billion in assets under custody and 61 per cent market share in assets held for cross border clients as at 31 December, 2009, the company said. SR
Many funds already hold risk reserves INCREASING numbers of superannuation funds are already well-placed to deal with any future government moves to impose a requirement to hold operational risk reserves. A Mercer survey has revealed that of 28 industry, public sector and corporate superannuation funds, 75 per cent said they had a reserve in place compared to just 56 per cent in 2008. Further, the Mercer research found that of the 21 funds with an operational risk reserve, a third had actually used their reserve during 2009. Commenting on the research, Mercer senior partner David Knox said the widespread uptake of operational risk reserves highlighted the advantage of SUPERREVIEW
the practice and bodes well for seeing the recommendations of the Cooper Review passed into legislation. “If the recommendation on operational risk reserve is adopted, the good news is it won’t be a quantum leap for many super funds,” he said. “Instead, it is a continuation of good practice within the industry.” However, Knox said there was no one-size-fits-all approach on how much should be held in such reserves. “While it makes sense to have a minimum and maximum range for reserve levels, the fund should be given flexibility according to its size, insurance arrangements and actual operations,” he said. SR
Beware of green camels With the Greens set to control the Senate in 2011, the superannuation industry should consider how its policies will affect future changes.
ew Australian Governments have controlled both the House of Representatives and the Senate. The last to do so was the Howard Government in its last term. Thus, on the face of it, there should be nothing to worry about when the Senators elected on 21 August take their seats in the upper house next year and the Australian Greens assume the balance of power. Minority parties have frequently held the balance of power, with the Australian Democrats most recently, having wielded more than their share of influence through the Hawke/Keating period and then the first two terms of the Howard Government. Did the Australian Democrats represent a significant impediment to the major parties
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implementing their policy agendas? Only at the margin but their presence gave rise to plenty of ‘legislative camels’ as first the Hawke/Keating Governments and then Howard sought to translate policy into legislation and then manoeuvre it through the Senate. There will be many still working in the Australian superannuation industry that will recall the degree to which a range of legislation impacting on the sector was amended to ensure the support of the Democrats. Some of those amendments were justified and arguably may have improved the ultimate bill. Other changes simply made things more complicated. And so we come to the Greens controlling the Senate in 2011 and the need to consider how their policy approach will be likely to impact superannuation in Australia. As a starting point, those seeking guidance from the Australian Green’s policy pronouncements will find themselves only slightly better informed.
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The only reference to superannuation contained in the policies the Greens took to the Federal Election was that the party would “conduct a full review of the superannuation system with the aim of reducing its complexity and establishing progressive rates of superannuation taxation”. It is worth noting that the party’s stated aim of simplifying superannuation would fit nicely with some of the recommendations of the Cooper Review, but that its reference to “establishing progressive rates of superannuation taxation” would seem to be inconsistent with the themes contained in the Henry Tax Review. And then there is the question of lifting the Superannuation Guarantee in circumstances where, like the Australian Labor Party, the Greens are happy to
impose higher taxes on the resources sector but are then silent on the question of whether a portion of those taxes might be directed towards increasing the superannuation guarantee. On the face of it, one sector of the superannuation industry should not feel phased by the Australian Greens holding the balance of power in the Senate. Notwithstanding the traditional support of the trade union movement for the Australian Labor Party, there is plenty of evidence to suggest the Australian Greens would find plenty to admire about the manner in which Industry Funds Management has been prepared to invest in green projects, particularly renewable energy. Similarly, the Greens have tended to side with those who have been critical of excessive executive remuneration and the
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dominance of institutions in particular markets. At the time of writing, the major parties were still haggling and horse-trading over which of them could form Government. For the superannuation industry, the election of a Coalition Government would represent a radical change in policy direction while the re-election of a Labor Government, albeit in minority, would likely result in a slowing down in the policy time-table outlined before the election. Irrespective of who ultimately gained control of the Treasury benches, the reality confronting the superannuation industry is that a reasonable understanding of Green doctrine will become fundamental and do not be surprised by the evolution of green camels. SR
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Avoiding the risk of fraud There is more to the payment of superannuation benefits than is immediately obvious and, as JENNY WILCOCKS points out, trustees would do well to understand a recent case handled by the Superannuation Complaints Tribunal.
determination by the Superannuation Complaints Tribunal (SCT) (Determination No. 08-09\047) highlights the need for trustees to carefully examine whether their payment benefit process exposes them to the risk of third party fraud. Trustees also need to audit the protective measures they have in place to deal with the risk of double jeopardy, if fraud occurs. A significant question raised by the Determination is who should bear the risk when neither the trustee nor the member is apparently at fault? Fraudulent instructions: In the recent SCT case, the trustee of the member’s superannuation fund had written to the member shortly after his employment had ceased requesting payment instructions. Soon after, the fund received completed payment instructions, together with copies of the following documents, each of which had been certified by a person purporting to be a Justice of the Peace: 1. certificate of Australian citizenship;
2. New South Wales drivers licence; and 3. Medicare card. The payment instructions directed the trustee to pay the member’s superannuation entitlement of approximately $100,000 to a self-managed superannuation fund (SMSF). The trustee obtained a letter from the trustees of the SMSF stating the SMSF was a complying superannuation fund eligible to receive transfers of superannuation benefits. The trustee paid the benefit to the SMSF in accordance with the instructions received. Unfortunately, these instructions were subsequently found to be an elaborate fraud perpetrated by a third party, purportedly without the knowledge or involvement of the member. The member claimed he did not become aware of the payment until several months later, when he decided to rollover his benefit. As he initially intended to leave his benefit in the fund, he took no action in response to the fund’s letter, which followed termination of his employment. Trustee refused payment: When contacted by the
Who should bear the risk when neither the trustee nor the member is apparently at fault?
member, the trustee informed him that his benefit had already been rolled over to the SMSF. The member lodged a complaint with the trustee regarding the payment of his superannuation entitlement to the SMSF. The trustee rejected the complaint and advised the member to seek recompense from the SMSF through the relevant authorities. The member lodged a complaint with the SCT claiming that the trustee’s decision to refuse payment of the superannuation benefit to him was unfair or unreasonable. This was on the basis that the trustee allegedly failed in its duty of care in verifying the documentation, prior to executing the transfer to the SMSF. In declining to pay a benefit to the member, the trustee relied on the terms of the trust deed governing the
fund. The trust deed contained the following provision regarding discharge of the Trustee’s liability: “To the extent permitted by Superannuation Law, the Trustee is discharged from all obligations in respect of a benefit if it is paid in good faith to or on behalf of a person the Trustee believes to be entitled to it.” Regarding the trustee’s liability, the trust deed stated: “Subject to Superannuation Law, the Trustee is not liable for any loss or damage to any person arising out of any matter where in respect of that matter: the Trustee relies upon any signature, notice, instrument or other document believed by the Trustee to be genuine and to have been properly passed, executed or approved.” Continued on page 12
Avoiding the risk of ☞ Continued from page 11 The trustee claimed it had applied a reasonable standard of care regarding the benefit payment, having followed its own internal procedures, which it considered to be in accordance with industry standards. The trustee noted there were no suspicious circumstances, which ought to have put it on notice regarding the benefit payment. Member’s claim rejected: The SCT affirmed the decision of the trustee. The SCT stated: “With the benefit of hindsight, it is clear on examination that on the face of it, some of the documents lack veracity. However, in the circumstances, the tribunal is of the view that there were no suspicious circumstances such that the fund should have departed from its normal procedures in processing the benefit.” The SCT determined the trustee had not failed to exercise an appropriate degree of care in transferring the benefit to the SMSF. In addition, it found the trustee could rely on the clause of the trust deed regarding signatures thought to be genuine. It is unclear from the SCT’s reasons, whether the trustee held on file a signature of the member, which could have been used for comparison purposes. There is also nothing to indicate the member was in any way at fault or had negligently exposed himself to the risk of this type of fraud. The SCT’s reasons for its determination do not discuss SUPERREVIEW
the trustee’s risk management strategy or insurance arrangements, in particular whether the trustee maintained fidelity and crime insurance under, which it could have claimed in this type of situation. Broader issues arising from the determination: The outcome of this complaint is a member, apparently through no fault of his own, has lost his superannuation savings due to the fraudulent actions of a third party without compensation from the fund. Even if a trustee’s actions are above reproach, it is difficult to see this as a fair outcome from the member’s perspective. Of course, we do not have access to all the information considered by the trustee and received by the SCT and can only rely on what is disclosed in the Determination. It may be the specific wording of the trust deed in this case and the fact that there was no evidence of negligence on the part of the trustee, which influenced the SCT’s determination. However, as a matter of principle, the case raises an important issue. Is it appropriate for the trust deed to include such a provision and for a member to be left without his superannuation benefit in these circumstances, given the fiduciary nature of the relationship between the trustee and a member? The risk of third party fraud is a risk, which should be identified and assessed as part of a trustee’s risk management strategy as required under its registrable
superannuation entity (RSE) Licence. The Superannuation Industry (Supervision) Act 1993 (Commonwealth) (SIS) requires that a risk management strategy of a RSE Licensee must set out reasonable measures and procedures to identify, monitor and manage risk, including the risks of potential fraud and theft. This risk for members can
Even if a trustee’s actions are above reproach, it is difficult to see this as a fair outcome from the member’s perspective.
be mitigated by the trustee an appropriate fidelity and crime policy, which protects against third party fraud in the circumstances of this case, where there was apparently no fraud or negligence by the trustee or the member. The question of whether the trustee had met its risk management obligations under SIS was not referred to in the SCT Determination.
fraud of fraud to which they have not contributed, the situation that arose in this case could be avoided. This could be achieved by making fidelity and crime insurance a condition of all RSE licences, in the same way Australian Financial Services (AFS) Licensees must meet the insurance requirements imposed under the Australian Securities and Investments Commission (ASIC) Regulatory Guide 126.
Members entitled to maximum protection: The two sections of the trust deed on which the trustee relied, were both subject to superannuation law and therefore would not have excused a failure to meet the risk management requirements under SIS. Had fidelity and crime insurance been in place, the member could have claimed against the
fund, which in turn could have been compensated by the insurer. There would then have been no loss to the member or the fund. Members of regulated superannuation funds should be entitled to the maximum protection the law can provide. If trustees were required to maintain appropriate insurance to ensure they are properly compensated in the event
Cooper Review: One of the recommendations of the Cooper Review is that the Federal Government should provide a system to: ■ offer appropriate SMSF information to large Australian Prudential Regulation Authority (APRA) funds (including member level details, confirmation that identification of/trustees has occurred and the SMSF’s bank account number) so the large APRA fund can verify the details of SMSF membership before a rollover request to that SMSF is processed; and ■ require the large APRA fund, upon appropriate confirmation, to immediately process the request and electronically transfer the rollover to the validated SMSF bank account. If these recommendations are adopted, it should provide greater protection against fraud. However, even with this process the fraud, which occurred in this case, would not have been avoided. Jenny Willcocks is head of Holding Redlich’s superannuation and funds management practice.
CHECKLIST Assessing how you are placed to respond to third party fraud: 1. Carefully consider the provisions of the trust deed to obtain a clear understanding of: (a) the trustee’s obligations regarding benefit payment; and (b) the point at which, it will be validly discharged from the obligation to pay a benefit. Note: Any amendments to the trust deed must be in the best interests of members. An amendment intended to avoid liability and deprive members of recourse against the fund in such circumstances may not meet this requirement and may not be consistent with the trustee’s fiduciary duty of care. 2. If it does not already exist, consider obtaining fidelity/crime insurance to enable the fund to pay benefit payments to members who, through no fault of their own, have been deprived of their retirement savings as a result of the fraud of a third party. In doing so, trustees should take into account the following obligations: (a) To act in the best interest of members (b) If they hold an Australian Financial Services Licence (AFSL), to have adequate professional indemnity insurance under Corporations Act 2001 (Commonwealth). Although professional indemnity insurance often excludes crime or fidelity cover, the trustee may be obliged to obtain a separate insurance policy to cover such risks to the extent that those risks relate to breaches of the trustee’s obligations under Chapter 7 of the Corporations Act 2001 (Commonwealth). The ASIC Regulatory Guide 126 states at paragraph 126.54: losses caused by fraudulent conduct, which amount to a breach of Chapter 7 of the Corporations Act 2001 (Commonwealth) must be covered. However, that obligation may be confined to fraud of the Australian Financial Services Licensee and those for whom it is legally liable. (c) Include in the risk management strategy how such a risk could be mitigated, including by transference to insurance. 3. Review disclosure documents. If disclosure documents indicate members will be paid a benefit on the happening of a condition of release, without any qualification, then the trustee may be exposed to liability if it declines, due to third party fraud, to make payment of the benefit. 4. Review benefit payment procedures carefully to ensure that they will stand up to scrutiny. Consider whether the benefit payment procedure should include comparison of the signature on the application for benefit payment with earlier signatures received from the member. Are there other safeguards available to the trustee, particularly when transferring to an SMSF? 5. Review the fund’s fraud policy to assess how it would respond in circumstances similar to those of this case.
The new architects of The changing rules with respect to the provision of advice within super, combined with the recommendations of the Cooper Review, are driving technological change. The challenge, DAMON TAYLOR writes, is to understand the options.
rom core registry solutions to the processing of transactions to financial advice platforms, the scope of what technology provides the super industry has been increasing. Competition within the super industry seems to be driving systems and process complexity and yet, just as there are multiple technology providers to this industry, so too are there a number of approaches to technology implementation. The challenge lies in fund trustees’ ability to pick between them. Commenting on the technology now required by super funds, Bravura global head of product Darren Stevens says that the complexity is certainly increasing, and that in a post-Cooper environment it will only be enhanced. “The requirement to give intra-fund advice for example, which hasn’t really been defined, versus the choice advice, the full advice, will mean that you’re going to end up with specialist providers of those technologies,” he says. “Funds will need to have the ability to SUPERREVIEW
provide a lot of that intrafund advice on a cheap basis with straight-through processing linked into their admin systems and linked into specialist calculators. “The requirement to have to do detailed projections going out to retirement will require specialist providers,” continues Stevens. “So you’ve got guys that are producing that right now and it’s the ability of the underlying registry solutions and the admin solutions to integrate with those that is what’s going to be important.” For IQ Business Group chief executive Graham Sammells, much of the technology status quo has been dictated by constant regulatory change within the super industry. “The super industry has been burdened by constant regulatory change and that has meant that the platforms that exist out there in the marketplace today have had no choice but to focus on the core registry functions,” he says. “So by that, I mean managing member details, benefit calculations and configuration and they simply
haven’t had the chance to keep up with a lot of the peripheral services like workflow, reporting, intelligence, CRM [customer relationship management], dash-boarding and the like. “I think they’d be the first to acknowledge that they’re behind the market there and, in fact, some of them have taken a conscious strategy to focus on the core and just do that really really well. “Some super fund customers are taking that strategy as well and sort of going ‘best of breed’ specialisation on the key peripherals around it,” Sammells adds. “They’re therefore opting to make systems talk to each other in order to achieve the best outcome rather than having the one platform try
to do everything.” With a very different perspective on the merits of specialisation within superannuation platform technology, DST Global Solutions Bluedoor executive director Mark Cassar says while integration is certainly the key, it is difficult to achieve it with a range of products from different providers. “What we’ve had in the past is a whole bunch of specialisation,” he says. “You’ll see major institutions buying workflow systems, imaging systems, web systems, and each one of these is a specialist system in its own right. “Of course, the issue with those is the integration project that’s required to make everything work together
and in an efficient manner,” continues Cassar. “So what we’ve seen in recent times is a shift away from that kind of approach to an end-toend, purpose-built superannuation system taking into account the whole end-toend business process. “And that’s really what we need because at the end of the day, we’re effectively trying to do more with less.” Cassar says fund trustees have only to look at where the wastage is in their superannuation systems and processes to see how important integration is on the whole. “The wastage is where people get involved in processes and we don’t want that to happen for two reasons,” he says. “One, we don’t want
them to do the work to begin with and secondly, when they do the work, they make mistakes and those mistakes can be pretty profound. “The true differentiator here is integration,” continues Cassar. “It’s the way all of these systems are integrated and work together and the cost of getting that to happen. And even if you could get to spend the money on making that work, there have been a litany of different projects that have failed to deliver on that outcome. “They just don’t get to the end, it’s just too expensive, too time-consuming and things go wrong.” Of course, the other side of technology implementation comes down to where scale fits into the equation. In the
past, scale has been a vital ingredient in the technology game, but according to Sammells scale can be accomplished even with the use of multiple products. “I think that if there’s clear delineation between what each part of the application stack is supposed to do, then actually scale can be well managed and perhaps better managed when using multiple ‘best of breed’ specialised products,” he says. “Nowadays, using open standards, the whole exercise of integration, while I won’t say it’s easy, is more optimal. “And if you can get that integration right, then you can leverage the ‘best of breed’ in each of the specialties, to do what they do well, and particular customer relationship management (CRM) vendors will achieve scale and functionality a whole lot better than trying to build that stuff into an existing platform,” adds Sammells. “So I think that if the integration’s right and if the process is right, that scale is achievable without the big enterprise platform model. “But the key here is working out what that right technology and systems architecture is so that you can fit the pieces together.” Commenting specifically on the delivery of financial advice platforms, Provisio Technologies director Cameron O’Sullivan says that there might be elements of the technology game where perspectives on scale are changing. “What we’re all looking for in the advice space – and by that I mean the members,
the funds and the guys trying to provide the advice tools – is the ability to service a much greater percentage of the fund membership than is currently possible,” he says. “And the only way to realistically do that without dramatically changing the fee structures and the fee bases all the members are paying is to be able to do it at a significantly lower cost than would be possible using the traditional tools that everyone’s been running with. “Some combination of web delivery and call centre solutions really is the only answer for those funds with a 60 to 70 per cent portion of their membership who really aren’t appropriate for a full face-to-face type advice process,” O’Sullivan continues. “Their needs don’t justify it and they’re not willing to pay the fees. “To me, scale implies that you have to get to a certain size before this will work but in reality, any fund large enough to exist probably has enough members to justify some form of rapid advice process because its going to deal with the majority of their members.” Alternatively, Cassar says that scale will always be best leveraged by an end-to-end system. “It goes back to this whole purpose-built theory and obviously we can get economies of scale across that,” he says. “But it’s a different kind of scale. When some financial institutions talk about scale, they’re talking about 200 different administrators and doing more with another 200. “When we talk about scale
as a vendor, we’re talking about a goal of having 30 different institutions and so we can leverage any development cost across all of those clients,” continues Cassar. “If, for example, ANZ pick a workflow system and AXA pick a workflow system and AMP pick a different workflow system, they each have to do that full integration and the cost is three times as much. “But when we do it, we do it once for everybody and we do it in a far deeper, more seamless sort of way than individual institutions could ever achieve in their own right.” Not surprisingly, one of the major catalysts for a renewed focus on technology and the role it has to play within super has been rebounding investment returns. While views seem to differ on the consistency of technology spend throughout the global financial crisis (GFC), Stevens believes current circumstances have given funds an opportunity to take stock of their technology situation. “Most of the funds that we’ve been talking to have been looking through their various processes and determining where the bottlenecks are,” he says. “And when I look at the SuperStream projections on what’s going to be saved in the industry, I think most of the savings are going to come out of these sorts of administrative processes that people have been working through. “I know about three or four funds at the moment who are putting in new workflow systems, they’re putting in optical character recognition
systems to get the straightthrough processing occurring with way less paper handling and people are putting in CRM systems as well,” Stevens continues. “So I’m seeing a lot of that ancillary system work happening right now and, in time, you’ll see the benefits of that downstream.” Cassar says that he’d be more inclined to say that the GFC has presented funds with an opportunity when it comes to technology. “What the GFC did above all else is put pressure on funds and their executives,” he says. “When you think that in order to maintain margins in an environment where revenues are decreasing, you’ve got to decrease your costs – and you realise that that’s not an easy thing to do. “So if you’re not on a reasonably efficient system, if you can’t take advantage of some of the technological improvements that have been coming over the last couple of years, then you’re definitely at a disadvantage.” Looking at both technology spend through the GFC and many funds’ renewed interest in technological improvement within their business processes, Sammells says it will be interesting to see what the next 12 months will bring. “Part of all technology spend has to be consistent because that’s the basic maintenance activity,” he says. “But only recently have we noticed some funds starting to really lift their heads Continued on page 16
The new architects of technology ☞ Continued from page 15 on some discretionary technology spend, putting a proper focus on certain data management activities or investing in some data warehousing and reporting capabilities where these kinds of projects have been off the radar for the last couple of years. “The most important thing here though is that the thought process happened,” Sammells continues. “I think it gave funds a real opportunity to look at not just systems but all the processes that go with it and we’re finding some funds and some administrators putting a good focus on process improvement and not just technology. “That’s pretty healthy because the reality is that you can’t have one really doing well without the other.” Yet while technology broadly is being viewed with fresh eyes by all super funds, if recent press is any indication, financial advice delivery is its biggest drawcard. Advice in all its forms is creating a great deal of interest on the part of trustees and members alike and according to Sammells, technology providers are well placed to assist. “We’ve seen a few funds get on the front foot with some new pieces of technology that are being integrated into their environment and offering a particular solution to this issue of intra-fund advice,” he says. “Some of these are off-the-shelf packages and some funds have tried to do their own thing using some sort of rules engine to talk to the platform to then SUPERREVIEW
expose the outcome of that through the web. “So that’s clever and there’s plenty of other solutions out there like that, but they’ve typically been boltons to the core platform and not the platform itself expanding outwards,” Sammells continues. “I think some funds have started to look at what’s out there and some are still going through the mindset of ‘should I try to develop my own?’ or ‘should I go back to the platform vendor and ask them to build something for me?’ versus the third party packages that are out there.” Sammells says that many fund executives are still making their minds up on what direction to take when it comes to the provision of financial advice. “And I say that because I only know of probably a handful that have gone out there and said that they’ve acquired applications and are going to be offering that service,” he says. “But certainly, they’ll be looking long and hard at the whole issue of how to do it on scale and technology has undoubtedly got a key role to play.” However, the key question, according to Stevens, is whether funds will be able to implement financial advice delivery platforms around their existing processes, systems and software. “There’s definitely going to be some element of increased technology spend for the older solutions,” he says. “Whereas some of our legacy systems have a full suite of APIs [application program interfaces] or remote procedure calls
which allow for that integration to occur, that’s just because we’ve had them around for years and we’ve been integrating with websites for years. “But there still will be additional requirements and SuperStream as well will bring in additional requirements,” Stevens continues. “So the more modern architecture, the service-oriented architected
solutions are certainly the ones that will be the lower cost for super funds.” For his part, O’Sullivan says that just about every fund that has tried using one of their existing solutions, which usually meant some form of holistic software, has really struggled to get the efficiency gains they were looking for. “You’re looking at somewhere between two and three SOAs [statements of advice] a day and that’s going to struggle to ever deliver the scale that people want,” he says. “But within transactional advice and the new systems specific to it, if the phone call takes half an hour then the whole advice process takes half an hour because during
the phone call, and as part of quantifying the benefits to the member, you’re building the scenario and the moment the phone call’s finished, the click of a button is all that’s required for the advice documentation to come out. “You’re not cutting corners in terms of the advice service – the phone call’s going to take however long it takes to explain the strategy to the member and get them comfortable with it – but the actual paperwork production after that is a click of a button,” O’Sullivan continues. “And that’s far more the sort of scale that funds are going to need.” So looking to the future of technology within the super industry, the primary challenge seems to lie in balancing legacy systems that may or may not be working sufficiently against new technology that may be in the form of multiple products or one end to end solution. As a broad comment, Cassar says that a great deal of the industry’s current technology is comprised of legacy systems. “We’ve seen some of the big providers try to take some steps forward in order to get their scale up but the whole scale argument is an interesting one,” he says. “What we’re seeing, in industry funds in particular, is if you read the financial press, you’re reading that these funds with less than $6 billion can’t survive, less than this many hundreds of thousands of members and this kind of thing. “Well, the technology today
is actually changing that, because if you take the sublime to the ridiculous, if you’ve got no administrators because everything is happening online and in real-time with no one having to do anything, then does it matter whether you have 10 accounts or 10,000 accounts or 10 million accounts?” asks Cassar. “So when it comes to this whole argument about scale, the legacy technology is where scale’s really important because they can’t get that efficiency. “But with the later technologies, when you’re doing everything online, self service, that sort of thing, its changing the nature of that scale debate.” Stevens says that his main observation is that many funds have well-established legacy solutions and are comfortable with them. “They’ve tended to focus on the areas of inefficiency in their businesses, through workflow, OCR [optical character recognition], and making sure that integrates with their legacy systems,” he says. “A good example is someone like Mercer who have spent quite a lot of money and time and effort themselves over the years building their own suite of solutions around the outside of our heritage solution Superb. “So if you went to Mercer and said ‘look, will you be migrating off or changing Superb?’ they’ll sit there and say ‘no, it works, it’s a good calculation engine and we’ve fixed up the rest of our business by doing other things’. “Over time that will change but it will change depending
on the type of businesses that are there.” Giving a guide to what the technology provider focus will be in the future, Cassar says that DST Global Solutions Bluedoor will continue working to improve the efficiency of the administration process. “We’re doing that by fully integrating all the components of the end-toend business process,” he says. “Firstly, we’re trying to remove paper from the system entirely, and Cooper will help to do that, but even in the legacy businesses where paper is still very much a part of the world we’re providing automation. “So from the time mail hits the mailroom and is scanned, we’re reading the image data on a piece of paper and pre-populating that data into the system,” Cassar continues. “And that means that the administrator is checking that we’ve extracted the data off the paper correctly rather than keying it in themselves. But even in that sort of old world context, we’re still creating higher levels of efficiency and we’re doing that with that really tight integration between our modules. “Our continual aim is to get higher levels of efficiency, taking that natural cluster of systems that make up that whole business process of the administration of super and really tightly integrating that.” SR SEPTEMBER 2010
Delivering on changed Irrespective of the current political landscape, further change to the superannuation industry is inevitable and, as DAMON TAYLOR writes, administrators are evolving their offerings to deal with this change.
hough Australian eyes are yet to focus on the result of the recent federal election, it seems certain the superannuation industry will continue on its current path of evolution. The industry’s various reviews have given all participants a great deal to think about with respect to positioning in the superannuation marketplace and, according to Steve Schubert, managing director of Superannuation for Russell Investments, fund trustees are well aware administration will have an important role to play. Pointing to a recent uptick in tender activity as evidence many funds were actively examining their existing administration offerings, Schubert said funds’ interest have been about more than simply due diligence. “Generally, I think there’s been a view in recent times that funds ought to look at their providers and clearly the Australian Prudential Regulation Authority (APRA) likes them to do that,” he said. “But I think our sense is that this is more than just kicking the tyres.” “I think there’s a genuine interest in exploring new service models and, just as a bit of background, that’s been one
of the reasons that we have really revisited our entire service delivery model,” Schubert added. “We’re in the process of making some pretty significant changes in our model, so where we have previously outsourced a lot of activity to IBM, we’re in the process of bringing a lot of those activities back in-house, particularly around member services.” “In our view, super funds are wanting to increase the ways in which they can engage with their members and so the key issue for us, is making sure our model allows us to control those activities and, more importantly, invest and innovate in them.” Alternatively, Peter Beck, chief executive officer of Pillar, identified other motivations for those funds going out to tender. “It’s probably driven more by all the Cooper Review activity that’s trying to encourage funds to look at themselves and drive efficiencies,” he said. “Part of it is driven by the need to drive efficiencies into those businesses and I believe that the potential for consolidation within the industry is a factor as well.” “There are a lot of discussions going on about potential consolidations, courting I
circumstances guess you would say, and there’s definitely going to be some first mover advantage for those in terms of securing administration resources.” Yet, while tender activity may be a constant for service providers to the super industry, government reviews and the prospect of legislative change is ever present.12 months ago, administrators signalled that the approach to be taken was one of ‘wait and see’ and in the wake of an election, Greg Camm, chief executive officer of SuperPartners, said the status quo hadn’t changed. “Unfortunately, with the election result still undecided, the reality is that the story could still change,” he said. “The Coalition has been luke warm, to the point of being offhand actually, about a lot of the stuff that’s been recommended and announced, but what we’re saying is that 95 per cent of what’s been announced, we like, and if it turns into reality we’ll be jumping into it.” “However, any preparations we make depend on the actual legislation,” Camm added. “You can’t build a system around a press release, you’ve got to build a system around legislation.” “All of these announcements require laws to go through parliament and it isn’t until you see that content that you can actually start cutting code and making changes.” Also focused on the election, Beck said the easiest prediction was that nothing would happen until that result was clear. “For certain parts of these
reviews, people will wait for a signal from the government as to what its intentions are,” he said. “But for other things, such as the use of tax file numbers (TFNs), there seems to be universal agreement to it, so we’re starting to think about what that means for our business.” “There are definitely some things we believe are going to get up irrespective of what government is in place, like TFNs, which are such a sensible thing that we find it hard
to believe it’s taken so long for us to get to this point,” Beck said. “So stuff like that, we’re preparing and planning for how it’s going to impact us. For limited advice, again we have confidence the market is starting to understand what’s required so, without really waiting for regulation, we’re getting on with it and developing our solutions.” “There’s certainly not as much ‘wait and see’ as there was a year ago. It’s more a case of the writing’s on the wall and we’re starting to plan for it.” Schubert said while the changes recommended by the Cooper Review in particular had not yet been implemented into legislation, it was in
the best interest of both funds, and service providers to be putting plans in place. “I think if the industry sits on its hands and is waiting for legislators and the dust to settle on the MySuper recommendations and so on, then we’ll be left behind,” he said. “So, in terms of finding ways to engage with members, some people are misinterpreting Cooper as being all about dumbing down the service you provide and basically assuming your members don’t want to engage.” “But we just have a fundamentally different view. We believe you can engage with members and get them to make good decisions about the level of contributions they make and how prepared they are for retirement,” Schubert said. “So funds can and should be investing in those areas and services regardless of how quickly or slowly the legislation from Cooper comes through.” Schubert said when it came to current legislative change; there was a comparison to be drawn with Choice of Fund. “When Choice of Fund was first flagged back in the mid90s, the industry started to think about what it meant even though it was near enough to 10 years before the legislation actually came through,” he said. “But by that time, the industry had really fundamentally changed and adapted on the basis this was coming at some stage.” “All funds realised they had to modernise and update their products and engage better with their members so by the time Choice of Fund came in, it was almost
academic because they had already adapted and evolved.” Of course, the one element of prospective legislative change that administrators seem united in bringing to super funds immediately is the provision of financial advice. With the announcement of the Financial Advice Reforms already having been a game changer for the industry, Gary Cox, director, administration services for Russell Investments, said it was an area in which all administrators were keen to get on the front foot. “It’s been a huge game changer. Even the contact centres these days are minimum Regulatory Guide 146 (RG146) qualified and then it steps up from there,” he said. “So in terms of intra-fund advice, we’re an advocate. You certainly need to provide that kind of service to fund members to explain things like allocations, top-up contributions and so on and it’s really important for us to provide those sorts of services to members to help them with that.” “If it isn’t already, this is going to be a fundamental superannuation offering and something all funds will be looking to provide.” For his part, Schubert said one of the key issues was that peoples’ need for advice followed a broad spectrum. “Its not just about needing to get information off the Internet or getting a financial plan or going to an adviser and then getting tangled up in issues about how the adviser gets remunerated,” he said. “In practise, there will Continued on page 20
Delivering on changed circumstances ☞ Continued from page 19 always be some members who need to pay for a full-blown financial plan (and obviously the fact that the new reforms make sure that there’s a proper relationship between the member and their adviser, rather than the adviser being paid from institutions is a good thing) but what needs to be put in context is that the vast majority of super fund members aren’t going to be sitting down and getting a full financial plan.” “They have information needs and advice needs from time to time and sometimes those needs are relatively modest and can be efficiently dealt with through things like intra-fund advice.” Holding a slightly different perspective, Camm said one of the main drivers behind an increased focus on the provision
of financial advice was the impending retirement of the babyboomer generation. “From an industry super perspective, you’ve got a big cohort of members who are now into their 50’s with reasonable balances,” he said. “They’ve now been in compulsory super for nearly 20 years so their balances are getting up and they’re thinking about retirement.” “And when you get into that headspace, we all know that you need a bit of advice because it just isn’t simple.” However, when asked whether the scope of what could be done under the proposed financial advice legislation was well defined, Camm indicated it was a tricky question to answer. “I think that the lawyers have been in charge of that space for a long time and I think it’s incumbent on the in-
dustry to say to the lawyers ‘hey, members can probably get a bit more advice than what you’re telling us’,” he said. “The regulators would be encouraging funds to give more advice rather than less but the law is always read down to its smallest parts.” “Typically, our advice is either single issue or only to do with superannuation,” added Camm. “So the stuff that we do, which is all phone based,
never strays outside of superannuation.” “We don’t provide a full financial planning service, that’s done by Industry Funds Financial Planning on a face-toface basis.” Adopting a similar perspective, Beck suggested one approach to be taken was that of self-limitation in regards to advice. “We’re going down the track of single-issue advice so we’re going to be licensed to do full financial planning but we’re going to limit what we do to a range of issues,” he said. “So to the extent that limited advice has been regulated and limited, we’re not actually going to rely on that limitation.” “We’re going to self-impose limitations on what we do because limited advice has got to be simple and quick and it’s got to follow a process,” Beck added. “So to some extent, it’s
self-limiting in terms of what you’re able to efficiently and effectively do through the web and contact centres.” “But that’s also the opportunity. It’s got to be efficient and it’s got to go to the major issues that people have concerns about or want advice on and we need to give people quick solutions – it’s kind of like a financial planning quickie.” According to Schubert, the sooner the industry has a clear definition on intra-fund advice, the better administrators’ financial advice offerings would be. “It’s still a work in progress and there are lots of things that have been spoken about without obviously being legislated,” he said. “Following the election’s outcome, what we are hoping for is a bit more direction about what we can do and about what is being offered.” “I think at the moment,
everyone is struggling to define what intra-fund advice is and what do we deliver,” added Schubert. “Everyone understands there’s a need for it but I think it’s fair to say that there’s a problem in terms of the definition around it at this point in time.” But while financial advice delivery is now an integral part of the administration service being sought by super funds, administrators’ primary focus remains on efficiency, data integrity and risk management. Looking at efficiency in isolation, the proposed use of tax file numbers and the National Clearinghouse scheme steps in the right direction however, Beck said there was still a great deal of ground to be covered, particularly with respect to the industry’s wider adoption of electronic commerce. “The Cooper Review is all about efficiencies and we think that’s a good thing,” he said. “Efficiencies and automation are something we support 100 per cent because though there’s always been the opportunity to have efficiencies, it does require investment.” “With a lot of the things that have been suggested in Cooper, we could have got on with them ourselves without regulation but it did require investment,” Beck added. “And I think what Cooper’s made really clear is the Continued on page 22
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☞ SEPTEMBER 2010
Delivering on changed circumstances ☞ Continued from page 21 government’s asking for that investment to be made in efficiencies and the industry will respond to that.” But when it comes to efficiency investment, Beck said the most important thing is the need for a return on that investment. “The efficiencies will come through but it needs to be remembered that most business cases are based on three to five year paybacks,” he said. “So the real efficiencies which get passed on to members will take some time to feed through the system and that’s a reality that the entire industry has to face.” “Historically, because there’s been no bi-partisan agreement on the basics of super, super’s always been a bit like a political football,” Beck added. “Every time there’s a change in government, there’s a change in the basics of super and, as an administrator, we’ve had to spend a lot of money on just keeping compliant.” “In some respects, that’s quite wasteful when it comes to what members are looking for. What we’ve got to try to do is move the spend from compliance to operational efficiency and service and if governments can help us by actually getting bi-partisan agreement to the basics of super and not kicking that football around every time a government changes, then that will be the precursor for investment in operational efficiency and service.” Illustrating the benefits of efficiency investment and the industry-wide adoption of SUPERREVIEW
electronic commerce, Camm said the key benefits would be in accuracy and cost. “We handle up to 10,000 cheques a day and even the world’s best operator is going to misplace one of those cheques every so often,” he said. “So getting us into an electronic world will reduce those error rates, money will get into peoples’ accounts faster and, in the end, that means lower costs for members, which is always a good thing.” However, the showstopper, according to Camm is inertia. “The biggest one is inertia but it’s also resistance at the small employer end of the marketplace,” he said. “We all carry
a mental model in our head that employers are all the size of Coles, Myer or Bunnings and they’ve got 20,000 employees and they send big payroll files on electronic tapes.” “But of course, the reality is the vast majority of employers in Australia have less than five employees. Every corner shop, or not even a corner shop, which has three parttimers and one full-timer, every tradesman that’s got an apprentice, every doctor who
has a nurse and a receptionist - they’re all employers,” Camm added. “And a lot of those people are terribly engaged with superannuation and getting to them somehow and getting them incentivised and encouraged to use electronic means is a challenge because there are a lot of them.” Despite this, Cox said the move to electronic commerce and electronic transactions was one that simply had to be made. “These days everyone is online to do their banking and everything else so to me, there’s no excuse,” he said. “It’s inertia or laziness that has lead to this paper-based administration for a large part of our industry.” “There’s never really been any incentive for the employer to drive things online but when it happens, its going to make life that much easier,” Cox added. “There is obviously
inefficiency in the system, so I think that by moving things online, the big result will be, being able to transfer the costs of administering paper, collecting paper, filing paper, losing paper, chasing that up. You can take the savings from that and put that into your front-end and put that into your services, spend more on the administration, on the engagement with customers, spend longer time on the phone with them, intra-fund advice, all of those things.” “The shape of the dollar spend on administration will change and give the trustee the flexibility to do so much more.” So while a lot within Australia’s super industry seems set for change, in line not only with legislation but also with increased competition, it seems clear the onus is on administrators to support funds through this. “In terms of administration,
this is a low margin business, which requires heavy investment and scale,” he said. “Our belief is that to be effective, you’ve got to make the investment in the business, you have to have operational efficiencies, you have to do administration well and you’ve got to focus on it but more than that, you can’t have gaps in your services.” “You have to have a comprehensive range of services and that range of service is expanding in terms of single-issue advice, clearing houses, rollover hubs and so on,” Beck added. “Those are all services and operational efficiency measures that need to be in place.” Looking to the future of super administration, Schubert predicted it would primarily be about member engagement. “All the stuff that happens in the back office, from a member’s point of view, that will be back office,” he said. “So the industry needs to get more efficient, and that’s all well and good, but by and large, that won’t be very visible.” “It’s like our banking system - people don’t change banks very often, so while we might grumble here and there, when we put our piece of plastic into the wall or we write a cheque or whatever, the banking system works for us,” Schubert said. “And that’s the way it has to be with super funds as well, everything just has to work and work well.” “Whenever we need something, it has to be there at our fingertips and if we can find ways to engage with our members, then they will be loyal because no one wants to change super funds if they don’t have to.” SR
New head for UBS GAM UBS GAM has flown in Ben Heap from New York to head the local business.
THE head of UBS Global Asset Management in Australia and New Zealand, Paul Bolinowsky, has stepped aside from the dayto-day running of the business and will now be focusing on his
Super Review’s monthly diary of superannuation industry events around Australia and abroad.
as managing director of retail distribution.
SEPTEMBER Victoria 8 – ASFA Luncheon. Cloud Computing – What is it and why should I care? Speaker: In the Cloud Pty Ltd director Steve Sacks. Venue: Park Hyatt Melbourne. 1 Parliament Square off Parliament Place, Melbourne. Enquiries: ASFA Member Services Unit. Ph: (02) 9264 9300 or 1800 812 798.
New South Wales 14 – FSC Deloitte Leadership Series Lunch. Speaker: Virgin Blue Airlines CEO and managing director John Borghetti. Venue: Four Seasons Hotel. 199 George Street, Sydney. 28 – ASFA Luncheon. Low-cost Super: dream, nightmare or reality? Panellists: Chant West principal Warren Chant; JANA Investment Advisers head of consulting (Sydney) and executive director John Coombe; Australian Administration Services CEO John McMurtrie. Facilitator: First State Super CEO Michael Dwyer. Venue: The Westin Hotel. No. 1 Martin Place, Sydney. Enquiries: ASFA Member Services Unit. Ph: (02) 9264 9300 or 1800 812 798.
Fax details of conferences, seminars and courses to Super Review on (02) 9422 2822
role as head of institutional sales. As a result, Ben Heap will be returning to Australia from New York to fill the role as head of UBS Global Asset Man-
agement in Australia and New Zealand after leading the company’s infrastructure team in the Americas. Commenting on the changes, UBS Global Asset Management chairman and chief executive John Fraser said they reflected the company’s commitment to developing the business in Australia and New Zealand. SR
John Van Der Wielen
FORMER Fortis senior executive and St Andrews Insurance boss John Van Der Wielen is to return to Australia to head up ANZ’s wealth management business. The big banking group has announced that Van Der Wielen will be managing director for wealth in Australia, taking up his role in October. Prior to October, current managing director of ING Australia, Harry Stout, who is returning to the US next year, will run the business. As part of the changes at ANZ, managing director of retail distribution Louis Hawke has been appointed to an integrated role as managing director of product, strategy and marketing, while its general manager of regional and commercial banking, Mark Hand, has been appointed
RUSSELL Investments has announced the appointment of Graham Herman as its new director of capital markets research. Herman’s main role will involve conducting and supervising research in various investment areas. Herman has 28 years of experience in financial markets, having previously worked in investment management, asset consulting, investment banking and corporate investor relations. In his most recent role as head of investment strategy at Citigroup Australia, he was responsible for asset allocation and equity market advice to pension funds. The head of Russell’s consulting business, Greg Liddell, said the company was “delighted to be welcoming an experienced and well-credentialed professional with such a broad background”. FORMER MLC chief executive Peter Scott has been appointed chairman of Perpetual. Scott will succeed Robert Savage, who in October will step down after nine years on the board and five years as chairman. Scott’s background is in the financial services industry, having previously worked for Perpetual. His previous experience also includes acting as chief executive of MLC and an executive general manager of National Australia Bank. He has also held a number of senior management roles with Lend
Lease Corporation and is currently chairman of Sinclair Knight Merz and a director of Stockland Corporation. AXA Investment Managers (AXA IM) has appointed former Mercer global chief investment officer Tim Gardener to head its global consultant relations unit. Gardener will report to the global head of distribution and member of the AXA IM management board, Jon Bailie, and he takes on the London-based role later this year. Gardener had 33 years experience at Mercer, and had extensive experience in the pensions and investment consulting business and Australian superannuation funds, an AXA announcement stated. The group stated that his new role would focus on strengthening AXA IM’s interactions with consultants across all asset classes and geographies. SR SEPTEMBER 2010
THE OTHER SIDE OF SUPERANNUATION
Don’t lose your head REMEMBER the movie Highlander that came out in 1986 and told the story of an age-old battle between immortal warriors who can only be vanquished when one decapitates the other? Well Rollover reckons life is currently imitating art in the context of the two men vying for the single chief executive position resulting from the amalgamation of two reasonably-sized funds. The only good news for the loser
in the battle for ultimate CEO supremacy is that he is more likely to end up with a handsome payout than decapitation. With Highlander in mind, Rollover is told that swinging a Scots broadsword is similar to swinging a golf club, and so he suggests to one of the individuals that there is more at stake than winning longest drive – and that he should therefore keep his head still. SR
Election doldrums ROLLOVER usually loves Federal Elections because of the highly confected staging inspired by the major political parties, which is only matched by the highly confected ‘shock, horror’ coverage dashed together by the daily media. That Rollover actually became soured by the 2010 election campaign is probably owed to the less than stellar heights reached by the political parties, particularly the abject lack of serious policy discussion. He is still wondering how the Coalition managed to fit its superannuation policy
onto just a couple of A4 pages, but assumes it was all part of a minimalist, ‘small target’ approach. Thus by the time he found himself standing in a queue for nigh on half an hour to cast his vote, Rollover was more than ready to suggest that the 2010 elec-
THERE are those in the superannuation industry who suggest that administrators are a boring bunch about whom you only hear when they get something wrong. Rollover disagrees. He finds nothing boring about the current competition for mandates being fought between the major administrators or the claims and counter
tion campaign was the worst he had ever encountered and needed to be brought to a rapid end. If only he had followed the example of a certain superannuation fund chief executive, who told Rollover that he had avoided the polling day queues by lodg-
claims around whether those that are winning the mandates are actually loss-leading to gain market share. Whatever the truth of the matter might be, there seems to be no questioning the fact that a number of major funds are the beneficiaries of a market in which three players are hoping a fourth falls by the wayside. SR
Sunny outlook for AIST IT has ever been Rollover’s experience that asset allocation is the crucial differentiator between funds that perform well and those that perform less well. And he believes that asset allocation is also important when it comes to holding industry conferences. Thus, he regards the Financial Services Council’s (FSC) decision to allocate its conference to Melbourne earned the organisation a lesser return in the minds of delegates than the Australian Institute of Superannuation Trustees’ decision to allocate its Australian Super Investment (ASI) Conference to the Gold Coast. There was barely a month between the two conferences, yet a world of difference in the returns to delegates. The FSC conference in Melbourne generated chill winds and wet shoes, while the ASI Conference generated warm climes, preconference golf and a beachside hotel conference venue. Is it a case of industry funds outperforming the retail master trusts – yet again? SR
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Super Review - September 2010