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 2011
Volume 25 - Issue 8
Communicating in a crisis 3 SOVEREIGN WEALTH Super is our sovereign wealth fund: Gillard
A recent determination by the Superannuation Complaints Tribunal has revealed that clear communication is crucial when funds outsource their functions amid a financial markets melt-down. By Mike Taylor
8 INDUSTRY MERGERS Funds looking to create cost and scale efficiences
14 COMMUNICATIONS Information provides calm in a crisis
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20 SUPERANNUATION Super trustees expecting more from their custodians For the latest news, visit superreview.com.au COMPANY INDEX
showed that over that period, the member – via his financial adviser – was provided with the following benefit quotations:
utsourcing superannuation fund functions such as asset allocation and administration can present significant problems, especially if the changeover occurs during market melt downs. However, fund trustees are likely to emerge without incurring significant penalties if they keep affected members appropriately informed. That is one of the bottom lines to emerge from a recent determination handed down by the Superannuation Complaints Tribunal (SCT) concerning a superannuation fund which moved to outsource administration functions, with the result that processing was frozen for nearly a month. The actions of the superannuation fund led to a member who had received advice from a financial planner seeking compensation from the superannuation fund to the tune of $72,511.73 – being the difference between the amount of his account balances as at 8 October 2008 and 19 November 2008. The SCT documentation 3
1 July 2008 — $617,179.85 16 September 2008 — $595,995.18 4 October 2008 — $572,418.56 8 October 2008 — $576,839.73 10 October 2008 — $568,920.53
“The Tribunal considers that the information was provided in a timely manner given the circumstances of the processing freeze.”
15 October 2008 — $525,076.72 29 October 2008 — $517,449.55 31 October 2008 — $511,573.34 1 November 2008 — $511,573.34 3 November 2008 — $514,102.36
Notwithstanding the losses incurred by the fund member, the SCT found in favour of the superannuation fund. In a determination handed down in late June, the Tribunal said it considered it unfortunate that the processing freeze (which impacted the member) had coincided with a downturn in investment markets. “However, the Tribunal is satisfied that the Trustee endeavoured to keep members 12
informed and supplied a mechanism for members to obtain quotations during the freeze,” it said. “Both the Complainant and the Complainant’s Financial Planner were provided with benefit information on a number of occasions by the Fund. “Although the information may not have been immediate during the time the online system was not available, the Tribunal considers that the information was provided in a timely manner given the circumstances of the processing freeze,” the SCT determination said. The superannuation fund had earlier in the proceedings offered to compensate the member for the late processing of an investment switch decision to the tune of $1,639.52 – provided the member agreed to the amount before it was paid. However, the Tribunal said the compensatory amount should have been paid immediately, and ordered that the amount be paid – together with interest, compounded annually – from 19 January 2009. SR 23
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Super is our sovereign wealth fund: Gillard By Mike Taylor
AUSTRALIA has such a strong superannuation system that the country has no need for a sovereign wealth fund, according to Prime Minister Julia Gillard. Gillard told a Financial Services Council breakfast in Sydney she believed superannuation is “already our trillion dollar sovereign wealth
fund – but with market benefits”. “That’s because it’s privately managed by thousands of trustees instead of a sovereign wealth fund managed centrally by a Canberraappointed manager,” she said. “Or alternatively, you could say that Australia has 8 million sovereign wealth funds – the superannuation accounts of Australians across the country.”
Gillard said these were the very same superannuation accounts the Government wanted to make massive injections into, but this was something that could not be achieved without the implementation of a Minerals Resource Rent Tax (MRRT). “We can only get to 12 per cent by 2020 if we use part of the proceeds of the MRRT to mitigate
APRA warns on liquidity providers THE Australian Prudential Regulation Authority (APRA) has used an article in one of its regular bulletins to place superannuation fund trustees on notice that they need to be mindful of liquidity provider arrangements under the Government’s proposed new Stronger Super regime. The article points out that many superannuation fund trustees use a particular investment option in a fund as a liquidity provider or banker to the rest of the fund. “Simply, in this arrangement the liquidity provider is used by the rest of the fund to trade assets with, in order to rebalance strategic asset allocations. The liquidity provider then trades with the external market to rebalance its asset allocation,” the APRA article said. However, it said while this arrangement might provide cost savings for the fund, APRA had observed that
trustees had not always fully identified the risks arising from such arrangements or established sufficient controls to fully address or mitigate the risks. “Specifically, trustees need to ensure that the liquidity provider is managed according to the needs of the members who have chosen to invest in it, and hence, that it maintains an appropriate asset allocation,” the regulator said in the article. It said trustees also needed to be mindful that after the implementation of the Stronger Super proposals, they would need to evaluate whether use of a MySuper option as a liquidity provider would be viable, or even permitted. “This will be dependent on the Stronger Super legislation,” the article said. SR
Wholesale insurance engagement pays off A COMMITMENT by superannuation funds to engage and educate their members has set the wholesale insurance market up for strong growth over the next 15 years, according to a new Rice Warner report. Rice Warner director and head of life insurance Richard Weatherhead said the growth was likely to come from individual member increases rather than increases to default cover levels. “The growth we’re seeing is the re-
sult of a continued commitment by funds to engage and educate members, in particular through the increasing use of improved member analytics that help in tailoring insurance solutions to the needs of individual members,” said Weatherhead. He added that the increased availability of insurance online was contributing to growth in the sector, along with the regulatory changes that Weatherhead predicted would prompt
advisers to recommend wholesale insurance arrangements in the future. The Rice Warner report also found that technological developments and service levels needed to be addressed. “Automated underwriting is becoming a prerequisite for insurers to be considered, at least for larger funds. There is also increasing demand for online claims lodgement and assessment and case workflow reporting,” Weatherhead said. SR
APRA releases draft guidance, invites comments THE Australian Prudential Regulation Authority (APRA) has released two draft guidance papers aimed at regulated superannuation funds: one on contribution and benefit accrual standards, and a second on payment standards. The draft papers were released along with a discussion paper, and the three documents will be open for feedback until 31 October. A spokesperson for APRA said that the guidance papers updated the prudential guidance, taking into account legislative changes since 2006.
The spokesperson said that there were no substantial changes to the current requirements, but that APRA was required by legislation to hold a consultation period. SR
the lost revenue incurred by taxing super at concessional rates,” she said. Elsewhere in her speech, the Prime Minister closely aligned the Government’s Future of Financial Advice legislation to its broader superannuation agenda, and said she expected the bill would be introduced to the Parliament “later this spring”. SR
ISN backs FOFA draft legislation By Tim Stewart THE Industry Super Network (ISN) has come out strongly in support of the Government’s Future of Financial Advice draft legislation, claiming it will prevent millions of Australians from payBrad Fox ing for financial advice they don’t receive while simultaneously building aggregate national savings by “billions of dollars”. ISN chief executive David Whiteley cited a recent study by Roy Morgan that found 60 per cent of super fund members have never used a financial planner. “The deduction of advice fees and commissions from Australian’s super savings – where no advice is provided – is an unconscionable and unsustainable feature of our compulsory super system,” said Whiteley. He added that the imposition of a two-year ‘optin’ requirement would ensure “Australians will no longer be able to be charged ongoing fees without receiving advice”. Whiteley also pointed to ISN-commissioned Rice Warner Actuaries research that found optin would only cost planning business an average of $11 per client per annum. But Association of Financial Planners president Brad Fox was highly critical of the Government’s use of the Rice Warner research, and rejected the notion that opt-in would only cost planners $11 per client. “The Minister [Bill Shorten] in this regard is not acting in the public interest, but in the interest of industry super funds. Research from the advice market has opt-in costing $100-$250 per client, with cost imposts at every level of the advice chain – adviser, licensee and product provider,” Fox said. SR SEPTEMBER 2011 * SUPERREVIEW
Govt backs down from risk commissions ban By Tim Stewart THE Government has stepped back from its blanket ban on individual risk commissions in super – but the complete ban on group risk commissions remains in place. In a statement released last month, Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, announced the Government had adjusted its proposed ban on life insurance commissions within super. “The ban will apply to commissions on group life insurance in all superannuation products (including both
Default/MySuper products and Choice products) and to commissions on any life insurance policies in a Default/MySuper product from 1 July 2013,” Shorten said. Effectively, this means the only commissions that will be allowed in super from 1 July 2013 will be individual life commissions in self-managed superannuation funds and Choice funds. Association of Superannuation Funds of Australia chief executive Pauline Vamos was glad to see the exception on individual policies, and said that it removed the problem of regulatory arbitrage. “With commission only being paid on
non-superannuation individual policies, there was a risk that the superannuation industry would be selected against. [Advisers would] put their unhealthy clients in super, and their healthy clients outside of super. Even despite the best interest duty there was a risk there, so we’re glad to see [the change],” Vamos said. The superannuation industry will also be required to disclose both the dollar and percentage values of all new and existing commissions so that consumers can see the effect on their premiums. The Government will also work to introduce uniform claw-back provisions to discourage ‘churn’ in the industry. SR
Mercer helps members ‘stress test’ their super THE recent volatility in the share market is leading more people to engage with their super, according to Mercer Financial Advice leader JoAnne Bloch. Mercer has recorded a 15 per cent increase in enquiries to its helpline for Mercer Super Trust and stand-alone trusts operated by Mercer in the past fortnight. “Not surprisingly, market volatility has driven a spike in enquiries across all our engagement channels. It is important members can access
advice and tools which allow them to make informed decisions in the context of their own investment horizon and objectives,” she said. In an attempt to help members of the Mercer Super Trust ‘stress test’ their super, Mercer provides a Retirement Income Simulator on its website. Members can gauge what effect future volatility in the share market will have on their income in retirement. A recent Mercer survey found that 61 per cent of peo-
ple who used the simulator said they intended to take action regarding their superannuation in the next 12 months. “When members use Mercer’s Retirement Income Simulator they’re able to replicate the reality of life, and the reality of investment markets. This gives them a longer term perspective on the short-term fluctuations and is proving to be an effective means of kick-starting members into action,” said Bloch. SR
FOFA will protect consumers: AIST THE Future of Financial Advice draft legislation is set to “deliver substantial benefits to millions of Australians”, according to the Australian Institute of Superannuation Trustees (AIST). AIST chief executive Fiona Reynolds said the reforms would result in Australian consumers receiving affordable and good quality advice. It would also mean the default MySuper funds would be free of trailing commissions, she added. “These reforms are not about killing off advice. They are about ensuring that super funds members have access to affordable and quality advice, and in doing so, should boost retirement savings,” SUPERREVIEW
Reynolds said. Reynolds said the two-year ‘opt-in’ would protect some superannuation members from paying for advice for longer than they needed it, and compared paying trailing commissions in superannuation funds without accessing advice to being a member of a gym without using it. “By having to regularly renew their contract with their adviser, super fund members – as well as other consumers – will have to think more deeply about the sort of advice they really need,” she said. Reynolds also applauded the introduction of the obligation for advisers to act in the best interests of their clients. SR
Calming double-dip fears THE global economy should avoid slipping into another recession, but the biggest risk facing markets is poor investor sentiment and the resulting negative feedback loops, according to Credit Suisse. Recent falls in global equity markets are on a similar scale to the falls beginning in April, last year, Credit Suisse head of UK research and portfolio analysis Michael O’Sullivan said. However, where the falls last year took three months to reach their trough, “we’ve done all of that in about two weeks”, he said. With the caveat that equity markets sometimes overestimate the likelihood of recessions, O’Sullivan said most indicators painted a grim picture. “If you look at Treasury prices, if you look at the price of gold, if you look at equity prices they are reflecting recession-type levels. So the equity market is saying we’re going to have a 25-30 per cent fall in earnings,” he said. However, O’Sullivan said Credit Suisse believed “we’re going to see a slowdown in growth, not a doubledip”. The current expansion period is in line with other historical episodes, and the recent falls in stock markets are not unusual in that context. The median post WW2 expansion period for the US is 52 weeks, O’Sullivan added – whereas the current expansion period is only 26 weeks old. The biggest problem is poor sentiment, and the possibility of investors talking themselves into a recession, he said. He pointed to Internet searches for the keyword ‘double-dip’, which he said had just reached an all-time high and historically had a reasonably strong inverse relationship with global equity markets. SR
Warning on new risks to bonds By Mike Taylor
SOME western governments may resort to engineering pools of captive capital as a form of financial repression, thus impacting the risk associated with bonds, according to BlackRock Australia head of fixed income, Steve Miller. He said that rather than completely defaulting, BlackRock believed debt-stressed developed countries might try to disguise their unwillingness to fully meet obligations to global creditors. It was a risk that many superannuation funds and retail investors had failed to recognise, assuming western government bonds were risk free. Discussing the possibility of government’s pursuing “financial repression”, Miller said they could utilise
regulations to dictate the degree to which domestic financial institutions were required to hold government debt. “As forced buyers of government debt, financial institutions would essentially be compelled to accept lower returns than could be available in an open market,” the BlackRock analysis said. It went on to state that it did not believe the potential threats to valuations and returns from government debt were therefore being adequately captured in current issuer weighted fixed income benchmarks. “Traditional fixed income benchmarks assume that the riskiness of all western governments’ debt is equal,” the analysis said. “Europe’s rolling debt crisis is just one of the events that show this assumption is hugely problematic.” SR
Super funds exposed to anti-selection By Tim Stewart
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SUPERANNUATION funds need to carefully monitor increasing automatic acceptance limits (AALs) to keep anti-selection under control, according to RGA Reinsurance managing director Pauline BlightJohnston. Speaking at an ASFA luncheon on group life insurance, Blight-Johnston said people often misunderstood the role that underwriters played. “The purpose of underwriting is like a metal detector at an airport. Because the metal detector’s there, you don’t try to take metal things through. [Underwriting is] not there
necessarily to find out more about people’s health than they already know,” she said. The problem with high AALs was that they opened up the possibility of high levels of anti-selection (ie, when a person finds out they are terminally ill and then attempts to get life insurance) – particularly at a time when funds were watering down their other controls against anti-selection, she said. “There are some funds out there at the moment that are exposed to anti-selection,” Blight-Johnston said. “At the moment that doesn’t seem to have been picked up by the population, so I think we’re
getting away with it – but at some point in time we need to be alert to it.” AustralianSuper general manager Paul Schroder disagreed that there was a problem with high AALs. “I think all the good funds have got their own strong plan and they’ve worked with their insurer – and their insurer’s working with their reinsurer – to come up with something sensible, and it gets reviewed,” he said. Blight-Johnston agreed with Schroder that higher AALs were effective in tackling underinsurance, but she stressed that they needed to be closely monitored. SR
Handle rollovers with care: SCT Australia • Asia • Europe • Middle East • The Americas
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TRUSTEES need to take particular care with rollovers during periods of market volatility, according to the Superannuation Complaints Tribunal (SCT). The warning is contained in the Tribunal’s latest quarterly bulletin, with the SCT chair Jocelyn Furlan saying trustees need to be aware “that market instability can and does cause problems for some fund members, whether or not they are approaching retirement”. Furlan cited the example of a fund member rolling a benefit from one fund to another and who, on the day he decides to roll out of his fund, checks his balance online and notes he has $20,000 in his account. “By the time his request is processed – perhaps a week or two later – his account balance has dropped to $19,000 due to negative investment performance,” the SCT chair said. Furlan said the member could then be forgiven for believing he had lost $1,000 and could therefore lodge a complaint with the SCT.
She said in reality the member might not have actually suffered a loss at the hands of his pre-existing fund. “If the member’s new fund’s performance was not as good as that of the fund he is leaving, it may well be that, had his rollover request been processed sooner, he would have lost even more,” Furlan said. SR
Mergers not always best for industry funds By Chris Kennedy IN many cases when industry super funds are looking to merge to create scale and cost efficiencies, members may be better served through mutually beneficial partnerships with other funds, according to a Russell Investments paper. While some mergers can deliver economies of scale, over a certain point complexity can be added because larger asset pools provide extra challenges, according to Russell’s managing director of industry and government funds Michael Clarke in his paper Future Proofing for Industry Funds. These challenges include the increase in technical gov-
ernance skills required by trustees as investment complexity grows; accessing increased numbers of managers with growing monitoring and implementation costs; the costs of growing internal investment teams; and the challenges associated with accessing and managing global asset portfolios. These mean investment economies of scale are quickly exhausted for small, medium and large funds, according to the paper. Funds are most efficient at around one million members and $20 billion in assets, beyond which dis-economies of scale are introduced due to constraints on factor availability, reduction in incentives and growth in bureaucracy in
large organisations, and a lack of specialised resources in once small markets, Clarke said. Mergers may also result in significant one-off costs around transitioning assets, merging fund structures and management teams, and associated legal, accounting and advisory fees, he said. More complexity is added if the average member balances vary widely between funds or if they share differing levels of
Fund cooperation needed on tech systems By Benjamin Levy SUPER funds have been warned away from investing in their own infrastructure capable of moving enormous amounts of digital information, saying the volume and scale of information would make it impossible for one fund to gather enough resources to cope. Instead, super funds need to work together and share costs and technology talent to be able to create the infrastructure needed to move large amounts of client information, according to the chief executive of IQ Business Group, Graham Sammells. Speaking at the Australian Institute of Superannuation Trustees administration conference in Melbourne, Sammells said it was too expensive for one super fund to invest in enough infrastructure that could deal with “big data” feeds, and there wasn’t enough computer analytics talent available to deal with the feeds. “Don’t even think about having the budgets and the capacity to invest in the infrastructure,” Sammells said. Senior research engineer at national communications technology SUPERREVIEW
research centre NICTA Ben Lever said super funds had to take technology, storage and processing power costs into account when implementing a big data solution. There was 1.27 zetabytes of data in the world in 2010, and it was doubling every 18 months. Machine to machine information was causing a huge jump in the amount of data available around the world, including data input from social networks, smart phones, Twitter, and audio and visual data, Lever said. Sammells told the conference that super funds needed to pool resources, but still maintain their own value proposition. SR
exposure to illiquid assets that need to be valued, he added. One alternative for funds to look at is creating mutually beneficial partnerships, which given the emergence of vendors able to expertly provide outsourced super services means a broader depth of resources, he said. By selectively combining the individual strengths of the fund and the outsource provider, member interests are maximised and access to resources is strengthened, and Russell is encouraging funds to consider tailored outsourcing partnerships as an alternative, he said. “These relationships can relieve governance pressures, reduce risk and increase access
to markets and research,” Clarke said. “We’re not saying mergers are never appropriate, but rather funds should be aware alternatives exist that have the potential to deliver better member outcomes,” he said. Clarke also said it is puzzling that the merger process for industry funds does not follow the same rigorous principles of transparency, disclosure and stakeholder engagement as those found in public company mergers. “Members are not given a detailed analysis of expected costs so don’t have the means to hold trustees accountable for managing costs and achieving the forecast benefits over the medium term,” he said. SR
Proposed changes to foreign managed funds By Andrew Tsanadis THE Government has released draft legislation that will bring Australia’s investment manager regime more closely in line with other financial service centres. The draft legislation, entitled Investment Manager Regime Amendments, will clarify how certain investments of foreign funds for 2010-11 and prior income years are taxed. Under the change, income from relevant investments of a foreign fund that is taken to have permanent establishment in Australia by way of an Australian-based adviser will be exempt from income tax. The policy, referred to this as ‘conduit income’, has been extended from the 2009-10 financial year in order to address a key area of investment uncertainty for US-based fund managers investing in Australia. Assistant Treasurer and Minister for Financial Services Bill Shorten said the proposed changes will provide certainty for all international businesses investing through Australian advisers. “Australia’s taxation of foreign managed funds is not consistent with other financial centres, including the US, the UK, Hong Kong and Singapore,” Shorten said. “These new measures will help Australia retain $57 billion already invested
here by foreign managed funds.” Shorten’s announcement comes after a recommendation made by the Financial Services Council (FSC) into an Australian Financial Centre report that looked at the tax treatment of funds management vehicles. FSC CEO John Brogden said he has certainty that the proposed changes will provide foreign investors. “The importance of this change cannot be underestimated – it removes a major barrier to Australian based fund managers attracting foreign investment,” said Brogden. The proposed legislation is available on the Treasury website and open for submission until 30 August. SR
Super fraud on the rise By Benjamin Levy REGULATORS and industry experts have questioned whether investors’ money is still safe in the superannuation system, considering the growing incidents of super fund fraud. Speaking at the Fund Executive Association conference in Melbourne, director of KPMG Forensic, Peter Morris, used damning figures from their upcoming annual fraud survey to question whether super funds are failing to train their staff in fraud awareness. Only one-third of fraud incidents were being detected by super funds, Morris said. According to KPMG figures, 53 per cent of respondents to the survey said they experienced an incident of fraud – up from 45 per cent last year. The total amount of money being lost to fraud has jumped from $44 million to $345 million over the past two years, Morris said. Poor internal controls were letting fraud occur, he said.
Super funds are not picking up indications of fraud, and if they do have fraud awareness training, then they might not be updating their training, Morris said. A number of super funds don’t have ideal fraud reporting mechanisms in place, and therefore don’t know where to go when they suspect fraud is occurring, he added. It took 372 days for fraud to be detected, and the value of fraud grew the longer it took to be detected, KPMG found. Australian Taxation Office assistant commissioner Stuart Forsyth questioned whether investors’ money was safe in the super fund system, considering the growing occurrence of identity fraud. There were 61 attempts of both successful and unsuccessful identity fraud in the super fund system over the past four years, Forsyth said. Criminal gangs have made a number of attacks on super fund money in the past few years, he said. Vision Super compliance manager Andrew Margetts said staff needed regular training to pick up instances of fraud. SR
Extend loss relief for merging super funds: AIST By Tim Stewart THE Australian Institute of Superannuation Trustees (AIST) has reiterated its call for the Government to extend temporary loss relief for merging superannuation funds until 30 June 2013, citing recent global market volatility. In a submission to the exposure draft on the issue, AIST chief executive Fiona Reynolds applauded the Government’s proposal to extend capital gains tax (CGT) loss relief for merging superannuation funds for three months from 30 June 2011 to 30 September 2011. However, in the face of “events on global financial markets over the last few weeks,” she argued that the relief should be extended “as far as possible”. “The MySuper initiative is fundamental to the Australian superannuation environment moving forward.
For a lot of funds it will be the central reason why funds may be considering mergers,” Reynolds wrote. She added that while the Government’s position to recommendation 10.11 of the Stronger Super consultation (“CGT rollover relief ... should be permanently available to the [superannuation] industry”) was “do not support”, the Government had acknowledged in its response that it did “support, in principle, appropriate relief for superannuation funds which are required by APRA to merge in order to meet MySuper licence conditions”. The AIST believes that the loss relief should be extended until 30 June 2013 because that is the day before MySuper can be offered to new superannuation fund members for the first time, according to Reynolds. Reynolds also pointed out that if some members
were deprived of the tax benefits arising out of capital losses there would be a perception of unfairness – particularly given that the decision to merge often seems arbitrary. “We have previously noted that the cost to members of mergers proceeding without CGT relief may be in the magnitude of tens of millions of dollars,” Reynolds wrote. “In the investor climate of the past few weeks, we are obliged to stand by this observation, pointing to current market volatility as further evidence of this cost.” SR
Risk models must be reassessed SUPER funds and investors must change the way they measure investment risk, according to investment experts at the Fund Executive Association (FEAL) conference, where traditional risk models were branded as flawed. Managing director of risk analysis company CheckRisk, Nick Bullman, told the conference that traditional investment models measured risk as a flat line on a graph, when in reality risk behaved differently – clustering together in times of high volatility and feeding on itself. Investors should measure risk in ways that don’t rely on the standard valuations of risk, which are flawed in many cases, he said. Super funds and investors also need to start sequencing risk to understand how it changes over time, Bullman said. “It’s incredibly difficult to predict, but it’s something you can measure in terms of rate of change, and in terms of like a seismologist might – when SUPERREVIEW
tremors are starting, seeing pressure build in the system – which can give you [an edge] in terms of protecting your portfolio,” he said. “Maybe we just need a fresh approach, we’ve all been lulled into a false sense of security in terms of having positive real returns and positive relative returns – we now need to become risk managers on a daily basis,” Bullman said. Russell Investments’ Dianna Zentner – director, global manager oversight and due diligence – warned that one small risk that seemed manageable could spark a multitude of risks that could quickly become uncontrollable. “We see all the time the same kinds of risk that boil underneath the surface; little things that seem innocuous, but then all of sudden, there’s another risk, and then another risk and pretty soon it just explodes. Reputational risk, regulatory risk, all kinds of things happen at that stage,” she said. SR
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Trustee board structure needs new framework The controversy which has surrounded MTAA Super, combined with recent events elsewhere in the superannuation industry, suggest the use-by date applying to traditional trustee board structures may have expired.
he Australian superannuation industry should brace itself for increased scrutiny and calls for key changes to the way in which funds operate and are supervised. The controversy which continues to surround MTAA Super, and issues such as so-called “liquidity providers” within superannuation funds, have combined with the actions of the Australian Prudential Regulation Authority to turn a spotlight on the superannuation industry as a whole. Month by month, the media coverage which has attached to the MTAA Super saga has prompted a number of observers to suggest it is the superannuation industry’s equivalent to the
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collapse of Storm Financial – something which gave rise to a Parliamentary inquiry, and ultimately, the proposed Future of Financial Advice changes. The questions generated by the MTAA Super saga have grown in volume as a result of the Australian Prudential Regulation Authority’s reluctance to answer questions on the issue posed by Tasmanian Liberal Senator David Bushby during Senate Estimates more than a month ago. The questions pursued by Bushby were neither controversial nor particularly probing, yet the regulator chose to invoke the secrecy provisions of its parent act as part of its explanation for not providing an answer. All of this has provided grist to the mill of those who argue that the trustee structure which has become so central to the operation of superannuation funds in Australia has become both out-dated and inappropriate in an industry accounting for around $1.3 trillion in assets, and within which trustee boards
EDITORIAL Managing Editor – Mike Taylor Ph: (02) 9422 2712 Fax: (02) 9422 2822 email: email@example.com Features Editor – Milana Pokrajac Ph: (02) 9422 2080 Fax: (02) 9422 2822 email: firstname.lastname@example.org Reporter - Tim Stewart Ph: (02) 9422 2210 email: email@example.com Contributing Reporter – Damon Taylor email: firstname.lastname@example.org Ph: 0433 178 250
control billions of dollars worth of investments but are subject to less transparency than those of publicly-listed companies. When the Association of Superannuation Funds of Australia last month rightly celebrated the 20th anniversary of the superannuation guarantee, it paid homage to those who established a regime which provided Australia with an unparalleled compulsory retirement savings system which, in turn, provided a bulwark against the worst of the global financial crisis (GFC). As ASFA chief executive Pauline Vamos quite rightly pointed out, Australia’s superannuation savings played a significant role in providing the ballast which kept Australia afloat during the darkest days of the GFC. Sadly, amid all the celebration, no one attending ASFA’s Canberra celebration chose to dwell on the fact the trustee board structure that has served the superannuation industry so well over the past two decades
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has become outdated, and is badly in need of review and refurbishment. In particular, there is a need for the Government to recognise it should clear the opacity which surrounds trustee boards, and make them more answerable and responsive to the needs of members – many of which hold six figure balances. Putting aside the manner in which APRA has chosen to view superannuation fund television advertising in the context of the sole purpose test, the claim by Financial Planning Association chief executive Mark Rantall that MySuper balances should be quarantined from use for television advertising and sporting sponsorships does not seem unreasonable. Indeed, it would not seem unreasonable for members of superannuation funds to be given a voice on whether they support expenditure on television advertising and sporting sponsorships, as opposed to the delivery of better member communications or group insurance options. Viewed objectively, and in the context of the funds controlled by superannuation funds, the trustee structures which seemed so appropriate in the late 1980s and early 1990s can be perceived as anachronistic in a decade during which
governments and regulators have espoused and pursued the need for higher levels of corporate governance and accountability. Quite simply, trustee boards can make key decisions with respect to investments, mergers and acquisitions without direct and specific reference to their members and with only limited reference to the regulator. Moreover, the make-up of those trustee boards is not subject to member ballot. With the Government scheduled to push ahead with its Stronger Super legislation over coming months, there is much to keep the industry busy – but it would be wrong to assume that some of the more fundamental issues surrounding trustee board structures will go away. While ever there are suggestions the existing trustee board structure is being manipulated by industrial or political interests – or that it has become inappropriate to a financial services industry otherwise embarked on greater corporate transparency – then the superannuation industry cannot avoid the issue. At some point, it must embrace the need to refurbish the trustee board structure to bring it into line with the concepts of modern corporate governance. SR
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ESG Investing on the Rise details how almost half of Australian investors include a climate change statement in their investment management agreements, while 69 percent of investors are considering an allocation to climate change-related investments within the next three years. Australia’s forthcoming carbon tax will likely further these trends by heightening awareness of ESG investing.
BY GREG O’SULLIVAN round the world, sustainability is playing a greater role in financial services. In Australia, superannuation funds and other institutional investors are leading the way by increasingly incorporating environmental, social and governance (ESG) factors into their portfolios. As a result, investment managers in Australia and around the world must consider how ESG factors may impact the risk and return of their investments, while also facing added pressure to provide transparency into their ESG practices. Among the drivers that have brought sustainability into the spotlight are demographic trends as the world’s population continues its rapid growth, scarcity of natural resources and climate change — all catalysts that are altering how business is conducted globally. Furthermore, in the wake of the global financial crisis, the need for good corporate governance — a fundamental component of reputation and risk management — has never been greater. Investors in Australia and New Zealand are keenly aware of these trends. That awareness is prompting investors to instruct their advisors to integrate climate change in their advice more frequently, according to a recent Mercer report.1 The report
ESG’s Increasing Traction One of the appeals of corporate sustainability is that it is a long-term value creation strategy. When incorporated into a firm’s investment decisions, it should yield superior performance, provided the company is well governed and operates in an environmentally friendly and socially responsible manner. The United Nations Principles for Responsible Investment (UN PRI) have been providing a framework for investors to voluntarily incorporate ESG factors into their investment processes since they were enacted in 2006. The UN PRI counts the Australian Council of Superannuation Investors among their more than 800 organizational endorsers, representing 45 countries and over AU$18 trillion in assets. Moreover, asset owners and managers representing more than half of all Australian assets under management are now UN PRI signatories. In 2010, there was a 29 percent increase in Australian signatories to the UN PRI, notes the Responsible Investment Association Australasia’s most recent annual research report. The report also indicates that managed responsible investment portfolios rose 10 percent from AU$14.02 billion to AU$15.41 billion. Furthermore, according to ESG Research Australia, ESG research has become more rigorous in the past 12 months and more analysts are including ESG issues in their reporting. These trends have prompted investment managers to meet client needs with enhanced product and service offerings. State Street, for example, has developed a suite of ESG services for pension fund managers and institutional clients to help them assess ESG risks in their portfolios, implement a responsible investment strategy and fulfil UN PRI reporting requirements.
1 Mercer, “The Climate Change Report: The Impact of Climate Change on Strategic Asset Allocation,” June 2011. 2 SSgA“A Comprehensive Analysis of the Relationship between ESG and Investment Returns,” 2008.
Evidence Helps Make the Case Despite its momentum, more facts are needed before ESG can move further into the mainstream as a viable investment strategy. A 2008 study by State Street Global Advisors (SSgA) suggested that, although ESG ratings had variable predictive power overall, there is a forecasting ability in pockets of the universe. 2 In addition, in some instances predictive power actually tended to strengthen over time. This predictability implies that ESG-related matters have gradually become part of the investment landscape and that, in the future, they may increasingly become a source of alpha for investment purposes. It is important to note that a limitation of this study, and of most others that originated before 2008, is that it does not include any significant bear market periods. However, new research that examines ESG in bear markets outlines a number of supporting observations on the dimensions of return and risk. The research, also conducted by SSgA, shows that high-scoring ESG corporations generally suffered less during down markets, and that there is evidence of fat-tailed risk protection. Taking a New Approach The disconnect that many see between the short-term time horizons of traditional financial analysis and the long-term nature of the business impacts of ESG investing, is one of the challenges to overcome on the road toward a more sustainable economy. It is critical for super funds and investment managers alike to rethink their traditional investing models and to identify potential new sources of return and/or protection against risk — a point made even more salient by the passing of the carbon tax. The evidence suggests that the financial implications of sustainability issues are likely to grow significantly going forward. By working to align themselves with this movement now, super funds and investment managers may be better positioned for the future.
Based in Sydney, Greg O’Sullivan is vice president and head of Sales for State Street Global Services.
14 MEMBER COMMUNICATIONS
Information provides The global financial crisis prompted superannuation funds to refine their member communications and engagement and, as DAMON TAYLOR writes, the lessons learned are continuing to be applied. welve months ago, most super fund executives were talking about building upon the member communications momentum that had been generated during the global financial crisis (GFC). Of course, having achieved higher levels of member engagement, the challenge lies in ensuring that engagement doesn’t taper off. According to Damian Hill, chief executive officer for REST, most funds have been communicating effectively enough to avoid such a fate. “The key point here is that the engagement of members with their superannuation has stayed at a higher level,” he said. “The GFC saw member engagement grow very rapidly and peak as people took an interest, and while it did drop back somewhat post-GFC, it was to much higher levels of engagement than we’d seen previously. And I think that’s what you’re observing in the marketplace generally. “With that higher level of engagement, not only has there been a desire for super funds to keep communicating, there’s been a need as well. “Members have been demanding funds to communicate more with them and they’ve
been receiving more relevant information as a result.” Alternatively, Chris Jansen, acting director of Wealth Management Products for AMP, said while communications had certainly increased recently, he wasn’t convinced it had been on the back of the GFC. “We are, however, seeing very much more proactive communications, and if I use AMP as an example, we went to market a year or so ago with our Member Benefits Report to a number of our superannuation customers,” he said. “We’ve had great success with that and are continuing it. But I think that’s just one example of the communications that organisations are now providing through websites, through printed communications, and through their financial planning arms. Communications have become far more proactive than they were two or three years ago.” Wayne Sullivan, Executive Manager of Marketing at HOSTPLUS, said that increased member engagement had been one of the few positives to have come out of the GFC. “There’s no doubt that if there is a silver lining to a cloud like the GFC it is that fund members do start to pay more attention to their super
and the communications they receive and see from their super funds,” he said. “At HOSTPLUS, we have always placed a high priority on regular member and employer communications, so to an extent, we haven’t needed to markedly change our approach to the way we communicate. “At an industry level, though I think we have seen change in the volume, and I have to say, quality of fund communications,” Sullivan added.
“And that’s a function of the ongoing maturity of our industry, an increase in the number of funds employing specialists in communications roles and leveraging enhancements in technology,” he said. Indeed, it could prove fortuitous that member communications and member engagement has been maintained at higher levels if one considers the current state of the global economy.
The volatility seen in markets in recent years has concerned a number of investors, and according to Hill, it is not surprising that superannuants will have sought a degree of reassurance as well. “There’s no doubt that over the last week or so, we’ve seen a very small increase in our call centre volumes,” he said. “But then it’s also dropped back as the market was going up and down like a yo-yo. “That said, I don’t think any
MEMBER COMMUNICATIONS 15
calm in a crisis 2008 and 2009, I’m not certain that new level of engagement has completely disappeared in the interim,” he said. “So, I think members will have had a greater understanding of what has been happening over recent weeks. “One lesson the GFC delivered to us as a fund was that early, effective communication goes a long way in assisting members to place the increased volatility of markets into some context in terms of their long-term retirement savings,” Sullivan said. “We did take the opportunity to communicate with our membership, via email, in the days following the initial heightened market swings we saw in early August, and we provided specific information on our website to help members make some sense of it in terms of their super. “It is, after all, only natural
that members and their employers will be concerned, will be looking for reassurance and, in many cases, advice.” Yet while it is clear that members are far more willing to receive the messages that super funds have long wanted to deliver, the acknowledged challenge is ensuring those messages are at once compliant and easily understood, able to be delivered efficiently, and yet also personalised. On the topic of balancing personalisation and practicality, Hill said there was no escaping the need for compromise. “With any communications message – and it doesn’t need to be related to superannuation – the more relevant and personal you make it to the end audience, then the more likely it is to be accepted,” he said. “And that holds true whether it be in a classroom, in a mail out or by any other means of
conveying information. “It then becomes about how practical it is, and you do need to make compromises and put members into various cohorts,” Hill continued. “But our experience has been that the more effort we’ve put into segmenting our membership and then tailoring communications to that membership, the higher the readership and the higher the response rates have been to our calls to action. “There are certainly pay-offs for personalising communications, but when you’re dealing with a significant number of members, you’re unlikely to be able to get it down to a member by member basis – you’re going to have to make some compromises,” Hill said. For Jansen, personalisation comes down to the medium under which funds provide information to their members.
“Access via calculators, websites, that kind of information can be personalised relatively easily because the customer can put the information in themselves,” he said. “Or in some cases, the information can be pulled from the underlying product systems with which they’re interacting. “There will always be some documents in which personalisation may not be economical,” Jansen continued. “But there’s no doubt that taking a personalised approach as much as possible is likely to engage each customer far more. “Customer engagement is a huge component of successful superannuation; it’s about making the information available when and how they want it, and the best way to do that is to actually listen to your customer,” he said. Continued on page 16 ☞ Bravura Solutions Limited ABN: 15 111 148 826
of the communications coming out now are necessarily a different message from those that were prepared for the global financial crisis,” Hill added. “It’s still about volatility, it’s still about long-term investing, staying the course, and so on. “We put great effort last week into arming our call centre and field staff with more information about what was happening in the market, but what’s been particularly pleasing is that we’ve found ourselves better able to deal with this sort of peak than we might have been pre-GFC,” he said. Similarly, Sullivan said super fund members’ greater levels of engagement had meant that most would have understood the market events of recent weeks, and more importantly, would have understood how they should be reacting. “If members became more engaged with super during
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16 MEMBER COMMUNICATIONS
Information provides calm in a crisis Continued from page 15 ☞
Talking about the balancing act between making member communications both compliant and understandable, Sullivan said the guiding light had to be member perception. “As communicators, we want to deliver messages that are easy to understand, to the point, and clear,” he said. “And frankly, most compliance people I’ve worked with would fundamentally share those ideals. “Where the balancing act comes in, is around ensuring that information is complete and not misleading. The challenge is to ensure the really important messages stand out among the detail that needs to support them. “It is possible to talk to someone in simple, easily understood terms without being inaccurate or misleading – you just need to think of the member or employer first, and speak in language they would use and understand.”
BALANCING ACT The other balancing act, according to Hill, is getting the information out in a timely manner. “With this higher degree of engagement, and with a greater interconnectedness of people, actually getting the information out there quite quickly is important as well,” he said. “We’ve worked hard to make sure that our communications team and our compliance and investment teams have very good operating methods amongst them. “In fact, we’ve invested more resources, particularly in our investment team, to make sure they can get the information SUPERREVIEW
out there quickly, and the other teams know to respond,” Hill added. “In effect, we try to look at this from a member’s perspective and yes, it needs to be compliant, but it’s also got to fit in with the demand of members. “You can’t put anything out that’s not compliant, but you can’t also wait five days to finesse the words within an inch of their life,” he said. However, if getting the important messages out to members in a timely manner is an important factor in member communications, so too is backing those messages with advice. Enter, the relatively new development of intra-fund (or single-issue) advice. The ideal scenario, presumably, is that member communications in the form of a mail out or website visit provokes a question and prompts that member to seek intra-fund advice. Of course, the reality is that there have been a number of funds that have chosen not to add intra-fund to their service arsenal, and for Hill that is not surprising. “We provide single-issue advice, but I wouldn’t necessarily say that it qualifies as intra-fund advice according to the regulations,” he said. “We do it under the previous rules, where there’s the ‘know your client’ rule, and we give them a needs analysis as part of that.” “One of the issues has been that we were at the forefront of this development when we launched the pilot of this program back in 2004,” Hill continued. “And at that point, it was a market in which there were no solutions to this area of advice – you had traditional financial planning advice as
part of the wider financial planning industry, but it was largely focused on those people who were close to retirement, or very high-net-worth individuals. It’s not like there was always this simple advice solution.” Hill comments that at that time, intra-fund or single-issue advice simply didn’t exist and that in many respects, it was a market failure on the part of the superannuation industry. “I think what has happened over the last six or seven years is that more and more players have been dipping their toes in the water,” he said.
“They’re still finding that it’s a challenge to provide singleissue advice on a cost-effective basis, particularly in terms of members’ expectations of the reasonable cost of advice versus what they are, but there’s no doubt that they’re looking at it very seriously. “At REST, we continue to work hard at this as well and we’ve seen issued, I think, over 80,000 pieces of advice to our members over the years,” Hill said. Speaking to the flow of member communications through to advice specifically, Jansen said the most
important thing was giving members the information they were seeking in their preferred form. “It’s a really interesting question, because obviously all our customers have access to financial planners,” he said. “We certainly provide that access, and depending on the customers needs, sometimes they’ll seek a full advice model from a financial planner, sometimes they’ll seek general information from our call centres, and sometimes they won’t seek any information at all. Continued on page 18 ☞
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18 MEMBER COMMUNICATIONS
Information provides calm in a crisis Continued from page 16 ☞
“Nevertheless, we’ve got to provide the mediums so that they have access to all of those things,” Jansen continued. “It,s about finding a medium which is appropriate to the customer at that particular time, and one which provides them with the necessary information, be that via a website, via our financial planners, or via a general mail out.” Taking the members’ point of view, Sullivan said people often didn’t realise they were even asking for advice when they contacted their particular super fund. “‘What investment option would be best for me?’ seems like a pretty straightforward question to a lot of people, and one they would expect their fund could answer for them,” he said.
EDUCATION “So it’s important for funds to firstly educate members and encourage them to ask questions. Clearly, funds have a responsibility to at least provide them with the facts around those questions. And there is an opportunity for funds to provide an answer because generally members would expect that, even if it is only confirmation of the member’s own thoughts.” However, the elephant in the room when it comes to member communications is MySuper. As a superannuation option that caters to Australians who are not engaged with their super, it almost seems to fly in the face of the very thing that member communications is trying to achieve. SUPERREVIEW
“It is, after all, only natural that members and their employers will be concerned, will be looking for reassurance and, in many cases, advice.”
According to Sullivan, however, any communications impacts were likely to be minor. “HOSTPLUS’ current default option already largely mirrors the currently proposed MySuper architecture, so we don’t envisage the need to change our communication a great deal to comply,” he said. “We also believe that all members are potentially engage-able, and while we may alter our methods and channels of communication with our MySuper members, we’ll continue to treat those members as both valued and worthy of knowing of our extensive range of options and valueadding benefits.” Furthermore, Sullivan said that MySuper could even prove the trigger for increased member engagement. “It does sound a little defeatist to base a system around a product that almost encourages members to be disengaged or to avoid making a decision because they don’t know how,” he said. “The reality is that that’s an important group that is sometimes forgotten.
strategy, greater descriptions about risk – they could be useful,” Hill said. “And I would hope that MySuper puts more of a focus on what trustees are trying to deliver through each of their portfolios, rather than how they’ve gone against everyone else. “Most of us have a CPI of +3 per cent or +4 per cent target within our portfolios, but how much do we report against that target versus what the median fund has done?”
“MySuper could potentially have the opposite effect,” Sullivan pointed out. “It might be the trigger for some people to actually exercise their consumer power and not settle for the ‘entry level’ product or service.” “Trustees will still have a fiduciary obligation to help members maximise their retirement outcome, and to that extent, it will still be valid, perhaps more than before, to educate members about the best ways to do that.” Hill said there had been a lot of talk about the need to increase transparency and disclosure within MySuper, saying it would be interesting to watch how such a change affected member communications. “Broadly speaking, I think increasing the extent of disclosure is a good thing,” he said. “But I think the challenge will be to make sure that we not only add to the disclosure regime, but that we actually look at whether we should be removing some things as well. “Things like information about trustees’ insurance
According to Hill, with transparency and disclosure, as with member communications, the challenge is giving members the right information in the right fashion. “The challenge is getting that balance right,” he said. “How much disclosure versus how easily that’s understood. “Annual reports are a good example. With the annual reports for some corporates, the reality is that you get a fudge factor and most investors have now opted out of that sort of full disclosure. They are just not interested. “Superannuation disclosure can get much greater, but are we going to achieve the right balance of getting understandable and simple messages across rather than just the fudge factor?” Hill asked. So what next? With volatility rife within financial markets, uncertainty persists, but according to Hill, funds should be meeting that uncertainty with information. “We can’t say with certainty what’s going to happen but, regardless, we’re in the business of investing peoples’ retirement savings so we have
to make a call and have a strategy,” he said. “We have to explain that strategy and explain why we’re holding course. “Has the world actually changed that much in the last few weeks compared to what it was before?” he asked. “I’m not sure. The markets are certainly more skittish and volatile than they have been, but I’m not sure the world really has changed that much. “For most members, their long-term time horizon in the last two weeks has only reduced by exactly that – two weeks over 30 or 40 years – and that’s what they need to be reminded of,” Hill said. According to Sullivan, the global financial crisis has prepared both funds and members well for current market challenges. “So we will continue to educate members about the longterm nature of super and the fact that market volatility is a part of the journey,” he said. “That’s a message we were delivering before the GFC, when returns were consistently high, and it’s a message we have to continued to deliver. “As a whole, the industry has come a long way in terms of educating members about super, and though we will continue to see great initiatives to engage and educate, there is still a long way to go,” he said. Sullivan said at HOSTPLUS, the focus was simple. “We will continue to look for new, innovative, and effective ways to reach our members and employers, and build the connection and trust they have in our brand and ethos, so they will more readily want to engage with us about their super.” SR
Custodians of the future With markets again exhibiting volatility reminiscent of the global financial crisis, DAMON TAYLOR writes that superannuation trustees are expecting more from their custodians. n superannuation, there are a few key service areas where getting the basics right is paramount. In the wake of experiences through the global financial crisis (GFC), custody is at the forefront, and yet for Paul Cutts, Chair of the Australian Custodial Services Association (ACSA), core custody is simply a foundation for the broader array of services that a custodian can provide. “As custodians have moved up the value chain – and given their expanded capability I think there’s a general recognition that they have – there tends to be more focus these days on the value-added services,” he said. “Obviously, core custody processes can’t be overlooked because in terms of driving efficiencies and risk management, having very tight core custody processes in place is critical. They’re absolutely fundamental to the smooth running of a relationship but they’re only the starting point.” Cutts said what super funds were looking for in their custodians was an organisation that would be there for the long haul in terms of its commitment to the custody business. “They’re looking for very solid core custody processes and risk management frameworks, but most importantly, the ability above that to deliver value-added services,” he said. “For this market, in particular, when we talk about value-added services, we’re talking about the way that the service provider – a custodian – can bring greater transparency of the investment process to superannuation trustees. “That will be through the provision of performance reporting, for example, attribution analysis, the ability to help trustees monitor risk within the portfolios, and it will be shown in trustees being able to demonstrate compliance across their various investment managers
and at a total fund level,” Cutts said. Managing director and head of sales and client management for JP Morgan, Bryan Gray, believes that despite the super industry’s growing interest in how custodians could help them , the challenges of the past few years meant that trustees were looking for reassurance that those custody basics were in place. “There has definitely been a back to basics focus on security and the safety of assets,” Gray said. “It really came out of the financial crisis at a time when a number of banks around the world got themselves into a little bit of strife. “Pre-financial crisis, people were confident that their assets were safe and weren’t worried about how they were held. They were focused on what reporting and information their custodian could provide. “But post-financial crisis, people are suddenly a lot more concerned about the credit rating of the counter-party that we’re dealing with, and they want to be comfortable that their assets are actually being kept safe in various markets around the world.” According to Gray, the most important questions for trustees revolved around what would happen if certain banks around the world collapsed, how secure their assets were and how they would access them, and what would happens to their cash. “There’s been a lot of interest again just in terms of super funds’ understanding of what it means to have your assets custodially held, how they’re controlled, what risks might there be and those sorts of things,” he said. “We’ve had a lot of discussions just reassuring clients about how we operate, again reiterating strength of balance sheet, strength of credit rating and so on. “The reporting side, and the
additional services that a custodian can bring to its clients, are still critically important, but I think there’s been a little bit of a focus on making sure that the assets are safe,” Gray said.
NEW PRODUCTS Yet the reality is that services beyond what is traditionally thought of as core custody are often brought to the table as a direct result of that need for reassurance. Giving an insight into exactly that, Greg O’Sullivan, head of sales for State Street Global Services Australia, said that the majority of new services related to investment analytics. “What we’ve spent a lot of time doing is providing that lookthrough from an attribution standpoint down to the security level, whether that be equities or fixed income,” he said. “That’s a differentiator for us – there’s not too many providers out there who can provide that detailed look-through and attribution down to the security level of a portfolio, whether it be at the manager sector or asset class option, or even the fund as a whole. “Another product that we’ve
been in the process of rolling out recently is around a solution we’re calling entity exposure,” O’Sullivan said. “That really came on the back of the GFC where what funds wanted was to be able to assess what their exposure was to an entity at any given time.” However, O’Sullivan points out that he was not only talking about exposure from a direct holding standpoint, but from a collateral standpoint as well. “What we’ve developed is a product which enables a super fund to say ‘what was my exposure to Lehmann’s when it went under?’” he said. “They can ask ‘do I hold Lehmann bonds, do I have collateral with Lehmann, do I have stocks on loan to Lehmann?’ “To answer those questions, we’re able to provide that complete look-through at any instant to assess what the fund’s risks were, are, or could be,” O’Sullivan said. Of course, one of the interesting sidenotes related to custody services is a recent trend within the super industry for funds to employ their own
in-house investment teams. Naturally, those funds embarking on direct investment could not do so without the information provided by custodians, but according to Gray, the key point is that custodians are enabling the trend rather than driving it. “Custodians are certainly enabling it, but I think what’s driving it is the merger and consolidation activity that’s been occurring in the marketplace,” he said. “Funds, as they’ve become larger, have started to see that it makes sense for them to build up their own in-house investment expertise, to hire investment professionals out of the market. “It is particularly apparent at the larger end of town where they have been building up those inhouse investment teams. The obvious requirement they have is the delivery of data and delivery of information. So they look to the custodian to say ‘how can you make this information available to us?’ “They really view the custodians as the data repository and a means of feeding data to them so that they can then enrich with
other things they might do internally,” Gray said. Sharing Gray’s sentiment, O’Sullivan says it is the custodian’s job to evolve with the demands of the client. “When clients want to be able to run investment decisions in-house, we want to be able to support them in achieving that objective,” he said. “That support extends even to functions like middle-office, where we want to be able to support their investment decision processes by helping them with things like trade matching, in addition to the back-office custody and administration functions that are standard. “The idea is that we’re sitting down with our clients, working out where they want to go, what strategies they’re looking to employ, and then looking at our toolkit to see how we can support and enable them,” O’Sullivan said. “I firmly believe that your custodian shouldn’t be an inhibitor to anything a fund wants to do, and that’s fundamentally why we need to be developing more products and talking to our clients about the services they need,” he said.
and the question is whether or not Australian super funds are best served by a local custodian, or by one with a broader global base. Commenting on how individual players’ entries and exits had shaped the Australian custody market, Cutts said that firstly there had been a real shift in
terms of investment trends in recent years. “That’s been in terms of more overseas investments on account of the Australian market being limited or finite,” he said. “The Australian superannuation market is growing, so there’s been a need to diversify globally,
and I guess that, to an extent, plays towards the capabilities of the global provider,” Cutts said. “At the same time, there’s been diversification in terms of asset classes as well,” Cutts continued. “There’s been an increased use of alternative asset classes such as private equity, the more frequent
use of derivative instruments to gain certain exposures, and these are all requiring a broader capability from a custodian or fund administration point of view. “But those two investment trends are the key drivers here,” he said. Continued on page 22 ☞
INTERNAL INVESTMENT The trend developing towards internal investment teams is just one part of broader change occurring within the super industry. Gray believes it is likely to be a result of consolidation, because as funds grow larger, direct investment and in-house expertise makes more sense. Yet consolidation has also occurred within Australia’s custody market, SEPTEMBER 2011 * SUPERREVIEW
Custodians of the future Continued from page 21 ☞
In terms of business models, Cutts said both locally-based players and global players were sustainable in the Australian market, as long as they had good overseas networks and their core businesses remained integral to the strategy of the parent organisation. “Whether it’s a global bank or a local bank, a client or a prospective client needs to be convinced that custody is a core business,” he said. “They need to know that its going to be there for the longterm. That’s because this is a scalable business which requires constant investment in terms of technology, and any client is going to want to be reassured that that’s going to continue,” Cutts said.
AUSTRALIAN OWNED O’Sullivan said global players in the custody market had grown dominant, because they had been able to push the benefits of a ‘follow the sun’ model when it came to working with on-shore and offshore managers and supporting onshore and offshore investment strategies. “We really only have one Australian-owned custodian these days, and I think there are good reasons for why we’ve seen that diminish,” he said. “If you think about the fact that custodians were typically born out of the local banks and then look at a company like State Street, 80 per cent of our revenues are derived from the investment servicing business, that sort of core custody business. “Now if you look at some of the other players – they are retail banks and their focus is not the institutional market. While they’ve certainly got resources dedicated towards it, it’s not a big piece of their overall business,” O’Sullivan said. “So I think we’ve just seen organisations make the same decisions that State Street, and others have, where we want to focus on what we do best – we want to focus on our core capability and our core business.” “And frankly, for a lot of the Australian banks that are no SUPERREVIEW
longer custodians, I think that’s because they’ve decided to focus on their core business, which is retail banking and wealth management, and not custody.” Yet what may fly in the face of suggestions that the Australian custody market is rapidly progressing towards having only global players is the fact that the one remaining local custodian continues to win tenders, and continues to service a number of the industry’s more significant funds. In the past, the reasons cited for that relative success have been an intimacy with the local market and a unique knowledge of the Australian taxation environment, but for Gray it is simply marketing. “Clearly, to be able to support an Australian client base, you do need to understand the nuances and intricacies of the Australian environment,” he said. “It would always be difficult, after all, to support an Australian client base if you were only doing it from a location outside of Australia. “You need to have people on the ground, you need to have a connection to what’s going on in the marketplace to be able to support that, but if that’s all you’ve got, if you’re restricted in accessing scale benefits, then it becomes a little difficult to generate the return that you might need in the business,” Gray said. “Furthermore, I think the one provider in the marketplace that is doing that would say it would be very difficult for them to do if they weren’t teamed up with a global partner who could bring those capabilities.
“I don’t doubt that you need to have people on the ground and you need to understand the local marketplace, but I also don’t think there’s any doubt that the global players who have been here for any length of time have demonstrated that they can do both,” he said.
But regardless of whether a custodian is locally or globally based, it is clear that the Australian superannuation marketplace in which they operate is set to change significantly. With SuperStream and MySuper, the change for super funds themselves is obvious and yet, in custody, it seems that impact is less apparent. Cutts says he expects the impact would be both direct and indirect. “The indirect impacts are going to relate to the increased regulatory oversight of superannuation funds whose trustees and executives will require a different approach from their service providers,” he said. “And that will be in terms of support and information, data frequency and so on. “Overall, we’ll see a higher standard of governance across the industry and custodians will need to support that.”
PERFORMANCE Cutts said the direct impacts were likely to relate to the implications of MySuper. “So if, for example, let’s take a well known industry fund in the market. Whether through choice or default, it’s likely that there will be an asset pool assigned to MySuper that, from an accounting perspective, will need to be supported by a separate book and record,” Cutts said. “That’s a change that the custodian will undertake. But then when trustees are overseeing MySuper within that fund, they’re going to be looking for transparency as well,” Cutts continued. “They’ll want the ability to look at the performance of that relative to other investment choices, the differences in fee structures, or maybe the trustee is going to want to look at performance postand pre-expenses. “So to me, these are practical things that the custodian can, or will need to be able to, help with.” Alternatively, Gray said the impact on custodians would largely be driven by industry consolidation. “We’ve already had three of our clients undergo pretty significant merger and tender activity and that has a direct impact on us as a provider,” he said. “As a custodian, we need to make sure that we support them through that transition, because they’re pretty complex mergers where you’re bringing together two sizable funds with an even broader array of investments.” “You could, perhaps, call that a secondary or indirect impact, in so much as we’re not directly
impacted by SuperStream, for instance,” Gray said. “We are, however, somewhat impacted by MySuper in the sense that what our clients are going to be looking for is cost efficiency. “But that’s really going to come through economies of scale, and we are under no illusion that as our clients merge and grow they will be looking for services to be provided to them cheaper than they were before.” According to Gray, such a reaction on the part of super funds just plays back to the scale argument. “If that’s the way your clients are driving their business, then they’re going to be looking to you to just continue to deliver more services to them at a cheaper price,” he said. “The only way you’re going to be able to do that is if you can build and leverage your scale globally.” So with an eye to the future, and to how custodians could best support their super fund clients in what continued to be a rapidly changing superannuation environment, Cutts says the key themes remained unchanged. “The main themes continue to be risk management and driving efficiency,” he said. “The end-to-end custodian process from core to valueadding services, fund accounting, fund administration is a highly complex process in any market, but especially in the Australian market, given its taxation and regulatory reporting requirements. “Custodians need to be prepared to continually redefine those processes, to make sure that they’re at good levels of automation and control,” Cutts added. “No matter where you go, there’s always an opportunity to strive to get to a better position, and that will continue to be the challenge for custodians. If you’re making your shop more efficient, it helps the client, but it also helps with the scalability of your own business by making it more resilient into the future.” SR
Russell bolsters risk Former Aria risk chief Dr Thomas Gillespie employed to bolster Russell investments risk advisory team.
Super Review’s monthly diary of superannuation industry events around Australia and abroad.
SEPTEMBER VICTORIA 2 – FSC Deloitte Lunch. The Future Direction of the Australian Financial Services Industry. Speaker: Jeremy Duffield, Former Chairman and Managing Founder, Vanguard Investments Australia. Venue: Park Hyatt Melbourne. 1 Parliament Square, Off Parliament Place, Melbourne.
WESTERN AUSTRALIA 23 – ASFA Luncheon. Corporate governance regulations: what’s to come? Speaker: Charles Kamwi, Manager - Legal & Strategy, Maysen & Borowski. Venue: Pan Pacific Hotel, 207 Adelaide Terrace, Perth. Enquiries: ASFA Events Department. Ph: (02) 9264 9300 or 1800 812 798.
SOUTH AUSTRALIA 29 – FINSIA Seminar. SMSFs – Strategies For Implementing Stronger Super Reforms. Venue: Stamford Plaza Adelaide, Crystal Room, 150 North Terrace, Adelaide.
HONG KONG 27 – Asia-Pacific 2011 Pensions Forum. Venue: Island Shangri-La. Pacific Place, Supreme Court Road, Central, Hong Kong.
Fax details of conferences, seminars and courses to Super Review on (02) 9422 2822
lobal financial services firm Russell Investments has appointed Dr Thomas Gillespie as director, risk advisory. Dr Gillespie will be based in Russell’s Sydney office, working with existing and new clients to establish and implement industry best practice
MERCER has appointed Cara Williams as the global head of its wealth management consulting service. Williams, who will continue to be based in London, has been the global chief operating officer within Mercer’s investment consulting business for the past six years. Her responsibilities included managing the day-to-day operations, budgets and business strategy. Prior to joining Mercer, Williams worked in business development and client management roles at Merrill Lynch and CDC Investment Management Corp. The new appointment follows significant client expansion and business growth in Australia. “The appointment of Cara Williams and recent client growth has allowed Mercer to consolidate our presence as an adviser to the wealth management industry and to provide varied and comprehensive solutions for a broad range of clients,” said Brian Long, Mercer’s head of wealth management consulting in Australia and New Zealand. CERTITUDE Global Investments has created a new position within its senior ranks, with former Mercer executive Gary Burke to head investments. Burke previously headed Mercer’s investment management business in Australia and New Zealand, where he
risk management. Dr Gillespie brings over 20 years experience in risk strategy, and joins Russell from the Australian Reward Investment Alliance (ARIA), where his most recent role was head of risk. He has also held senior positions at Citigroup and JB Were. SR
was responsible for $18 billion in assets. Burke’s move to Certitude follows the company’s exclusive partnership with fund manager Threadneedle Investments. In his new role, he will help interpret investment information from Threadneedle, Marshall Wace GaveKal, and Lighthouse Investments Partners, to assist Certitude’s client base. Burke has 25 years experience in the financial services industry, having performed senior roles for Rothschild, Deutsche Funds Management and Zurich Scudder. Certitude has also appointed investment advisor Chris Condon to its investment committee, who will take on a non-executive role. Condon is the principal of advisory firm Chris Condon Financial Services, and was previously chief investment officer at MLC Investment Management. AUSTRALIAN Securities and Investments Commission
(ASIC) commissioner Shane Tregillis has been appointed chief ombudsman of Financial Ombudsman Services (FOS). Tregillis rejoined ASIC in May 2010 after eight years with the Monetary Authority of Singapore, where he was a deputy managing director. Tregillis will take up the Melbourne-based role this September, when he leaves his current position later this month. ASIC chairman Greg Medcraft applauded Tregillis’ role as commissioner.
“Shane worked on some of ASIC’s most important projects through their most crucial times, including supervision of the ASX following the successful transition to ASIC in August 2010,” said Medcraft. “He will make a superb Chief Ombudsman at FOS.” ASIC deputy chairman Belinda Gibson will assume Tregillis’ responsibilities. SR SEPTEMBER 2011 * SUPERREVIEW
THE OTHER SIDE OF SUPERANNUATION
Streets apart THERE are some people in the superannuation industry who could best be described as both characters and institutions. They could even be described as characters working for institutions. One such, is soon to be erstwhile Mercer man, Russell Mason. By Rollover’s estimate, Mason has been working the superannuation industry for Mercer for the best part of two decades, so it must have come as a considerable surprise when it was announced that the inveterate golfer and man about town was moving jobs to Deloitte. The moment Rollover heard of Mason’s impending move he checked his GPS to determine
the distance between the Mercer offices in the Sydney CBD and those of Deloitte. Thankfully, they proved to be at least a small distance apart and in different streets. Rollover checked his GPS because the last time he had cause to write about a Mason move it involved moving house. It transpired that the great man – after an exhaustive search of all the available Sydney real estate – chose to move two doors up from his existing home. Rollover hears that it is change all ‘round in the Mason household, with his wife Ros having recently migrated from QBE to Suncorp. SR
Who’s your daddy?
A rose by any other name AS Shakespeare wrote – What’s in a name? Well Rollover reckons that while there might not be a whole lot in a name, there can be an awful lot in the descriptor attaching to that name. Thus, he notes that significant sections of the financial planning industry have taken to describing Industry Fund Services as “a vertically integrated financial services conglomerate”. So far as Rollover can tell, the continued use of that descriptor by the financial planning industry is aimed at reminding SUPERREVIEW
the Government that, broken down into its component parts, Industry Fund Services does not look seriously different to the Commonwealth Bank – comprising of a bank, a funds management arm, superannuation funds, insurance products and financial planning. While Rollover has not had the opportunity to actually compare the pair, he suspects remuneration levels will prove to be the key differentiator between the Commonwealth Bank and IFS – at least at CEO level, if not where funds management is concerned. SR
WHILST he may have been there when the original superannuation guarantee(SG) legislation passed the House of Representatives, pressure of work precluded Rollover from attending the Association of Superannuation Funds of Australia(ASFA) celebration of the 20th anniversary of the event. All these many years later, Rollover still vividly remembers the passage of the legislation, and the warnings of the doomsayers that it would end up sending small to medium-sized enterprises broke. Like any important policy victory, the delivery of the SG has ultimately ended up having a thousand fathers, and a good many of those were apparently in attendance at the ASFA beano at Parliament House. However, as far as Rollover is concerned, the SG has only two real fathers – former ACTU head, Bill Kelty, and former Treasurer and later Prime Minister, Paul Keating. Rollover notes that if a search was conducted of media reports at the time the SG was passed, at least one person attending the Canberra celebrations would have been identified as one of the bigger nay-sayers. Time, it seems, can cure many things. SR
Bust a move ROLLOVER likes to watch the “hatches, matches and dispatches” in the superannuation industry to determine who is going where and why. With that in mind, he notes a number of recent advertisements suggesting some changes to the executive structures of a number of superannuation funds, both corporate and industry. Rollover understands that one of the higher profile job vacancies concerns the “flying kangaroo” while those that have accompanied the departure of Michael Delaney from MTAA Super have been made more than public. SR
Got a funny story? about people in the superannuation industry? Send it to Super Review and you could be raising a glass or two. Super Review is giving away a bottle of bubbly for the funniest story published in our next issue. Email email@example.com or send a fax to (02) 9422 2822.
Published on Sep 22, 2011
Published on Sep 22, 2011
Super Review is the leading independent journal for the superannuation and institutional funds management industry in Australia.