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 MARCH 2012
Volume 26 - Issue 2
Long delays on improved APRA data 3 DEFAULT FUNDS
Productivity Commission queries role of industrial judiciary
MIKE TAYLOR reports that a series of decisions taken by APRA since 2009 means the industry is unlikely to see the results of upgraded superannuation data collection before 2015.
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Actuaries call for super fund health checks
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“We actually started the consultation process on the new collection in 2009, and then the Government announced the inquiry. We put it on hold,” Jones said. He said that, as well, APRA had concluded – following discussions with the industry – that to have proceeded with the consultation process around statistical collections at the same time as other standards were being implemented would have left them overloaded. In answer to a question from Tasmanian Liberal Senator David Bushby, Jones admitted APRA’s decisions with respect to statistical collections had delayed the process by “a couple of years”. He also acknowledged it would now take a number of years before the new regime was introduced. “Given that now we are having consultation in the second half of 2012, we would still hope that we could begin the collection on 1 July 2013,” Jones told the Senate Committee. “But that is starting to look tight.” The APRA deputy chairman said much would depend on the way the consultation process evolved, but in any event, the regulator focused on the long-term rather than
he processes of the Cooper Review, followed by the Government’s Stronger Super changes, saw the Australian Prudential Regulation Authority (APRA) place its upgrading of superannuation statistical collections virtually ‘on hold’ from 2009. Further, the regulator appears unlikely to deliver on its upgraded superannuation data collection until around 2015. That is the bottom line of evidence delivered to Senate Estimates, with APRA deputy chairman Ross Jones confirming that the existing regime – which has been the subject of some industry criticism – is likely to remain in place for at least another two or three years. In doing so, Jones acknowledged that consultation with the industry on the collection of more comprehensive data, as requested by former Financial Services minister, Senator Nick Sherry, had been placed on hold since 2009. “… what happened was that we started the consultation process, and then the terms of reference for the Cooper inquiry included statistics – so we put that on hold until we got the Government response,” he told Senate Estimates. 3
“We will continue to publish returns at the fund level because the fund level statistic is the measure of the trustee performance.” - Ross Jones
quarterly statistics, and he would prefer APRA had a couple of years’ worth of statistics. He agreed with Senator Bushby that on such a basis it was likely to be 2015 before the industry saw the new regime. Jones said that in the meantime, APRA would continue its existing statistical regime based on publishing returns at the fund level, and this might even continue after the new data collection regime was put in place. “We will continue to publish returns at the fund level because the fund level statistic is the measure of the trustee performance, and that is what APRA’s focus is, because we are looking at the behaviour of the trustees,” he said. “In terms of the investment option information, that information certainly would be far more relevant to individual members,” Jones said. SR 27 ROLLOVER
2 PAGE TWO
COMPANY INDEX Received by Vanguard Investments CommInsure MLC MasterKey Business Super NAB Asset Servicing
Type of mandate Custody Insurance Corporate super Custody
Issued by MLC Retirement Benefits Fund Swick Mining Services/Atlas New Zealand Guardian
Amount n/a n/a $10 million n/a
Productivity Commission questions role of industrial judiciary By Mike Taylor THE Productivity Commission (PC) has signalled it will be examining whether the industrial judiciary in the form of Fair Work Australia should remain integral to the selection of default funds under modern awards. The question surrounding the role of the industrial judiciary has emerged in an issues paper released by the PC which also makes clear just how deeply the commission will be delving into the competition and transparency issues surrounding the selection of default funds under
modern awards. The issues paper also makes clear the degree to which the future of default funds under modern awards is directly linked to the implementation of the Government’s Stronger Super policy, particularly MySuper. On the question of the current selection process for default funds under modern awards, the PC paper asks three key questions: Is the process transparent? Is it competitive? Is there a level playing field between industry and retail funds? Is there a level playing field between domestic and international funds, and
should there be? “If not, what are the barriers to transparency and contestability? What are the effects of these barriers on member outcomes?” the PC paper asks. The document also raises the key issue of whether industrial judiciary in the form of Fair Work Australia should be a part of the process of selecting default funds. “Is there a case for an organisation other than FWA [Fair Work Australia] to assess the eligibility of funds against any selection criteria?” the paper asks. “What should be the role of the industrial par-
ties to the awards? What should be the role of FWA?” Commenting on the release of the position paper, the Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds said the questions raised by the PC highlighted the complex issues that needed to be considered. She said this included the question as to whether additional criteria were required over and above those for new MySuper funds. Reynolds said AIST expected to be an active participant in the inquiry and would argue strong-
Let younger members boost their super, says CEPU By Tim Stewart THE $25,000 contribution cap for workers under 50 is preventing younger ‘fly-infly-out’ workers from boosting their superannuation when they have the chance, argues the Communications, Electrical and Plumbing Union (CEPU). CEPU national secretary Peter Tighe said some of his members had ‘fly-infly-out’ jobs on major projects that paid very well, but “they are the sort of jobs that don’t necessarily last”. However, workers who are under 50 will be penalised with a tax rate of 31.5 per cent if they put more than $25,000 into super over a financial year, Tighe said.
“These are workers who could be boosting the superannuation system, and supporting the national infrastructure that industry super funds, in particular, specialise in,” he said. Many CEPU members are keen to support the superannuation system over “less productive investments like property”, and the Government should be doing everything it can to help them, Tighe said. “Superannuation Minister Bill Shorten should look at lifting the cap as soon as possible, because every Aussie worker who is able to plough extra money into super during their working life is one less burden on the tax system in their retirement,” he said. SR
Aussies unhappy with levels of super By Benjamin Levy NEARLY half of Australian households are unhappy with the current level of their longterm investments including super, according to a startling financial health survey released by ME Bank. The survey, released at the Australian Institute of Superannuation Trustees lunch in Melbourne, has painted a dire picture of household confidence in superannuation performance. Twenty-four per cent of all
Australian households were very uncomfortable with their level of investments, while a further 20 per cent were somewhat uncomfortable. Approximately one in five
people thought they would have a very uncomfortable retirement, according to the survey. The level of confidence in super greatly increases once superannuation hits levels of $200,000 or more, according to the survey. Forty-six per cent of households were also very uncomfortable or somewhat uncomfortable with their household’s levels of cash savings, while one in four thought they couldn’t withstand a financial emergency.
More than half of all respondents were spending all or more than their income every month. ME Bank chief executive Jamie McPhee urged the banking sector to resist playing on Australians’ overly optimistic assessment of their finances to feed them more debt. Nearly 17 per cent of all respondents were overly optimistic about their finances. ME Bank surveyed more than 1500 households. It was conducted in October last year. SR
ly that default fund selection was a matter for workers and employers to decide through the industrial award process. SR
Include self-insured arrangements in GST changes, says ASFA THE Association of Superannuation Funds of Australia (ASFA) has called on the Government to include superannuation funds with self-insured arrangements in its amendments to the GST legislation. In a submission regarding the GST Financial Supply Provisions exposure draft, ASFA welcomed the Government’s proposal to allow reduced input tax credits (RITCs) to be claimed in relation to costs associated with the processing and assessing of insurance claims. However, ASFA argued that for the “spirit of the change to be effectively enacted”, superannuation funds with self-insured arrangements should not be excluded. When it came to the treatment of trustee and responsible entity services under the proposed GST arrangement, ASFA said that “some entities [will] gain and some [will] lose”. “Overall ASFA supports the final decision to address the issue by reducing the RITC rate attributable to the acquisition by a recognised trust scheme of services from a trustee,” said the ASFA submission. However, ASFA argued that the implementation date for the changes should be delayed from 1 July 2012 to 1 January 2013. “The reduction in the RITC rate for acquisitions of non-excluded services by a trustee will have a direct impact on the pricing of units in a unitised trust,” ASFA said. If the GST changes are implemented by 1 July 2012, trustees could be “exposed to claims of unit pricing errors”, said ASFA. SR MARCH 2012 * SUPERREVIEW
Global insto sentiment falls
By Milana Pokrajac INSTITUTIONAL investors continued the pattern established late last year of reducing allocations to equities, with the sentiment falling by six percentage points in February.
This is according to State Street’s Investor Confidence Index, which measures investor confidence or risk appetite quantitatively by analysing the actual buying and selling patterns of institutional investors. The decline was most pronounced among North American investors, whose confidence fell 9.5 points to 80.5, according to Harvard University professor Kenneth Froot, who developed the index with Paul O’Connell of State Street Associates. “Across the regions there was a significant divergence this month,” said O’Connell. “The latest round of policy developments in Europe went some way towards lowering the risk of a catastrophic ‘tail event’ crisis, and this improved the mood of European investors.” Asian investors held their outlook constant, though O’Connell did note that net purchases of Pacific (exJapan) equities by all global investors were relatively robust. SR
Super assets still growing AUSTRALIA’s superannuation assets resumed their growth on the back of improving markets in the year to 30 June 2011, according to the latest data released by the Australian Prudential Regulation Authority (APRA). The data revealed total superannuation assets increased by 11.5 per cent for the period to $1.34 trillion. It said that, of this, $810.6 billion were held in APRA-regulated superannuation entities and $407.6 billion were held in self-managed superannuation funds (SMSFs).
It said the remaining $117 billion was comprised of exempt public sector superannuation schemes ($80.9 billion) and the balance of life office statutory funds ($36.1 billion). The APRA data again confirmed that SMSFs continued to dominate as a proportion of total assets, with small funds accounting for 31 per cent of total assets, while retail funds accounted for 28 per cent and industry funds held 19 per cent. The data also confirmed that small funds held the largest average account balance of $484,243, while corporate fund members held an av-
erage of $98,493, followed by public sector funds with an average account balance of $62,456. The data revealed that the average balance in a retail fund was $24,546, while that of an industry fund was $21,895. SR
Intsos going direct on alternatives INSTITUTIONAL investors are investing directly in alternatives rather than going through fund of funds managers, according to Towers Watson. Towers Watson global head of investment research Craig Baker said the changing approach to alternative investments (such as hedge funds, private equity and direct real estate) reflected a “focus on better fee structures and greater transparency”. He added that the direct alternatives managers selected by Towers Watson over the years had “shown their ability to adapt to the changing environment and generate good net-of-fees performances”. The clients of Towers Watson made 800 manager selection decisions in 2011, which reflected around US$80 billion of assets moved – up 40 per cent from 2010. Bond mandate selections accounted for US$21 billion, with the allocation to US bonds almost doubling SUPERREVIEW
from 2010. Equities mandates accounted for US$24 billion in 2011, with global equities accounting for a third of all equity mandate selections. “These figures confirm an established trend of investors investing away from local markets, as they seek to diversify their portfolios more globally,” said Baker. There was also an increase in passive investments in 2011, with Towers Watson clients investing over US$16 billion in the asset class – up 60 per cent from 2010. “Indexation and smart beta are playing increasingly important roles in investors’ portfolios as many new innovations provide efficient access to markets at lower cost,” said Baker. Passive investors can now choose from among a range of options – including insurance and emerging market currency – with the expectation of better risk-adjusted returns, he added. SR
MLC wins two corporate super mandates By Tim Stewart MLC MasterKey Business Superhas won the right to provide corporate superannuation services to two Western Australian mining companies. The two new mandates with drilling contractor Swick Mining Services and iron ore producer Atlas are worth over $10 million in combined funds under management. MLC MasterKey Business Super general manager Michael Mulholland said the combined resources of MLC and NAB Wealth meant the fund could put together “competitive deals that are catered to each company’s needs and wants”. He added that MLC MasterKey offered insurance benefits, financial education, a rewards pro-
gram and a medical service for members under 65 who hold income protection insurance. “MLC MasterKey Business Super is the superannuation plan for employers who view their corporate super plan as more than just a compliance exercise, but instead as a real benefit for their employees,” Mulholland said. SR
MLC changes Aussie share strategies MLC has temporarily added a passive allocation to its Australian shares strategies within its Horizon Series, which will see Vanguard Investments manage the mandate. Vanguard has replaced Concord Capital, which has been removed from the strategies. The move came as MLC opted for more diversification, according to Peter Summer, MLC Investment Management portfolio manager of Australian equities. “When we see evidence of greater diversity in manager positioning, and genuine diversity of insight, we are highly likely to replace Vanguard with an active manager,” Summer said. “In the current market environment, MLC considers it prudent to add a passive allocation to its Australian shares strategies,” he added. However, while the passive allocation is likely to be a temporary appointment for MLC’s Australian Share Fund, the introduction of a passive manager is likely to be a more permanent feature in the MLC Horizon series of portfolios and MLC Long-Term Absolute Return Portfolio. SR
Don’t limit lifecycle products to age By Tim Stewart DIMENSIONAL has praised the Government for allowing lifecycle options within MySuper products, but warned against limiting them solely to age at retirement. In a submission to the Parliamentary Joint Commission into MySuper, fund manager Dimensional pointed to section 29TC(2) of the draft MySuper bill which outlines the ‘lifecycle exception’. The section states that lifecycle options can be based on age only, or “the age of members and other prescribed factors in prescribed circumstances”.
According to Dimensional, the “other prescribed factors” should include: member salary and contribution rates; personal retirement income objectives; desired retirement age; members’ personal investment experiences; and the age pension. Lifecycle products that only take age at retirement into account, or “target date funds”, are limited because they aggregate individuals’ assets according to one factor: their retirement date. “A simple lifecycle product based solely on the age of individual members ignores the fact that members still have individual goals in terms of
the level of income they will require at the end of their working lives,” the submission said. Dimensional argued that trustees should not be barred from seeking to personalise the investment process just because a member had selected the default option. “While our solution still supports the concept of ‘auto-pilot’ and minimal member engagement, it is designed to more clearly reflect each member’s retirement destination and makes adjustments to the ‘flight path’ when economic or member circumstances dictate,” the submission said. SR
QIC’s McTaggart headed for Suncorp Board Australian By Mike Taylor THE soon-to-retire chief executive of QIC, Doug McTaggart, has been appointed to the board of Suncorp. McTaggart’s appointment was announced along with that of Michael Cameron and the resignation from the board of director Paula Dwyer. Announcing the changes, Suncorp chairman Ziggy Switkowski said McTaggart and Cameron brought considerable financial markets and business experience to the company. He pointed out McTaggart’s background both with QIC and as Queensland under-treasurer, and Cameron’s role as the current managing director of GPT Group and his former roles at the Commonwealth Bank, NAB Wealth Management and MLC. Switkowski said Ms Dwyer was stepping down from the board to take up a directorship in the financial services industry. SR
Unity recruits Fiona Dunn Doug McTaggart
RBF teams up with CommInsure By Tim Stewart RETIREMENT Benefits Fund (RBF) has made another step towards its goal of becoming a registrable superannuation entity (RSE) with the announcement of a contract with CommInsure. CommInsure will underwrite death and incapacity insurance for the 62,000 members of RBF’s Tasmanian Accumulation Scheme. RBF chief executive Philip Mussared said the transition from selfSUPERREVIEW
insurance to external group insurance with CommInsure would “modernise” the fund’s offering. “An immediate advantage for members is that the diagnosis of a terminal illness will now be grounds for payment of insured death and permanent incapacity benefits,” Mussared said. The agreement with CommInsure is part of RBF’s “progressive transformation” to an RSE, he added. “RBF is currently an exempt public sector superannuation scheme and
is in the process of preparing an application for an RSE licence,” Mussared said. The fund moved its administration services over to Mercer in May 2011, and a managed IT services contract commenced in October 2011, he added. “Further significant changes are planned at RBF over the next 18 months,” said Mussared. RBF currently has $3.8 billion in funds under management and 77,000 members. SR
AUSTRALIAN Unity Investments (AUI) has appointed Fiona Dunn as general manager of the joint venture and institutional teams. In her new role, Dunn will have two direct reports: head of institutional Stephen Acorn, and head of joint ventures Kara Gilmartin – both of whom were appointed late last year. Dunn will report directly to AUI chief executive David Bryant. “Fiona has the commercial experience as well as the strategic background to make a significant contribution to our expanding institutional business and growing asset manager joint ventures,” Bryant said. He added that Dunn’s extensive senior management experience in funds management and financial services made her an “attractive recruit” to AUI. Dunn has 22 years experience in financial services, and was recently general manager of Perpetual’s wholesale business. She has also worked at Macquarie Bank, Credit Suisse Asset Management and Citibank. Most recently, she held a number of business advisory roles. Dunn will be based in Sydney. SR
Abrogation of responsibility led to default fund mess By Mike Taylor THE industrial relations judiciary abrogated its responsibility to create a fair and transparent system around default funds under modern awards, according to the Financial Services Council (FSC). In a submission filed with the Productivity Commission inquiry into default funds under modern awards, the FSC has argued that the industrial judiciary should not be a factor in how employers select default funds. The FSC said it was of the view that superannuation funds should “not be entangled in the Fair Work system” and accused the industrial judiciary of “abrogation of responsibility”, such that “funds under investigation by the APRA (Australian Prudential Regulation Authority) [are] being prescribed as default funds”. In a submission filed with the Productivity Commission this week, the
FSC has urged a competitively neutral regime for default funds under which employers would be permitted to select any APRA-regulated super fund as a default fund. It said that if this were permitted, “a designated Fair Work process would not be required, as an employer would be free to select any APRA-regulated fund”. “This approach has the benefit of removing conflicted industrial parties from selecting default superannuation funds which are approved without consideration by Fair Work Australia,” the
FSC submission said. The submission then goes on to recommend that the Fair Work Act be amended to eliminate the need to nominate particular superannuation funds by specifically stating, “a modern award must not include terms requiring employer contributions to be paid to named superannuation funds”. The FSC submission also suggests that all MySuper products should be capable of being utilised as default funds in awards approved by Fair Work Australia.
The FSC submission makes clear it believes that Fair Work Australia erred from the Government’s original intentions by becoming involved in the specific selection of superannuation funds. It pointed to a letter written by the former Minister for Superannuation and Corporate Law, Senator Nick Sherry, which requested that if Fair Work Australia prescribed default superannuation funds in modern awards, it should establish an appropriate process and criteria for selecting funds rather than doing so on an arbitrary or non-transparent basis. “The Commission chose not to heed the Minister’s request and instead prescribed superannuation funds into awards without adopting a process,” the submission said. “The consequence is that neither a process nor review mechanism for the selection of default superannuation funds in modern awards exists.” SR
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Shares drive retail master trusts ahead By Mike Taylor
STRONG domestic and international equity market returns saw retail master trusts outperform their industry fund counterparts in January, according to the latest data released by Chant West. The data showed that retail master trusts returned 2.9 per cent in January, outperforming industry funds
which returned 2.3 per cent. As well, the data showed that the outperformance of listed shares and property had seen the retail master trusts outperform the industry funds over the past three years – returning 8.4 per cent compared to 7.2 per cent for industry funds. Chant West principal Warren Chant said this was a result of listed markets re-
covering from the lows experienced during the global financial crisis (GFC). He pointed out, however, that industry funds held the advantage over the longer term, outperforming retail master trusts by 1.3 per cent a year over a 10-year period. Chant West this week reported that the median growth superannuation fund grew by 2.5 per cent in January –
enough to more than recoup the entire 1.9 per cent loss experienced over the 2011 calendar year. However, Chant warned that notwithstanding the 29 per cent growth recorded since listed markets bottomed in late February 2009, they still needed another 7 per cent before they returned to the highs recorded before the GFC. SR
Super to grow faster than personal investments By Milana Pokrajac THE superannuation market is expected to grow faster than the personal investment market over the next 15 years, according to a report released by Rice Warner. Rice Warner’s Personal Investments Market Projections Report 2012 revealed that the personal investments market, which includes assets held in banks, shares and investment properties, sat at $1.9 trillion
at 30 June 2012, compared with $1.3 trillion currently sitting in superannuation. However, the superannuation market will grow faster than personal investments over the next 15 years – 6.3 per cent per annum compared to 4.2 per cent per annum – mostly due to the significant compulsory component within that market driven by the superannuation guarantee. Despite the projected growth of the superannuation market, Rice Warner di-
rector Richard Weatherhead said personal investments would become increasingly important, with the wrap platform market to double in the next 15 years. He claimed that concessional contribution caps and other tax changes dampened the attractiveness of investing in superannuation. Importantly, investors will seek the flexibility of access to their savings. SR
Towers Watson boosts client consulting team By Tim Stewart TOWERS Watson has added two investment analysts to its Australian investment team. James Morris and Viduranga Weerasuria will both provide support to the client consulting teams. They join the eight other recruits to the Australian investment team last year.
Towers Watson Australia director of investment services Graeme Miller said the expansion of the team demonstrated Towers Watson’s “ongoing commitment” to provide its clients with “a significant competitive investment edge”. “James and Viduranga will be supporting our client con-
sulting team by carrying out quantitative analysis, assisting with research, and assisting
with the preparation of client reports,” Miller said. Towers Watson recently replaced Mercer as the asset consultant for AMP Capital’s range of multi-manager funds. The Towers Watson Investment business has more than 700 associates globally, as well as assets under advice of over US$2 trillion. SR
AustralianSuper appoints Beijing-based Asia strategist BIG industry fund AustralianSuper has appointed Stephen Joske to the role of senior manager, Asia. AustralianSuper is one of the first industry super funds to have an investment strategist “on the ground in Asia”, according to the fund’s chief investment officer Mark Delaney. Joske will be based in Beijing. “Over the last few years we have been steadily been growing our in-house investment expertise and are very pleased SUPERREVIEW
to have been able to appoint someone of Stephen Joske’s specialist expertise and experience in Asia to develop our investment strategy for the region,” Delaney said. Joske makes the move from The Economist Intelligence Unit, where he was director of the China Forecasting Unit. His role with The Economist involved “managing a team of expert economists and econometricians to provide advice to companies on the factors driving struc-
tural change within the Chinese economy”, according to AustralianSuper. Prior to his role at The Economist, Joske worked at the Australian Embassy in Beijing as the senior Australian Treasury representative to China. He has also represented the Australian Treasury at APEC and OECD meetings. Joske will begin his role with AustralianSuper on 22 February, and will report to Delaney. SR
Hope of positive outcomes in 2012 SUPERANNUATION funds rating agency SuperRatings has warned that the worst is far from over despite a strong January in which the median balanced fund returned 2.28 per cent. In an analysis issued with the January ratings, SuperRatings managing director Jeff Bresnahan said that with Europe still facing significant growth and debt issues, there was no doubt that markets, and therefore super fund performance, would continue to face headwinds for the rest of the year and experience continued volatility. However he said that while considerable downside risks remained, a recovery in sentiment and a greater focus on fundamentals was noticeable and had been building gradually. “While markets and super fund performance may not surge in 2012, it does provide encouragement that members may see their super account balances grow this year,” Bresnahan said. SR
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Actuaries call for super fund health checks By Freya Purnell SUPER funds should be subject to a “financial health check” to bring their governance into line with that of banks and insurance companies, according to the Actuaries Institute. Institute CEO Melinda Howes said periodically undergoing a financial strength assessment, fund sustainability modelling, a risk review and stress testing should be consid-
ered best practice for a public offer super fund. Risk management of this kind would become particularly important as baby boomers moved from the accumulation phase into drawdown. “Over the next 10 to 15 years, the tap of these constant contributions is going to start being turned off as people go into the retirement phase. So funds are going to have to be very conscious of that demographic shift
and how it will affect their cash flow,” Howes said. In response to this trend, there should be an increased focus on fund liquidity. “We have seen some issues around liquidity in super funds over the last few years. There are a lot of funds that have investment strategies with illiquid investments – in infrastructure, for example – so is that going to be sustainable going forward when more of the
MySuper trustee obligations lack clarity: Mallesons By Tim Stewart DESPITEa lack of clarity and some “nonsensical” wording, the Government looks set to push through its proposed MySuper trustee obligations largely unchanged. Mallesons Stephen Jaques partner John Edstein said the clarity of the second tranche of the Stronger Super legislation was “a long way short of the ambition”. In particular, he labelled as “nonsensical” the requirement in the exposure draft that insurance offered in MySuper products must “not inappropriately erode the retirement income of beneficiaries”. Mallesons senior associate Michael Mathieson was also critical of the proposed covenants in the exposure draft. He pointed out that trustees will have an additional covenant to “promote the financial interests of MySuper beneficiaries”. If ‘promote’ means ‘pursue’, then Mallesons wouldn't have a problem with the wording, Mathieson said. “But if it means to ‘advance’ their financial interests, then it may well be that in the end those interests are not advanced by what the trustee does, which would be a breach of the covenant,” he added. Exactly what constitutes the “financial interests of MySuper beneficiaries” was also unclear, said Mathieson. If it meant ‘best SUPERREVIEW
returns’, then that would be “even worse” from a trustee's point of view. “Net of what? Net of fees? Net of taxes? Or net of both? And over what time period? There’s no time period specified in the covenant,” Mathieson said. Creating a separate set of obligations for MySuper members (as opposed to Choice members) could create two different pools of members in the fund to whom the trustee owed different obligations, he said. “What if this covenant requires you to promote the financial interest of your MySuper beneficiaries at the expense of your Choice beneficiaries? That would be a stupid outcome, but it’s possible it could happen based on this wording,” Mathieson said. The Government should amend the legislation so that the same obligations applied to both pools, or “just get rid of it entirely”, he said. SR
fund has to be liquid to pay out benefits on retirement?” she asked. While Howes does not believe this type of assessment should be mandatory, she said the leading players were already doing this type of work and other funds could benefit. “Now that these funds are the size they are, we really have to get more sophisticated about how we manage the risks within them.” SR
Cooper urges Roundtable consideration of annuities THE former chair of the Federal Government’s Super System Review, Jeremy Cooper, hopes that the recently announced Superannuation Roundtable will yield a clear roadmap for the adoption of non-commutable deferred annuities to help retirees better manage longevity risk. Cooper, who is chairman of retirement income at Challenger, said the Roundtable would look specifically at post-retirement products, and “some of the blockages that are preventing these longevity products from being offered around the market”. Cooper said there were currently a number of problems with deferred annuities, which create an income stream for the retiree once they reach their median life expectancy, some years after retirement. Currently, even during the period when the retiree does not receive any funds from the annuity, they are deemed for tax and Centrelink purposes to be earning income on the product, and it is included under the Centrelink assets test. “So there are all sorts of technical issues with it that make it unworkable,” Cooper said.
“I would be hoping that the Roundtable could work through those issues and come up with a concrete proposal on it,” he added. Deferred annuities were originally taken out of the landscape because of concerns they were being used for tax minimisation purposes, according to Cooper, but these concerns only apply to commutable annuities. “The solution to that is they are just not commutable under any circumstances,” he said. Cooper said he would also welcome any ideas from the Roundtable about other drawdown products to assist retirees. SR
Dimensional bolsters fixed income team By Andrew Tsanadis GLOBAL asset manager Dimensional Fund Advisors has expanded its fixed income presence with the appointment of Damien Koch as a portfolio manager in its Sydney investment team. Koch joins Dimensional after a 10-year period spent researching, building and im-
plementing quantitative models and in managing fixed interest strategies at Suncorp Management. Before that, he worked in government and economic consultancy roles. In his new role, he will be leading a team of eight, and will be the firm’s second local fixed income specialist alongside Dimensional Australia
portfolio manager and vice president Steve Garth. With a quarter of the firm’s global assets under management in fixed income, Koch will help to increase this allocation through his extensive skills and experience in research, design and implementation, Dimensional Australia chief executive officer Glenn Crane said. SR
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HIP adds medical advice offering to member services By Andrew Tsanadis HEALTH Industry Plan (HIP) has announced a partnership with a global network of medical specialists that will provide members with access to medical information and advice. Offered through MLC Group Insurance, Best Doctors will now offer HIP members access to a global data-
base of expert consultants, providing them with an in-depth assessment and full clinical report. The support service currently has a network of 50,000 leading medical specialists, Best Doctors’ website stated. HIP’s service is available to all members at no additional cost, and is not confined to life-threatening events, but also day-to-day medical needs. It offers
“peace of mind” by providing members with the confidence and certainty to access appropriate treatment, the industry fund added. The networking offering is the first for an Australian industry super fund and provides a value-add to members beyond the financial security of insurance cover, MLC Group Insurance general manager Megan Beer said. SR
Look forward on performance says Provisio By Mike Taylor SPECIALIST financial services software provider Provisio has released a white paper arguing strongly for superannuation funds to move away from past performance reporting towards future benefit analyses. The white paper argues that superannuation fund reporting has changed little since the Superannuation Guarantee was introduced by the Hawke Labor Government, and that while it may be more regular and contain more market commentary, it is “still built around
last year’s performance because that is what’s absolute and easy to measure”. The Provisio white paper argues that Australians are making super investment choices based on the wrong information – and that this may increase the risk of making poor decisions and needless switching between investments or funds. The white paper analysis claims that under existing practices, the future benefits of superannuation and its ability to support retirement are glossed over, “leaving Australians with little idea of what their compulsory sav-
ings might achieve in the form of retirement income”. “Communication of super’s future benefit is a better approach,” it said. “Telling a member how they are track-
ing toward retirement, and what they can do to improve it, tells them what they can do to achieve the retirement lifestyle they want. “If we want Australians to engage with their super, then we have to communicate the purpose of the whole exercise,” the Provisio white paper said. Commenting on the release of the white paper, Provisio director and co-founder Cameron O’Sullivan said short-term reporting encouraged knee-jerk reactions. “We think that can cause bad decisions based on the wrong information,” he said. SR
Income streams crucial to super equation By Benjamin Levy SUPERANNUATION needs to move to a more income-oriented system to improve its long-term outcomes for retirement, according to Mercer senior partner Dr David Knox. Speaking at an Association of Super Funds of Australia lunch, Knox suggested that 70 per cent of a person’s retirement benefit should be converted to an income stream to last for 15 to 20 years, with the other 30 per cent used as discretionary spending. A deferred income stream – gradually paid for during those 15 to 20 years – would then start once the income stream ran out. The role of the deferred income stream would be as longevity risk and inflation protection, Knox said. The discretionary spending amount SUPERREVIEW
Dr David Knox
could also be used to support the income stream if there is a bad year in markets, Knox said. The income stream, similar to an account-based pension, would also remove uncertainty as to how long retirement savings would last because of its finite
existence, Knox said. Focusing on an income stream system, which would inevitably mean integrating the age pension, would help the argument for instituting tax concessions, he said. However, Knox admitted there needed to be some flexibility to the arrangement, as yearly index income was not ideal for everybody. He also warned that an income stream would not work for someone with a low level of retirement savings. Dean Thomas, general manager of MLC’s MasterKey platform, warned that retirement income was subject to market risk and sequence risk, and the industry needed to deal with both risks to make retirement income more viable in the near future. Standard diversification strategies were failing to mitigate market correction risks, Thomas said. SR
ASP agrees to move to web-based electronic rollover service By Freya Purnell THE Affiliation of Superannuation Practitioners(ASP) has agreed to take the electronic rollover system it piloted last year to the next level as a web-based system. Members of the ASP include AAS, AMP, BT Financial Group, Colonial First State, MLC, Pillar and Superpartners. The model created for the pilot program was successful in enabling ASP members to transact superannuation rollover data and payments electronically, but the technology underlying the system meant it faced issues of scale, according to ASP spokesperson Nigel McCammon. “The management committee has now committed to lifting that to` a web-based solution, which not only addresses that issue of scale but also supports fully the Government’s intention and direction in regards to services and data standards,” McCammon said. While a formal timeline has not been agreed for the project, the group hopes to have the web-based service operational in about 12 months time. To date, the ASP’s pilot program has seen 12,000 rollovers with a collective value of $120 million completed, with products being added on an ongoing basis. The success of the pilot program has also been an important test of the ability of the participants to work together to deliver efficiencies through technology. “We have really proven to ourselves and to the industry that retail providers and fund administrators are able to collaborate successfully,” McCammon said. “We’ve now demonstrated a commitment to taking that to the next level with web.” McCammon also said the ASP has enjoyed strong support and engagement from both the ATO and Treasury in its bid to establish new technology and standards in the industry. SR
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The IFM Alternative Fixed Income Fund is not available to retail investors and does not have a PDS. Investment can only be made by eligible superannuation funds and institutional investors. The 7.78% return shown does not UHSUHVHQWWKHUHWXUQWRUHWDLOLQYHVWRUV,WLQGLFDWHVWKHDYHUDJHUHWXUQRQFDSLWDOLQYHVWHGE\VXSHUDQQXDWLRQIXQGVIURPFRPPHQFHPHQWWR'HFHPEHUDIWHUIHHVDQGEHIRUHWD[DQGLQFOXGHVWKHPRQHWDU\EHQHĂ€WRI IUDQNLQJFUHGLWV3DVWSHUIRUPDQFHLVQRWUHOLDEOHLQGLFDWRURIIXWXUHSHUIRUPDQFH&RQVLGHUDVXSHUIXQGÂˇV3'6DQG\RXUREMHFWLYHVĂ€QDQFLDOVLWXDWLRQDQGQHHGVZKLFKDUHQRWDFFRXQWHGIRULQWKLVLQIRUPDWLRQEHIRUHPDNLQJ an investment decision. For more information, visit www.ifm.net.au Industry Funds Management Pty Ltd ABN 67 107 247 727 AFSL 284 404 *as at 31 December 2011
Good policy not implemented in haste The Government risks making long-term policy errors if it moves too far in advance of the Productivity Commission’s review of default funds under modern awards.
s the Government moves further towards debating its Stronger Super changes in the House of Representatives, it has become increasingly clear that, at some point, it will need to make adjustments which take account of the Productivity Commission’s findings with respect to default funds under modern awards. Any reading of the issues paper published by the Productivity Commission dealing with its approach to its review of default funds under modern awards, confirms that the implementation of MySuper cannot and should not be separated from the outcome of the Commission’s final report and recommendations. Of course, it is entirely a matter for the Government whether it picks up on those
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recommendations, but to completely ignore the Commission’s findings would be to ignore the fact that the Productivity Commission reference represented the fulfillment of a promise made by the Government at the 2010 Federal Election. For the Government to have made such a promise in the context of an election campaign represented an acknowledgement that there were at least some issues which needed to be addressed. Those issues became magnified in the minds of the broader financial services industry as the Government moved further towards implementation of its Stronger Super policy, particularly MySuper. It is then worth noting the approach outlined by the Productivity Commission, which appears to extend significantly beyond the brief handed to it by the Minister for Financial Services, Bill Shorten. In the issues paper released late last month, the Productivity Commission described its approach as including considering “whether to allow all
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MySuper products to be eligible for nomination in modern awards, or whether there is a net benefit to designing criteria over and above those for MySuper”. It said that if additional criteria are required, consideration would need to be given to how those criteria would be implemented. “In conducting its analysis, the Commission will be mindful of the impacts of its recommendations on: • those who elect to choose their own superannuation fund or product • the way that default superannuation funds are chosen under enterprise agreements. The Commission will consult widely with stakeholders, drawing on input from participants through consultations, written submissions and public hearings. “The Commission will also take into account other relevant inquiries and reviews that are currently underway,” the issues paper said. In other words, while the Government might not be prepared
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to wait for the Productivity Commission’s findings before proceeding with the substantial implementation of Stronger Super, the Productivity Commission itself will be weighing the results of the various other investigations currently underway, including the inquiry being undertaken by the Parliamentary Joint Committee on Corporations and Financial Services. Of course there will be many in the financial services community, particularly those operating within the major ‘for profit’ institutions, who would welcome the Productivity Commission finding in favour of all MySuper products being eligible for nomination in modern awards. Such a recommendation, if actually adopted by the Government, would eliminate the primacy currently delivered to those funds nominated by Fair Work Australia as a result of its assessment of the current and historic industrial awards regime. While the Government had good policy reasons for pursuing its modern awards regime, its extension into the realm of superannuation always appeared inconsistent with the manner in which the Australian superannuation industry had evolved over nearly two decades – something
which was underscored by the numerous funds which did not gain recognition from Fair Work Australia. Then, too, the matter became complicated by the controversy which surrounded MTAA Super and its status as a default fund under modern awards. Whatever the Productivity Commission may ultimately decide, it is hard to escape the perception that there was nothing wrong with the default fund regime which existed before the Government implemented its approach to modern awards and, in doing so, legislated the involvement of the industrial judiciary. Given the number of Australian workers who find themselves in default fund arrangements, and the number of related policy issues currently before the Parliament, the Government would seem well advised to delay the implementation of its Stronger Super changes until all the relevant moving parts are in place. The Government may not ultimately like what the Productivity Commission recommends, but it owes it to the superannuation industry and many individual superannuation fund members to await the outcome and adjust its policy settings accordingly. SR
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18 FIXED INTEREST
Fixing on continued Volatility has continued to give life to fixed interest investments and, as DAMON TAYLOR reports, those with greatest experience in the market do not believe the situation will change any time soon.
s investors ease their way into 2012, there seems almost to be a certain tolerance for uncertainty. So while volatility and large unknowns may persist in global markets, one could be forgiven for thinking that investors were getting used to it. Yet according to Rob Mead, head of portfolio management for PIMCO Australia, such a situation is a real opportunity for investors to adjust their investment mindsets and ensure they have in place the portfolio insurance policy that fixed income can provide. “Investors should get used to uncertainty because it will be with us for a while,” he said. “But that doesn’t mean they shouldn’t make adjustments to their investment mindsets. “Asset classes shouldn’t be looked at in isolation but rather in terms of their role in building efficient portfolios,” Mead continued. “In volatile markets investors should be focused on generating real returns with a manageable level of risk across their entire portfolio, and still taking into account their own investment horizon.” According to Mead, the key point was that fixed income, especially the highest quality components of the credit market, could offer investors SUPERREVIEW
both attractive real returns and exposure to what were fundamentally sound companies with stable cash flow streams. “This increased certainty of cash flow generation from fixed income acts a portfolio anchor,” he said. “And, more importantly, it can mitigate risk in uncertain economic environments.” In giving an overview of current fixed income performance, Nick Bishop, senior investment manager at Aberdeen, said there was no doubt that the more investors were exposed to certain market events, the more they got used to them. “You essentially get a bit numb to the headlines,” he said. “And I think that’s been reflected in the pretty fantastic performance we’ve had from equities in the last few weeks. “Now, why then does that not mean that everyone’s just abandoned fixed income and piled into equities?” asked Bishop. “Firstly, if you look at the volumes involved and the volumes traded on the share market indices, they’ve been absolutely awful. In the US and Europe, for example, volumes have been exceptionally low for early on in the year. “So I don’t think it’s fair to say that investors are piling in en mass to equities. On the whole,
I think we’ve seen share market performances which haven’t really been reflected by their underlying flows.” For Bishop, such factors cannot help but amount to an attractive outlook for fixed income. But the risk, according to Clive Smith, fixed income portfolio manager for Russell Investments, is what impact market normalisation could have. “For most investors, I think fixed income is still looking quite attractive,” he said. “At this stage, markets are still remaining quite wary and this is giving an element of safe-haven investing.
“But if we start to see global conditions normalise and materially improve, this does increase the risk that longer duration assets will be sold off as investors start looking to add more risk to their portfolios.” However, for better or worse, market normalisation and rising bond yields are not scenarios Bishop is currently anticipating. “In fact, we don’t think yields are rising aggressively for the medium term and that’s down to two factors,” he said. “Firstly, on a global basis, growth is weak. So part of why the markets feel a bit better in the last
few weeks is because what we’ve managed to do is avoid the cataclysm that markets were pricing in in Q4 of last year. “Things were looking so bleak last year that anything that’s not as bleak as that is a form of relief and that becomes a source of good news,” Bishop continued. “But if we take a step back from that and look at some of the fundamentals, they’re still really mediocre. We’ve got 8 per cent-plus unemployment in the US, we’ve got massive levels of indebtedness across the developed world, we’ve got a European economy that’s probably in recession now or certainly
FIXED INTEREST 19
will be in 2012 and revenue growth – earnings growth – is pretty soft. “The growth outlook really isn’t brilliant and that’s one thing that should serve to keep bond yields well behaved; you won’t see large negative returns from your bond portfolio whilst growth is so weak.” Bishop said that the second observable impact on bond yields was various central banks’ efforts towards quantitative easing measures. “So they’re embarking on non-conventional monetary policy because growth and growth prospects are weak enough to
mean that they need to use more than just the overnight cash rate to try and stimulate the economy,” he said. “As we know, the Federal Reserve has had interest rates at effectively 0 per cent for some time and is committed to doing so through to around 2014. “But quite simply, that isn’t enough to get the economy going and to reduce unemployment to the level that they need to,” Bishop added. “They have to do something else. They can’t take interest rates below 0 per cent so the central banks have to do more; they have to actually squash down bond yields further
out in the term structure. “So this form of quantitative easing is again another yield suppressant and that’s what the central banks are trying to do. They’re trying to squash fixed income returns down so that investors go to something more exciting like credit, like equities, those riskier assets.” Yet while managers may be cautiously optimistic about the outlook for fixed income, the often-expressed view within Australian superannuation is that its value within a portfolio continues to be underestimated. In fact, John Wilson, head of PIMCO Australia, was quick
to point out that Australia currently had the lowest fixed income weighting of any OECD pension system. But it is a position he believes must – and will – change. “People started off with relatively low member balances and so the industry saw its objective as trying to accumulate up a reasonable lump sum for people,” he said. “In order to do that, they were biased towards growth assets; that’s probably the most generous reading you can give but I think that that’s broadly what the industry saw its mission as. “In executing that mission,
people have foregone some pretty fabulous returns in fixed interest, particularly over the last decade,” Wilson added. “Whether you were invested in global bonds or Australian bonds, you would have handily outperformed the median superannuation fund return over that period of time, at considerably lower levels of volatility and without any of the wild ride that people have had as a result of being invested in balanced fund structures. “To put it bluntly, you would have done roughly 7 per cent Continued on page 20 ☞
MARCH 2012 * SUPERREVIEW
20 FIXED INTEREST
Fixing on continued market volatility ☞ Continued from page 19 versus 5.2 per cent and change.” Expressing a similar view, Bishop said that while many investors, both institutional and retail, continued to favour equities or equity-like investments, the fixed income message was gradually gaining traction. “Unfortunately, I think the best thing that could happen to make the case for fixed income again quite obvious would be another slump in the stock market,” he said. “And that’s simply because we found a lot more people wiling to listen to us when we were touring around the country two years ago, coming off the back of what was obviously a really ropy time for stock markets. “Even today, if you look back at the last 12 months or so, fixed income returns do again look extremely healthy compared to equity returns,” Bishop added. “That case is still demonstrated and the market data still validates it, but to really change the Aussie super landscape, we think you need to see something more like a 10 to 15 per cent shift in fixed income allocations rather than the 3 to 5 per cent that we’ve seen from what we’ve observed recently.” Alternatively, Smith said that he could see the value of fixed income being better understood by the greater focus investors were giving different types of fixed income investment. “If we go back to pre-global financial crisis (GFC) periods, investors saw fixed income, both domestically and globally, as being largely generic,” he said. “They didn’t really differentiate risk between types of investments and, furthermore, SUPERREVIEW
they were really quite happy to go along with standard-type benchmark construction, in particular issuance weighted. “But those two things have changed now,” Smith continued. “On the first point, this has been quite notable in some of the offshore markets where we previously saw developed countries, developed sovereign debt, being all lumped together. “But we’re now seeing much greater differentiation based on ability to pay and I think we’re
going to continue to see investors put more of a focus on identifying what are the appropriate risks within fixed income and looking to more proactively manage those risks.” With regard to fixed income benchmarks, Smith said that there had been a similar focus shift. “What we’re starting to see, and something which will continue to develop, is investors looking at benchmarks and identifying whether or not those benchmarks are truly representative of the risks they want in fixed income markets,” he said. “And I think that the key area that investors are now starting to look at with issuance-weighted benchmarks is this fact that
the largest weight is to the largest borrowers. “They’re starting to ask, ‘is it logical for me to really be tilting my portfolio towards the largest borrowers?’” Smith outlined. “There’s been a realisation that they need to proactively structure their fixed income portfolios to better represent their investment objectives rather than simply assuming that a broad market, issuance-weighted benchmark is appropriate for them.” However, beyond the lessons to be learned post-GFC and any proof borne out in returns, Wilson said that superannuation investment behaviour was most likely to occur as a result of trustees closely examining the composition of their funds. “Trustees are already starting to realise that a lot of their assets are, in fact, owned by people over 50,” he said. “So if you’ve got age on the horizontal and you’ve got assets on the vertical, the 18-to-50 year old group is a very short column with a very wide base, where the 50plus is a very high column and a very narrow base. “The realisation they’re coming to is that most of their assets are owned by people who are at or near the retirement phase, and that introduces a whole new class of members for most superannuation funds and a whole new problem for super funds to think about,” Wilson continued. “And as superannuation funds understand the agerelated assets in their funds and understand that group of members who are nearer retirement or, indeed, have retired, they realise that that group values different things. “It’s a group that values stability of capital and reliability of
“For all fund managers, the broad acknowledgement is that cost, particularly with respect to active versus passive management, has become a key focus.”
income above all else at retirement. And, in turn, that drives the demand for a different composition of assets than we’ve heretofore seen in the industry.” So while the outlook for fixed income is healthy based on both the investment market outlook and the growing needs of Australian’s superannuants, the one impact yet to play out is that of MySuper. For all fund managers, the broad acknowledgement is that cost, particularly with respect to active versus passive management, has become a key focus. And yet the key for Bishop is that super funds are less focused on cost and more focused on value for money. “And in the sense that MySuper will cause people to focus on value for money rather than just cost, that’s a good thing,” he said. “Its particularly good for active managers because when you look historically at what an active manager’s been able to achieve compared to their costs in fixed income, versus what an active manager can achieve compared to their costs in equities, it does make fixed income look like reasonable value.” Indeed, Bishop anticipates that MySuper could well make investors look more closely at the perils and pitfalls of passive investing when trying to assess the value-for-money argument. “The first problem with index investing in fixed income specifically is that, by definition, its benchmarks are dominated by issuers that are the most heavily indebted,” he said. “So the more debt outstanding, the bigger you are in an index and that’s generally not a great thing. Continued on page 22
22 FIXED INTEREST
Fixing on continued market volatility ☞ Continued from page 20 “Secondly, the issuer chooses when you buy the debt,” continued Bishop. “So with a bond index, an issuer will issue bonds when the price is good for them – ie, when yields are low – so that’s when it appears in your bond index and that’s when an index investor has to buy it and, again, that’s not a great thing to do. “You wouldn’t let your bank tell you when to buy a term deposit but that’s essentially what you’re doing there.” Bishop said that the third problem was that the credit rating agencies determined, to a large extent, which bonds appeared in an investor’s bond index. “And credit rating agencies, historically, have had a very questionable track record in telling you which bonds are likely to default or not,” he said. “Then the final problem that we have with index investing is that it closes off to you quite a broad range of ‘off-index’ investments that actually might be quite good for your portfolio on a riskadjusted basis. “So, for example, in the Aussie bond index there’s no issuance from some of the trueblue Aussie corporates that fund themselves in the US dollar market,” added Bishop. “There’s no BHP, there’s no Rio, there’s no Qantas, there are very few examples of some of the top-tier Aussie corporates because they fund themselves overseas. “Now an index manager can’t buy those bonds but we can. We can buy the high quality names when attractively priced, and then hedge the overseas currency and interest rate exposure SUPERREVIEW
to get that bit more diversity.” Offering a different perspective on the active versus passive debate, Wilson said that it was his belief that investors regularly overpaid for the promise of excess returns in growth assets. “Now, it’s no surprise that I’m saying that because I work for a bond manager, but the fact is that if you look at returns per unit of fee paid, you get a very handsome payoff in fixed interest,” he said. “If
son I say that with reasonable confidence is that as people look at the volatility characteristics of fixed interest relative to equities, they’re going to own more of them because their membership will demand it.” According to Wilson, those sort of circumstances dictated, quite simply, that fixed income would have to play a larger role in superannuation portfolios than it had previously. “If you’re trying to construct a very simple, transparent fund
sounds coming out of Europe, it was important to keep in mind that the outlook remains uncertain. “Some positive things are occurring in Europe with the Greek situation but there still is a lot of water to pass under the bridge before we get a resolution,” he said. “I would also say that whilst Europe is starting to put together a cohesive strategy for dealing with the issues, that’s not the only issue that’s about.
you think about it logically, the place you can achieve the greatest cost savings if you’re a superannuation fund is to pay less to the people that you pay the most expensive fees to and, in this instance, that’s the equity managers. “Fixed interest managers don’t command anywhere near the same sort of fees, so my belief is that there will be less pressure on fixed interest fees in a MySuper environment,” Wilson continued. “And the rea-
that is battle-worthy in all different environments for your average investor, then fixed interest needs to play a very important role in that,” he said. “And further, if that fixed interest allocation comes at the expense of equities, then the total costs of the funds are going to go down.” So how then is the fixed income story likely to play out for 2012? For Smith, whilst the world is starting to see some positive
“Debt and the reduction of debt globally that’s been taken on by sovereigns post the GFC is going to be something that will continue to weigh on markets,” continued Smith. “And, indeed, the markets’ next focus could be on the US and how the US intends to get its house in order. “So I think that that, overall, really does highlight that for fixed income markets and for asset markets in general, we are going to continue to have more volatility.”
According to Wilson, investors, whether fixed income or otherwise, could expect more of the same. “So what I mean by that is that government policy is going to be an important component in markets in a way that, if you wound the clock back 10 years, it most certainly wasn’t,” he said. “Once upon a time, as a fixed interest investor, you had to be very, very focused on economic fundamentals, because economic fundamentals determined the cost of capital, and the cost of capital then determined what interest rates were in various countries, along with inflation expectations. “But now that you’ve seen growth come down in very large parts of the developed world, inflation is less of an influence and Government policy is a greater part of the mix.” However, despite what continue to be large unknowns, Bishop maintains that it isn’t a bad environment to be in. “It’s definitely going to have its risks and we’re going to remain in a period where volatility is the norm rather than the exception,” he said. “I think investors should still expect to be either surprised or appalled when their superannuation statements arrive. “I don’t think that’s going to go away any time soon but we’ve certainly changed the stance of our portfolios from being really quite conservative and essentially having a negative exposure to credit to having a more positive one,” Bishop continued. “We’re feeling a bit more optimistic about the world than we were, for example, in Q4 last year. “And that, hopefully, is encouraging.” SR
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Matching popularity with Self-managed superannuation funds have continued their growth path in Australia but, as DAMON TAYLOR reports, their popularity is not always matched by their investment performance.
hough investment markets, both global and domestic, have experienced their fair share of ups and downs in recent years, it seems the popularity of self-managed super funds (SMSFs) has remained steady. Of course, the logical assumption to be drawn from that trend is that such popularity has been based not only on flexibility and control but also on solid performance, and yet for Philip La Greca, technical services director for Multiport, proving and reporting that performance is difficult. “This is probably one of the dilemmas we have in this sector,” he said. “That gauging SMSF performance and returns is so difficult because there isn’t exactly great data. “Now, I know the Australian Taxation Office [ATO] put out some data just before Christmas where they tried to put forward some historical rates of return on asset types to address this issue,” La Greca continued. “But the problem you have is that it’s such a diverse sector; you’re looking at average performance across 400,000 funds when you look at that ATO data.” SUPERREVIEW
And the question, according to La Greca, lies in how useful those average performance figures actually are. “Because even within our own client base, I’ve seen funds that have had really good performance but I can also point to clients whose performance is atrocious,” he said. “It really depends on what they actually invest in. “So I think there are two things that this highlights and they’re also what the debate really has to come down to,” La Greca continued. “That is, is the client actually being told what his rate of return is or is the trustee actually working it out? “Because they might think that they’re doing well, or at least better than X industry fund or Y retail fund, but are they really?” Indeed, the key point when looking at the data referred to by La Greca and contained within Self-managed superannuation funds: A statistical overview 200809 is that it is data that was released in late 2011 and yet it is already two years old. So while those statistics may show that SMSF popularity has been justified by their performance (16.7 per
cent, -6.3 per cent and -6.7 per cent across 2007, 2008 and 2009 as compared to 14.5 per cent, -8.15 per cent and -11.7 per cent for APRA-regulated funds), can trustees adequately assess their performance so long after the fact? However, assessable or not, Peter Hogan, principal of Plaza Financial and director of the SMSF Professionals’ Association of Australia (SPAA), argues that one of the main
reasons SMSFs have performed so well is investment flexibility. “One of the things that selfmanaged super funds do offer in terms of a return is a higher degree of flexibility,” he said. “Trustees are able to move the whole of their fund into more defensive assets when they think its appropriate, and perhaps be a little bit more nimble when they think it might be time to move back
into markets as well. “That’s as compared to writing off to a fund manager and saying that they want to cash out this investment, which takes a day or two, and then saying that they want to invest in this other investment, and that takes a day or two again.” For Hogan, although such an attraction is a subset of the flexibility and control that the SMSF sector can so readily boast, it is nonetheless a vital
factor when measuring its returns and overall performance. “Of course, the question of whether that nimbleness results in better returns or not is a hard one to answer,” he admitted. “At the moment, the evidence we have is probably anecdotal more than anything else.” Looking to Stronger Super, La Greca said that it was his hope that the upcoming rollout of reforms in the SMSF
Philip La Greca
space would enable greater reporting and therefore greater performance comparisons. “I’m hopeful that some of the reporting requirements will actually force true return calculations to be done,” he said. “Because there’s nothing that actually says that they have to be done at the moment. That’s where we need to go, and I think some of the discussion around things like tightening up investment
strategies – so that you actually have measureable benchmarks, and that you do actually measure against those benchmarks – will actually help focus that,” La Greca continued. “But this is part of the problem. That’s what should happen in the process of every investment decision. “I mean, take gearing in property, which has become very popular lately, as an example. Just because you can
do it, that doesn’t mean that you necessarily should.” According to La Greca, having to quantify investment objectives and actually benchmark them will force those investment decisions to be made properly. “If you suddenly say that your investment objective is to return 3 per cent over inflation, then you can say ‘if I’m going to buy this, is it actually going to meet that objective?’” he said. “You have to do the maths and perhaps see that you’re going to get 6 per cent income on a $500,000 investment but be paying out 7 per cent interest on $300,000.” “So your net isn’t actually that 6 per cent that you might have originally thought – and it’s that realisation that isn’t necessarily happening at the moment.” The final factor to consider, according to Hogan, is the reality that SMSF trustees often have the ability to make direct investments. “They’re reducing a layer of fees and that’s going to have an impact on return as well,” he said. “In fact, that’s often a motivation for people to have their own fund: to appreciate that a fund manager has to be paid for managing investments, but to realise that if they do that directly themselves, that’s one more fee that they don’t have to pay. “And whether that’s a false saving or not really depends on the return at the end of the day – something I guarantee can be argued well on both sides of the fence.” La Greca compared the fee factor to investment selection Continued on page 26
MARCH 2012 * SUPERREVIEW
Matching popularity with performance ☞ Continued from page 25 and strategy as well. “So somebody who’s saying that they really don’t want to be in the market – they’re picking term deposits and securities that are in that sort of a space,” he said. “And there’s obviously some cost savings that they may be getting from those structures which therefore reflects straight through to their return. “They’re not necessarily putting in other layers of costs that have occurred into the process,” La Greca continued. “And that’s the reality of it. The place where SMSFs really start to pull their savings is going to be in those intermediary layers of costs because, at the end of the day, the difference between a self-managed super fund holding equities and a big fund holding equities is what? “The equity is going to perform exactly the same, it’s the cost of holding it that varies.” As an example, La Greca pointed to the costs involved in trades for an SMSF. “So if you trade a lot, then you may find that your costs are higher, because obviously an SMSF is going to have smaller volumes with trading costs that are relatively fixed,” he said. “So if you're paying CommSec $19.95 for a trade and you’re only doing a $1,000 trade, the cost for that trade is quite high proportionately. “On the other hand, if I'm a big fund I'm getting a much better trade price, even though I'm buying and selling exactly the same stock,” La Greca continued. SUPERREVIEW
“I don’t think there’s a systemic problem, that somehow trustees of self-managed funds are unwilling to share their performance or returns.” - Peter Hogan
“It’s the same asset, and so the performance of the asset isn't going to be different. “It’s really the costs incurred in holding, maintaining, acquiring – that’s where your savings will come.” According to La Greca, costs can make a particular difference if an SMSF trustee is holding their assets rather than doing active trading. “For a start, you don't have to pay a custodian,” he said. “And that cost might not be a lot, but in the current environment, if you take 5 to 10 basis points off returns that are single-digit on every single asset, that’s going to have a significant impact.”
But despite all the ins and outs in self-managed super fund returns, Hogan was quick to point out that there wasn’t a lack of reporting or a lack of transparency in the sector. “It’s probably quite the opposite, insomuch as there must be accounts produced every year, they must be audited every year, and they are made available to the members of the fund,” he said. “So I don’t think it’s a transparency issue per se. It’s probably more a lack of any one central organisation collecting the data, to perhaps make it publicly available. “I don’t think there’s a systemic problem, that somehow trustees of self-managed funds are unwilling to share their performance or returns,” Hogan continued. “The information is all there. It’s more just a matter of collecting it all together to do comparisons.” Pointing to a number of asset allocation surveys compiled by various SMSF administrators and industry research houses, Hogan said
that there had clearly been efforts towards data collection, but noted that without a central regulating body like the Australian Prudential Regulation Authority, finding a central source of truth was difficult. “Even if you had to go down the track of telling the trustees of self-managed super funds that they had to publish their returns, I suspect their response would be that they are doing so already,” he said. “It’s just that no-one’s collecting that information and putting it all into some sort of central database. “But I think anything that could help people compare returns and results would be a good thing,” Hogan continued. “Because I have no doubt that there are some trustees of self-managed funds that think they’re doing much better than what they are because they don’t take the time to properly analyse their returns. “I’m also sure that the opposite is true, but performance reporting will help to accurately measure that.” SR
New chair for SPAA The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has appointed Andrew Hamilton as chair for a two-year term ending February 2014.
Super Review’s monthly diary of superannuation industry events around Australia and abroad. MARCH VICTORIA 7 – ASFA Breakfast. Cutting through the infrastructure debate. Speaker: Sir Rod Eddington, nonexecutive Chairman (A&NZ) of J.P. Morgan and Chairman of Infrastructure Australia. Venue: Grand Hyatt Melbourne. 123 Collins Street, Melbourne. Enquiries: ASFA Events Department, Ph: (02) 9264 9300 or 1800 812 798.
NEW SOUTH WALES 16 – ASFA Investment Interchange. Should the super industry invest more in fixed interest? Speaker: The Hon. Al Gore, Former Vice President of the United States of America and Co-Founder and Chairman of Generation Investment Management. Venue: The Westin Hotel. No. 1 Martin Place, Sydney. Enquiries: ASFA Events Department, Ph: (02) 9264 9300 or 1800 812 798. 22 – FSC Life Insurance Conference. Venue: Sydney Convention and Exhibition Centre. Darling Avenue, Darling Harbour.
QUEENSLAND 26 – ASFA Luncheon. The social media phenomenon. Speaker: Peter McGarry, Director of CTQ. Venue: Stamford Plaza. Cnr. Edward & Margaret Streets, Brisbane. Enquiries: ASFA Events Department, Ph: (02) 9264 9300 or 1800 812 798.
WESTERN AUSTRALIA 27 – ASFA Super Forum. Digging deep into the Super Reforms. Venue: Burswood Convention Centre. Great Eastern Highway, Burswood. Enquiries: ASFA Events Department, Ph: (02) 9264 9300 or 1800 812 798.
Fax details of conferences, seminars and courses to Super Review on (02) 9422 2822
s the managing director of Cavendish Superannuation, Hamilton has been instrumental in growing the business’ offering to now include self-managed super, portfolio administration and actuarial services. Hamilton said SPAA is critical to the future structure of superannuation in Australia because it provides a broad representation of all of the trustees, advisers, account-
ants and auditors that make up the self-managed super fund (SMSF) industry. Commenting on his appointment, SPAA chief executive Andrea Slattery said Hamilton’s experience in SMSF product design, software design and development, training programs, technical knowledge and understanding of compliance will allow him to offer unique insights and advice to SPAA members. SR
MACQUARIE Life has appointed Marcello Bertasso to the newly-created role of national underwriting manager. With ten years’ experience in reinsurance, Bertasso will take on a national role leading Macquarie Life’s underwriting team. The South African-born Bertasso previously worked with global reinsurer Swiss Re before joining CommInsure in a senior underwriting capacity in 2008. Most recently, he served as head of underwriting at AMP. Bertasso’s appointment reflects Macquarie Life’s desire to strengthen its underwriting team and capabilities.
Dunn has more than 22 years’ experience in financial services, having held a number of senior business advisory roles. She was previously general manager of Perpetual’s wholesale business, and a division director with Macquarie Bank’s funds management division. Commenting on her appointment, Bryant said Dunn had a proven track record of building successful businesses – predominantly within the institutional space – and an ability to create and maintain strong business relationships.
AUSTRALIAN Unity Investments (AUI) has appointed Fiona Dunn as general manager – joint ventures and institutional. Reporting to AUI chief executive David Bryant, Dunn moves into her new role following the appointments of Stephen Alcorn as head of institutional and Kara Gilmartin as head of joint ventures. Both Alcorn and Gilmartin will now report to Dunn.
IN a six-month handover process, QBE Insurance Group has announced that John Neal will succeed long-serving group chief executive Frank O’Halloran from 17 August 2012. As the former chief executive officer of specialist commercial motor insurer Ensign, Neal has considerable underwriting skills. For eight years he served as chief underwriting officer and chief operating officer in QBE’s European operations before heading to
Sydney in 2011 to manage the company’s global underwriting operations. As QBE’s current CEO of global underwriting operations, Neal facilitated global forums to drive both strong underwriting discipline as well as operational and cost efficiencies. PERPETUAL Investments has announced a number of key changes to its equity team line-up. After 10 years on sabbatical, Sean Cunningham has returned to Perpetual and will be focused on developing a new high conviction yield strategy. In regards to the Perpetual Industrial Share Fund, current head of equities Matt Williams will step down from 1 April 2012 and be replaced by deputy head of equities Charlie Lanchester. Lanchester will be responsible for 70 per cent of the fund while the remaining 30 per cent will be managed by senior analyst Vince Pezzullo. Williams will remain the portfolio manager of the Australian Share strategy and the Pure Value Fund. SR MARCH 2012 * SUPERREVIEW
THE OTHER SIDE OF SUPERANNUATION
Qld Election? Don’t you worry about that IF it’s the Conference of Major Superannuation Funds CMSF 2012 (CMSF), then Rollover thinks he must be in Brisbane and he believes it is fitting that all the conference delegates are in the Queensland capital just days out from the state election. In fact, Rollover has it on good authority that one or two of the CMSF delegates have been fulfilling some party political commitments while visiting the Sunshine State, so he's pleased to note that the opening plenary is being addressed by former Queensland premier and sec-
Appropriately appropriating APRA? ON the subject of regulators, Rollover has noted from time to time the level of criticism directed at APRA for the timeliness and relevance of its statistics. However he now finds that the regulator does not wont for statistical resources, with the regulator's Charles Littrell recently telling Senate Estimates that, while numbers vary, APRA currently has 43 personnel working in its statistics department. Asked by Tasmanian Liberal Senator David Bushby how many of those people
performed superannuation data functions, Littrell said there were approximately five staff who work exclusively on superannuation. "There is another, say, third of that unit who support all four industries, and their time allocation varies depending on what is happening at the moment," he said. Rollover wonders whether the level of interest from the Coalition suggests they will be pressing for APRA's statistical functions to be transferred to the Australian Bureau of Statistics. SR
retary of the Queensland Railway Station Officers' Union, Peter Beattie. Given the state of the polls in Queensland, and the likelihood that the Coalition may be elected to Government in the state, Rollover is wondering whether Beattie will be interspersing his speech on innovation with some sage words on life after politics. Then, too, Rollover wonders whether, after years of conducting CMSF in either Brisbane or the Gold Coast, the Australian Institute of Superannuation Trustees may opt for a new venue in 2013. SR
Regulate the night away STILL on the subject of CMSF, Rollover notes that the regulators are getting plenty of air time this year, with Australian Securities and Investments Commission chairman Greg Medcraft and Australian Prudential Regulation Authority (APRA) deputy chairman Ross Jones delivering a session titled – “What keeps the regulators up at night?” Rollover understands that the two men will be outlining their expectations of the superannuation industry – but wonders whether the title of the session is actually misleading. As best as Rollover can tell, it is not Medcraft and Jones who lose sleep over what is going on in the financial services, but those who live in fear of enforceable undertakings. Of course, where regulators are concerned, it helps when poachers turn gamekeepers. SR
The race for Got a Productivity funny ROLLOVER notes the speed with which the various parties have developed their submissions for the current Productivity Commission review of default funds within modern awards. He was particularly impressed by how quickly the Financial Services Council (FSC) gave its assessment of the Productivity Commission's approach, and then noted that the FSC had actually been pipped at the post by the Australian Institute of Superannuation Trustees. However from what Rollover can tell, the Productivity Commission will be taking its time and listening to all sides before coming to any conclusions. SR
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