Investment Magazine April 2017

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 137

APRIL 2017

S PEC I A L E D I T I O N

WINNING partnership

The duo in charge of investments at Cbus Super dish the details on their ambitions for the fund TROPHY TALK HEAR FROM CONEXUS SUPERANNUATION AWARDS 2017 FUND OF THE YEAR UNISUPER, AND ALL THE OTHER WINNERS GIVE A LITTLE CHRISTIAN SUPER CHIEF PETER MURPHY WANTS TO ENCOURAGE MEMBERS TO DONATE TO CHARITY EXIT INTERVIEW OUTGOING AIST CHIEF EXECUTIVE TOM GARCIA REFLECTS ON HIS ORIGINS, ACHIEVEMENTS AND PLANS GIRL TALK COMMONWEALTH BANK’S ANNABEL SPRING CALLS ON INDUSTRY TO TACKLE THE SUPER GENDER GAP

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CONTENTS APRIL 2017

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CONEXUS SUPER AWARDS

“The industry is inching forward. Every year, organisations seem to have gone that extra mile” CHRIS CUFFE CHAIR OF FUND OF THE YEAR WINNER UNISUPER

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CIO OF THE YEAR Trish Donohue and Kristian Fok, from Cbus Super, reflect on their big insourcing plans for the fund.

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INTRODUCING MDUF v1 Mine Wealth + Wellbeing’s David Bell on the launch of a new framework for making assumptions about what members want in retirement.

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INVESTMENT OPERATIONS Sunsuper’s Lounarda David and NAB Asset Servicing’s Ravnol Gray ruminate on the trends re-shaping the back offices of super funds.

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WORKPLACE WELLBEING Canadian expert Mary Ann Baynton outlines the questions managers need to ask.

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TOM GARCIA The outgoing Australian Institute of Superannuation Trustees boss reflects on past achievements and priorities for his successor.

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GENDER GAP Commonwealth Bank group executive wealth management Annabel Spring calls on the industry to help women get real about their finances.

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HOWARD BRINDLE A Q&A with the chief operating officer of UK Universities Superannuation Scheme Investment Management.

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EVA SCHEERLINCK The AIST acting chief executive says the peak body’s new governance code will protect members’ best interests.

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CHARITY SAVES Christian Super boss Peter Murphy wants to instil the philosophy of ‘give, save, and spend the rest’ in members.

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\ FROM THE EDITOR

EDITORIAL EDITOR

SALLY ROSE / sally.rose@conexusfinancial.com.au

Sally Rose MANAGING EDITOR

Keith Barrett DIRECTOR OF INSTITUTIONAL CONTENT

A LETTER from the editor

Amanda White JOURNALIST

Dan Purves HEAD OF DESIGN

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

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FUND EXECS WALK DATA ‘TIGHTROPE’

Haki P. Crisden PHOTOGRAPHER

Matt Fatches matt@mattfatches.com.au

IG BANKS AND businesses are going gaga for data at the moment, and forwardlooking super funds have been jumping on the bandwagon, too.

The idea is that funds should be doing more to collect and analyse all the personal information and preferences they hold about their members, and then turning this data into knowledge that can be used to offer more attractive products and services.

It all seems sensible but it’s easier said than done. Indeed, a little bit of knowledge can be a dangerous thing.

At the Fund Executives Association Limited (FEAL) Forum in Sydney on March 9, 2017, one of the participants shared an anecdote about how one super fund got into hot water with data.

Before commissioning an advertising campaign, the mid-sized fund in question brought in an ‘expert’ who commissioned some market research and data analytics of the member base to help come up with the right focus.

Much to everyone’s surprise, the research showed investment performance rated as the least important factor to members, while specialised advice rated as the most important factor.

The fund’s longstanding chief financial officer didn’t believe the data, and told the board the conclusions were contrary to everything they’d all observed and it would be foolish to base the branding campaign on it. The directors shot down the CFO’s concerns with cries that, “We are a data-driven

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organisation now, get on board.”

Turns out the finance chief ’s intuition was right.

Unfortunately, it was only after the fund had spent $1.3 million on a misdirected advertising campaign that someone realised there had been a mistake in the compilation of the research. One of the columns in the Excel spreadsheet had been sorted without being properly correlated with the others.

The moral of the story is that data can help you make better decisions but it is important to be certain you can rely on the data you have. It highlights the incredibly difficult position super fund executives are in as they grapple with the need to get more sophisticated insights out of the huge volumes of data their organisations hold. There is a tightrope walk between relying on specialist external service providers and retaining ultimate responsibility for decisions taken.

After the FEAL Forum, many participants slipped on their finery for the Conexus Financial Superannuation Awards 2017. Interviewing the winners for our story (page 6), it became obvious that figuring out how to better harness technology and data is top of mind for many industry leaders.

Congratulations to Fund of the Year UniSuper, and to all the winners and finalists.

More than $86,000 was raised on the evening for the event’s charity partner, The Wayside Chapel. Thank you to all those who donated, for your generosity. Ñ

CHIEF EXECUTIVE

Colin Tate

ADVERTISING BUSINESS DEVELOPMENT MANAGER

Karlee Samuels

karlee.samuels@conexusfinancial.com.au (02) 9227 5721, 0420 561 947 BUSINESS DEVELOPMENT MANAGER

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sean.scallan@conexusfinancial.com.au (02) 9227 5719, 0422 843 155 SUBSCRIPTIONS

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anastasiap@conexusfinancial.com.au (02) 9227 5703 CLIENT RELATIONSHIP MANAGER (EVENTS)

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ADVISORY BOARD MEMBERS

Graeme Arnott, chief operating officer, First State Super | Richard Brandweiner, partner, Leapfrog Investments | Peter Curtis, head of investment operations, AustralianSuper | Joanna Davison, chief executive, FEAL | Brian Delaney, global head of clients, QIC | Kristian Fok, executive manager for investment strategy, Cbus | Damian Graham, chief investment officer, First State Super | Sheridan Lee, principal, Shed Enterprises | Geoff Lloyd, managing director, Perpetual | Graeme Mather, head of distribution, product and marketing, Schroders | Damien Mu, chief executive, AIA Australia | Mary Murphy, chief digital officer, First State Super

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Sometimes the best support comes from the sidelines While the ball boy might not be what the fans came to see, he still has a job to do; one he does in the background. A bit like us. At AIA we’re dedicated to providing our partners with specialised life insurance expertise. It’s a partnership we take very seriously because without you we wouldn’t exist. So while we might be behind the scenes, when you need us, we’ll be here to handle it.

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\ AWARDS

Superannuation 2017

FUND OF THE YEAR UniSuper wins big UniSuper was top dog at the CONEXUS FINANCIAL SUPERANNUATION AWARDS 2017, taking home the Fund of the Year title for the second year in a row and winning three other gongs as well. The awards were hotly contested in a year when three new categories were added to the mix.

By Dan Purves Photos Matt Fatches

UNISUPER WAS THE runaway winner at the Conexus Financial Superannuation Awards 2017, taking home four gongs, including the coveted Fund of the Year Award.

The $57.5 billion super fund for higher education workers also won Best Insurance Offering, Best Advice Offering and Default Fund of the Year.

In a video message, Prime Minister Malcolm Turnbull congratulated UniSuper and “all the winners and all the finalists”.

“There was a lot of debate in the selection committee because there are so many outstanding funds,” Turnbull said.

It was the second year running that

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UniSuper has landed the most prestigious honour.

This fifth year of the awards brought the introduction of three new categories – Best Insurance Offering, Best Advice Offering and Best Technology Offering – recognising vital functions super funds provide to their members and bringing the total number of awards to 12.

The Innovation and Transformation, Small Fund of the Year, Large Fund of the Year and Chief Investment Officer of the Year awards were fiercely contested.

Cbus Super executive manager, investment management, Trish Donohue, and executive manager, investment strategy, Kristian Fok, shared the CIO of the Year Award, as the traditional duties of chief investment officer at the fund are spilt between them.

Award judge and California State Teachers’ Retirement System (CalSTRS) chief investment officer Chris Ailman said the committee was pleased to consider such a mix of CIOs from small, medium and large funds as finalists.

“I have to say, for the judges, it was a very hard decision,” Ailman said. “Each of the finalists should consider themselves very

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AWARDS \

Award judge

CHRIS AILMAN Chief investment officer CalSTRS

FOR EXTENDED COVERAGE PLEASE VISIT

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Host

COLIN TATE Chief executive Conexus Financial

Event sponsor

TIM TEZ Chief strategy officer, AIA Australia

Event sponsor

MATTHEW LUMSDEN Head of distribution Vanguard Investments investmentmagazine.com.au

worthy [of being] recognised tonight.”

Vanguard Australia head of distribution, Matthew Lumsden said close analysis of the entries in the Large Fund of the Year category revealed that no single fund was able to lead in every assessment criteria.

In the end, QSuper got the judges’ nod, taking home its second award of the night.

In the Innovation and Transformation category, there was a sense of relief that this year the judges named a winner – Australian Catholic Super – following a shock decision to withhold the award in 2016, due to lack of worthy entries.

AIA Australia chief executive Damien Mu said the judging committee was pleased that the category this year was so close the chair’s vote had to be used to determine the winner.

Conexus Financial chief executive Colin Tate took pride in the “fierce independence” of the awards, which do not support the commercial aims of any research firms.

“We do not charge fees to enter the awards, and we do not charge fees for funds that wish to promote themselves as finalists or winners,” Tate said.

He added that the selection committee remained autonomous and comprised key industry stakeholders, who brought independent and varied views to the process of assessing the key aspects of a superannuation fund’s operations.

The prime minister was just one of the high-profile guests to congratulate all winners across the 12 categories. Other dignitaries offering congratulations included Minister for Financial Services Kelly O’Dwyer, former parliamentary secretary to the treasurer Bernie Ripoll and Australian Prudential Regulation Authority deputy chair Helen Rowell.

Here we showcase all of the evening’s winners.

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TO SEE THE FULL PHOTO GALLERY PLEASE VISIT

investmentmagazine.com.au/category/awards/ ★ CHIEF INVESTMENT OFFICER OF THE YEAR ★

W I N N E R | Cbus Super executive manager, investment management, Trish Donohue and executive manager, investment strategy, Kristian Fok

Award presenter

THE HON. MALCOLM TURNBULL MP Prime Minister

8 THE UNISUPER TEAM

★ FUND OF THE YEAR ★

W INNER | UniSuper Prime Minister Malcolm Turnbull appeared via video message to announce UniSuper as the overall winner of the Conexus Financial Superannuation Awards 2017.

The award rounded off a fruitful evening for the $57.5 billion super fund for higher education workers, as it also took home Best Insurance Offering, Best Advice Offering, and Default Fund of the Year.

The Fund of the Year Award recognised UniSuper’s commitment to offering the best service to members.

“There was a lot of debate in the selection committee because there are so many outstanding funds. But the winner has shown leadership in member services, good fund governance, fund design and performance,” Turnbull said. “Congratulations UniSuper and congratulations to all the winners and all the finalists.”

UniSuper chair Chris Cuffe said it was important those in the industry never lose sight of “the gift” that it is to work in the superannuation system.

“Every year, you come to these awards, and the industry is inching forward; every year, organisations seem to have gone that extra mile,” he said. “Not only is it a fantastic privilege to work in this industry, it is a fantastic group result.

“But don’t forget how lucky we are in this industry to have this responsibility.”

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Fok and Donohue share the duties of chief investment officer at the $37 billion industry fund for construction workers. Fok focuses on investment strategy while Donohue focuses on investment management and operations.

The award acknowledges the person – or in this case people – deemed to have made the greatest contribution to the implementation of investment strategy and advancement of members’ interests through contributions to the investment process.

Award judge and CalSTRS chief investment officer Chris Ailman said the committee was impressed by Cbus’s new strategic plan to insource management of 20% of the fund, which is forecast to deliver 10 to 15 basis points in cost savings to members over the next five years.

Donohue and Fok jointly accepted the award.

“I am completely honoured to accept this award,” said Donohue, who was the founding member of the Cbus investment team and has led it ever since.

Fok thanked Donohue for her vision in bringing him onboard to help implement the fund’s ambitious growth strategy.

“Thank you for guiding me since I joined the fund, and for understanding the enormous potential of the fund,” he said.

TRISH DONOHUE & KRISTIAN FOK | Cbus

Every year, you come to these awards, and the industry is inching forward; every year, organisations seem to have gone that extra mile. CHRIS CUFFE | UNISUPER investmentmagazine.com.au

AWARDS \

★ PENSION FUND OF THE YEAR ★

WINNER | QSuper

MICHAEL DUNDON | VicSuper

★ BEST INSURANCE OFFERING ★

W INNER | UniSuper The Best Insurance Offering Award was a new addition, judged “based on quantitative criteria that covered cost, terms and definitions.

“To win this award, the funds had to do well on premiums and features,” award judge and Rice Warner chief executive Michael Rice said. “However, there was a clear winner on premiums; it was the cheapest in the field by a long way.”

UniSuper chief executive Kevin O’Sullivan said there were two components to a good insurance offering: the product and the claims process.

“I am very proud of the way the fund shows compassion to our members when they become disabled, and likewise to their families when they die,” O’Sullivan said. ★ DEFAULT FUND OF THE YEAR ★

W INNER | UniSuper This was the most hotly contested award, receiving more submissions than any other category.

The key criteria for Default Fund of the Year were the quality of member services, fees, insurance and investments.

Australian Prudential Regulation Authority general manager Heidi Richards – standing in for special adviser to the awards and APRA deputy chair Helen Rowell – said UniSuper had performed particularly well in investments and excelled in insurance.

“Interestingly, it was its low investment fees that made a difference and edged this fund in front to be the overall winner,” Richards said.

UniSuper chief executive Kevin O’Sullivan said many factors, including advice and insurance, made UniSuper a strong default fund, but he singled out the investment team for special praise.

“Such a big part of the strength of our default offering comes back to the excellent performance of the investment team, which they deliver with very low fees,” he said.

UniSuper’s investment team, led by chief investment officer John Pearce, manages roughly 55 per cent of total assets in-house.

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The $65 billion super fund for Queensland public-sector workers won in the pensions category for the fourth year in a row, as noted by the government spokesperson on super.

Financial Services Minster Kelly O’Dwyer recognised QSuper for the breadth of features available in its pension offering, its low volatility and great flexibility, and for “continually improving its pension option to guide members on a safe path to retirement”.

“In a volatile economic environment, it is vital that member outcomes are maximised, while mitigating risk exposure,” O’Dwyer said.

QSuper chief executive Michael Pennisi said the retirement journey does not start the day a member hits 60; it starts the day they begin saving.

“The first thing is, it’s not all about product,” Pennisi said.

“Sometimes we as an industry jump to a product solution.

In the post-retirement phase, it’s about information and advice and guidance. That is the thing that drives you.

“Every seminar, every piece of information, our whole advice service, our contact centre – all the programs we do add up to that day [when a member retires].” ★ MEMBER SERVICES FUND OF THE YEAR ★

W I N N E R | Vi c S u p e r The quality of VicSuper’s advice model helped the $16 billion super fund for Victorian public-sector workers onto the winner’s podium.

In this category, the award judges emphasised the quality of a fund’s online tools, the presentation of its website and the levels of advice available. “[VicSuper] did well in every category – with a great website and online calculators – and it was a particular stand out in advice, where it has a great advice model,” award judge and CHOICE chief executive Alan Kirkland said.

Kirkland added that VicSuper clearly had skilled and enthusiastic staff.

VicSuper chief executive Michael Dundon said the win was a testament to the work his team had done over the past three years to improve the fund’s underlying technology platforms, advice offering and member-facing online services.

A little over three years ago, VicSuper refreshed its Sonata administration platform, allowing it to upgrade its website, implement a new mobile offering, and improve the connectivity to its call centre.

Event partner

JOANNA DAVISON Chief executive officer, FEAL

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★ BEST ADVICE OFFERING ★

W INNER | UniSuper Picking up its third of four awards, the $57.5 billion super fund for higher education workers was the first super fund to win in the Best Advice Offering category, newly created in 2017 to celebrate the fund that provided the highest quality of general and personal advice.

UniSuper also won a second newly created category: Best Insurance Offering. “[UniSuper] demonstrated a clear commitment to offering all levels of advice to members, and has held individual discussions with 31,577 members, including nearly 10,000 face-to-face discussions,” award judge and former Parliamentary Joint Committee on Corporations and Financial Services chair Bernie Ripoll said.

He added that in the 2015-16 financial year, UniSuper issued 3300 Statements of Advice, and he praised the pure fee-for-service model.

UniSuper executive manager, advice and employer relationships, Jack McCartney, said the fund planned to keep expanding its advice offering.

“We will be opening more offices and expanding the model,” McCartney said. “We do plan to work with third-party advisers as well. We are a professional practice with the [Financial Planning Association] – the first fund of our type to become one of those – so we have very high professional standards, and that’s where ASIC wants us to go.”

Sometimes we as an industry jump to a product solution. In the post-retirement phase, it’s about information and advice and guidance. MICHAEL PENNISI | QSUPER ★ BEST TECHNOLOGY OFFERING ★

W I N N E R | B T Pa n o ra m a This new category was introduced to highlight super funds that demonstrate the best use of technology to support members in managing their accounts and maximising retirement outcomes.

In presenting the award, Financial Services Council chief executive Sally Loane said BT Panorama had undertaken a large-scale, and very expensive, technology project that aims to link all of its products and services, including banking, insurance, superannuation, investments and cash-management accounts.

“The technology is not just an adviser tool, as other platforms are, but can be used by individuals,” Loane said. “The technology ultimately allows people to manage their wealth holistically.”

BT Financial Group head of self-managed superannuation funds, Craig Lawrenson, said the beauty of the one operating system was that it created a great customer experience.

“Our reality was we could either renovate old technology or we could – if you’re looking for an analogy – buy a block of land next door and build a new house,” he said. ★ INNOVATION AND TRANSFORMATION ★

W I N N E R | Au s t ra l i a n C a t h o l i c S u p e ra n n u a t i o n GRAHAM LONG Pastor and CEO, The Wayside Chapel

KEVIN O’SULLIVAN UniSuper

THE BT PANORAMA TEAM

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In a fiercely competitive field, the $7 billion fund for people working in the Catholic sector demonstrated significant progress in the areas of operations, structure and products.

In particular, the fund has developed a new pension option that acts as a soft default – an account-based pension with a bucketing strategy, allowing the member to nominate what their drawdowns will be.

“We are pleased to say this was a very close category, and the chair’s vote was used to determine the winner,” award sponsor and AIA Australia chief executive Damien Mu said.

Australian Catholic Super head of marketing and business development, Cameron Wood, thanked actuarial and consulting firm Rice Warner for its “many months of work” helping the fund develop its proprietary retirement income solution.

“Now, as those members move into the pension phase, we have a default option for them that automatically re-balances,” Wood explained. “The product’s primary purpose is to assist members in maintaining their retirement income through all market conditions. Drawing down from the cash bucket, rather than from the bucket of growth assets, will prolong retirement income.”

Award judging committee member and Rice Warner chief executive Michael Rice abstained from voting in this category.

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AWARDS \

★ SMALL FUND OF THE YEAR ★

W I N N E R | Au s t S a fe S u p e r The investment prowess at the $2 billion industry fund for rural and regional communities brought it across the line to win in what the judges described as a tight race.

All of the finalists were neck-and-neck on member services and insurance offerings, but AustSafe stood out when it came to investments, award judge and Fund Executive Association Limited chief executive Joanna Davison said.

She added that AustSafe had good past performance and did well on forward-looking estimates of member benefits, based on the structure of the default option.

The fund’s general manager, investments, Simon Mather, said the team had made it easier for employers to select AustSafe as their default choice.

“We’ve been able to [set up] in very regional parts of Australia, where some of the funds have been unable to have people,” Mather said. “We are a small fund, but the fact is, when you get something like this, you feel like you are making a difference to your members.”

THE MTAA SUPER TEAM

★ MEDIUM FUND OF THE YEAR ★

W I N N E R | M TA A S u p e r The $9 billion super fund for workers in the motor trades scored the highest mark out of any fund, across all the 12 categories, in forward-looking estimates of member benefits, based on the structure of its default option.

Award judge and NZ Super chief executive Adrian Orr said this was a stellar achievement, and also praised the fund for rating the highest for member services in the category.

MTAA Super chief executive Leeanne Turner said everyone on the fund’s board, executive and staff deserved credit for the award, while noting the fund’s impressive turnaround under her leadership since 2011.

“This is a team effort,” Turner said. “And that team includes the board, a fantastic management team and fantastic staff.

We have all been on a long journey, which has been about putting members first and driving a new roadmap – pardon the pun – of where we are going.

“We are all very proud of what we have done but also acknowledge there is more to be done as we continue to work on ensuring our members have the retirement they deserve.”

THE QSUPER TEAM

★ LARGE FUND OF THE YEAR ★

WINNER | QSuper

CAMERON WOOD Australian Catholic Superannuation

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The $65 billion super fund for Queensland public sector workers took home this award as its second gong, after also winning Pension Fund of the Year.

“As you might imagine, identifying the best large fund was one of the most difficult decisions to make in this year’s awards,” award sponsor and Vanguard Australia head of distribution Matthew Lumsden said.

In the end, QSuper’s superb member services, flexible and high-performing investments and impressive pension option put it ahead of the pack.

“I feel very lucky to work in an industry where we get to do good things, and come to work every day with people I admire,” QSuper chief executive Michael Pennisi said.

While 2016 was a huge year for QSuper, 2017 is set to be even busier. Legislation recently passed in Queensland Parliament that will allow the fund to go public offer.

“We will open our doors at some point this year, but we won’t change our spots,” Pennisi said. Ñ

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\ CIO PROFILE

P OW E R of

T WO

J O I N T W I N N E R S O F | C h i ef I n v e s t m e n t O ff i c e r o f th e Ye a r | AT T H E C O N E X U S F I NA N C I A L S U PE R A N N UAT I O N AWA R D S 2 0 1 7 – C b u s S u p e r ’s Tr i s h D o n o h u e a n d K r i s t i a n Fo k – t a l k t o I n v e s t m e n t M a ga z i n e a b o u t t a k i n g control, and their contingenc y plans.

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CIO PROFILE \

By Sally Rose Photos Matt Fatches

TRISH DONOHUE Executive manager, investment management Tenure: 17 years (appointed 2000) Qualifications: Bachelor of Science, actuary, CIMA designee, Fellow of Finsia Other current roles: Deputy president and board member, Australian Council of Superannuation Investors Previous roles: Investment consultant, Mercer Melbourne; investment and actuarial analyst, Mercer Auckland; actuarial analyst, Mercer Melbourne

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CBUS SUPER EXECUTIVE manager, investment management, Trish Donohue, is publicity shy, while the fund’s executive manager, investment strategy, Kristian Fok, loves the limelight. It is just one of the many differences in their personalities and skill sets that have made them such a winning partnership for nearly two decades, held together by the glue of a shared sense of purpose.

The pair were joint winners of the prestigious Chief Investment Officer of the Year trophy at the Conexus Financial Superannuation Awards 2017, announced at a gala dinner at Ivy Ballroom in Sydney on March 9. Together, they share responsibility for the traditional chief investment officer role at the $37 billion construction industry fund.

“Kristian and I have actually been working together for 17 years,” Donohue said as the pair stood together on stage to accept the award on the night. “And while we don’t always agree, we do work well together. I put that down to a shared belief in always looking after the best interests of our members.”

Fok thanked Donohue for her vision in bringing him on board to help implement the fund’s ambitious growth strategy.

“I’d like to thank Trish for guiding me since I joined, and for understanding the enormous potential of the fund,” he said.

Donohue was the founding member of the Cbus investment team in 2000 and has led it ever since. A former Mercer consultant and actuarial analyst, she was originally hired by the fund to oversee its asset allocation strategy and external fund manager selection process.

In 2011, she spearheaded a major review of the fund’s investment strategy that led to the board approving a proposal to bring Fok, the fund’s long-time asset consultant from Frontier Advisors, in-house to share the chief investment officer role.

Fok’s former boss at Frontier, the firm’s inaugural managing director now its director

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CBUS SUPER of consulting, Fiona Trafford-Walker, has observed the dynamic between the Cbus co-CIOs up close.

“I’m sure they don’t always get along perfectly but they are really good at having healthy professional disagreements and I think they bring out the best in each other,” Trafford-Walker says. “It is definitely one of those situations where one plus one equals three. It is very refreshing to see two such senior people in the finance sector who are so much more focused on the long-term goals of the fund than their egos.”

In a crude sense, their respective responsibilities at the fund are split so that Fok now has primary oversight for investment strategy, while Donohue has primary oversight of implementation.

INSOURCING PLANS

In August 2016, the Cbus board approved a plan Donohue and Fok assembled to lift the proportion of assets managed in-house from 8 per cent to 20 per cent within five years.

To support this strategy, the board also signed off on the hiring of an additional 25 internal investment staff. The new members of the internal team will mostly be specialists in equities and infrastructure.

As of March 2017, the growing Cbus investment team consists of 55 staff, who are researching and readying to take on mandates. Subsidiary Cbus Property, the fund’s wholly owned real estate developer, manages another 5 per cent of member assets.

Cbus Property employs roughly 35 staff and has created more than 70,000 construction jobs via its direct investment program since the business was created.

The Cbus Property portfolio exceeds $3.2 billion, with a further $5.0 billion of development work in hand.

In total, roughly 10 per cent of the fund’s total assets are managed in-house. Under the new insourcing strategy, and with total funds under management projected to swell to $50 billion by 2021, the internal investment teams are set to be collectively managing at least $10 billion within four years.

The real number could be significantly higher.

“Getting up to 20 per cent is a fairly conservative target. If you look at some of the big international pension funds, 30 per cent

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internal management is quite typical,” Fok says.

He was adamant that they are in no rush.

“We want to do this right, and let me be clear, we are not looking at removing all external managers. Although [we are already] finding new ways to work with our managers,” he explains. “Things we expect to do more of include co-investments, designing strategies and having them implemented by external managers, and non-discretionary mandates, where the manager produces opportunities and we say yay or nay.”

Donohue takes the lead on negotiating manager contracts and has already had success in reducing costs since the insourcing strategy was announced late last year. The strategy aims to allow the fund to lower member fees by 10 to 15 basis points within five years.

Fok says that estimate is now “looking conservative”.

As well as shaving off costs, these types of structures all make it possible for Cbus to exert more control in their fund manager relationships. By investing in fewer prepackaged products alongside other investors, Cbus is reducing the risk of managers being able to lock-up their members’ funds in the event of another market crisis.

Total FUM: $37 billion Total members: 742,000 Average member balance: $46,160 Average member age: 38 Percentage of members in accumulation phase: 99% Percentage of default members: 90% Proportion of funds managed internally: 10% Total staff: 266 Investment team staff: 50

CBUS ASSET ALLOCATION

Balanced fund at June 30, 2016 Australian shares

25.87

International shares

21.97

Private equity Opportunistic growth

3.22

Infrastructure

11.37

Property

11.17

Alternative debt

6.60

Fixed interest

4.44

Cash

8.77

CBUS HISTORICAL PERFORMANCE

MySuper Balanced Options as at 31 January, 2017 11.6

10.9 8.9

9.9

8.9 9.8

DE-RISKING THE PORTFOLIO

Even without a significant downturn, the current investment outlook is challenging.

About two years ago, Cbus lowered the target return on its MySuper product by 25 basis points and there remains a risk this may have to be reviewed again, amid meagre global growth and ultra-low interest rates.

Over the past four years, Cbus has progressively reduced its exposures to private equity funds and listed equities, while increasing diversification.

Less headline grabbing than the insourcing strategy, but equally important, is Donohue and Fok’s ongoing effort to de-risk the portfolio.

Another outcome of the investment committee review back in 2011 that led to separating out the strategy and management teams was a change in the investment strategy to focus on absolute returns.

Donohue says this was a pivotal decision

6.57

8.1

7.5

6.0

5.1

1 YEAR

3 YEARS

5 YEARS

7 YEARS 10 YEARS

(% PA)

Median – SR50 MySuper Index SOURCE: SuperRatings Cbus

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Across tamEl et harum est dempore custia nus conecum consequ untota nosae. Apictat quaspelic tessin repudae eius dolorent, velia alit ra

KRISTIAN FOK Executive manager, investment strategy Tenure: 4.5 years (appointed 2012) Qualifications: Bachelor of commerce, fellow of the Institute of Actuaries, fellow of Finsia Previous roles: Deputy director of consulting, Frontier Advisors; deputy managing director, Frontier Advisors; senior consultant, Frontier Advisors; consulting actuary, Buck Consultants

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because it has freed up the investment team to care less about how they might be performing against rival funds in the short term.

“Peer risk…still needs to be acknowledged but it’s important that it is not allowed to be a big driver of investment decisions,” she says.

Peer risk refers to the risk of members choosing to take their money out of the fund during a period of relative underperformance.

“We are mindful that we are in a choice environment, so people can always switch if they feel the fund is not performing,” Donohue says. “But we don’t want that to be a driver because when you are comparing yourself to others you are always looking backwards.”

Of course, it is easy to say you don’t care about league tables when your fund is doing well. According to data from research house SuperRatings, Cbus MySuper has outperformed its peers over the past one, three, five, seven and 10 years.

Donohue says having a focus on absolute returns, rather than benchmark-relative returns, makes the most of the competitive advantages of strong liquidity and cash flow

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Peer risk…still needs to be acknowledged but it’s important that it is not allowed to be a big driver of investment decisions the fund gets from its default status by allowing it to maintain an allocation of about 40 per cent to unlisted assets.

Roughly 90 per cent of the membership is automatically signed up by their employer.

“The fund is very resilient. Inflows have grown significantly this past year, compared with recent years, and forward-looking stress testing indicates continued strong cash flows,” Donohue says.

She is mindful, however, of the risks associated with relying on this.

“We do a lot of work around liquidity stress-testing on a regular basis, to check how the portfolio would react to a number of elements that might affect liquidity, not just if there were changes to default, or another driver of changes to contribution rates,

but also to downturns in markets and how that might affect our unlisted assets and other exposures,” she says.

Cbus is holding about 10 per cent of total assets in cash.

“That’s a higher allocation to cash than we would typically have but it is offset by a much lower than typical allocation to fixed income,” Fok says.

Roughly half the cash holdings are managed internally.

“Managing more cash internally, as well as lowering costs, gives us more control,” Fok explains. “In the GFC, lots of funds had their whole cash accounts locked up for periods.”

Donohue adds the fund has spread out the roll-out periods on their cash accounts to make the liquidity profile less lumpy.

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Since the global financial crisis, and particularly in the past four years, the fund has expanded its use of sophisticated derivatives and futures overlays. This will allow it to move more quickly if there was ever a rising concern about any potential changes in the liquidity profile.

“There were a couple of lessons from the GFC and, in response, a lot of things have been repositioned and we continue to enhance the strategy’s flexibility,” Fok says. “The great thing about using options is it allows you to generate cash when you need it most.”

PROPERT Y RISKS

Flexibility is important when such a high proportion of the fund is in unlisted assets.

The financial year ended June 2016 was a bumper period for Cbus Property, with the portfolio returning above 24 per cent for the 12 months. Over the past 10 years, the property fund has delivered an average annual return of nearly 17 per cent.

But many, including the Reserve Bank of Australia, have questioned the sustainability of the nation’s property boom, which raises the question of whether Cbus Property’s success is another potential source of future vulnerability for the fund.

Donohue and Fok argue that the direct investment structure makes Cbus less vulnerable in the event of a property market downturn than if it only invested via external property funds.

In the GFC, it became quite difficult to redeem out of a pooled property trust. But Cbus was able to liquidate a couple of small real-estate assets it owned directly to tap into cash.

A property downturn could be a double whammy for Cbus, as it might be accompanied by a drop in employer contributions on behalf of its construction industry members.

Someone Donohue and Fok turn to for advice on managing the risks associated with the fund’s property exposures is Cbus Hi-Res PDF - GOOD For Print investment chair Dunne, PrM StephenAcD GrD SIGN OFF BOX committee who is a former chief executive of AMP

Capital, one of the country’s biggest property investors.

Dunne joined the board as investment committee chair in November 2015, bringing a “different personal flavour” to governance than his predecessor Peter Kennedy.

“He’s put a five-page limit on all papers to the committee, which really forces us to be succinct, then questions us to drill down when needed,” Fok says.

Donohue says Dunne’s background at AMP Capital gives him great insights into what the fund is trying to achieve in building up an internal investment team.

As investment committee chair, he will no doubt also have curly questions about how Donohue and Fok are reviewing the performance of internal management teams.

As with external managers, those who do well can expect to see their allocated funds under management increase, while those who underperform long term will face the axe. Frontier has also been engaged to play a formal role in internal manager assessment. Ñ

Working harder than ever, to support members when it matters most.

At CommInsure, we understand that making insurance as simple as possible for members is essential. We’re working harder than ever to ensure our streamlined claims process, committed support and specialised rehabilitation teams are there for your members in anyway required.

Now, and in the future.

For more information visit www.commbank.com.au/working

Important Information: CommInsure is a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA).

CMLA is a wholly owned but investmentmagazine.com.au APRIL 2017 non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. The information is of a general nature only and is not specific advice.

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\ COLUMN

Introducing the Member’s Default Utility Function Version 1 (MDUF v1) Industry officials and academics have created a formula designed to anticipate people’s financial preferences and help funds assess the BEST RETIREMENT ACCOUNT OPTIONS for their default members.

PROVIDING BETTER RETIREMENT solutions is a huge, complex challenge.

Finding the answer starts with clearly defining what we are trying to achieve for members in retirement.

Obviously, it is easier for super funds to understand the retirement needs of those members who become financial advice clients. However, most members just default into retirement solutions without seeking any advice. What should the trustees of a super fund assume about the retirement outcome objectives of these default members?

The industry needs to mature by developing products, solutions and strategies that meet the retirement outcome challenge. Currently, the absence of a clear, measurable objective hinders the industry’s efforts.

This was the idea behind the Member’s Default Utility Function Version 1 (MDUF v1) project. We as funds typically know little about our default members. MDUF v1 is a framework developed to address this. A panel of academics and industry professionals has established it to determine an appropriate, sensible set of objectives for trustees to assume on behalf of their default fund members.

The panel (detailed in the box) has more than 200 years of relevant experience.

We believe this new framework outlines

how this challenge can be met.

Throughout the MDUF v1 project, the panel asked: What is a sensible set of financial preferences for a trustee to assume on behalf of a default fund member?

These preferences were then converted into a mathematical function, known as a utility function. This was given the name Member’s Default Utility Function Version 1 – MDUF v1 for short.

MDUF v1 captures preferences that are intuitive but aren’t considered by other metrics. In particular, it recognises the importance of income level and variability.

It also places a value on any residual benefit

MDUF V1 TEAM Co-ordinators and lead authors  David Bell, Mine Wealth + Wellbeing  Estelle Liu, Mine Wealth + Wellbeing  Dr Adam Shao, Mine Wealth + Wellbeing

Working group members  Anthony Asher, UNSW  Nick Callil, Willis Towers Watson  Geoff Kingston, Macquarie University  Dr David Knox, Mercer  David Schneider, 10E24  Tim Unger, Willis Towers Watson  Dr Geoff Warren, Australian National University

Informal contributors  Dr Jack Ding, Milliman  Wade Matterson, Milliman  Craig McCulloch, Milliman  Nicolette Rubinszstein, UniSuper

The industry needs to mature by developing products, solutions and strategies that meet the retirement outcome challenge APRIL 2017

BY DAVID BELL ___

David Bell is the chief investment officer of Mine Wealth + Wellbeing and one of the lead authors of the research paper, Member’s Default Utility Function Version 1.

and acknowledges that most people are risk averse.

MDUF v1 is a credible and powerful metric that industry, regulators and policymakers can use for varying purposes. Possible applications include: post-retirement solution design by super funds and other product providers, assessment of design by regulators and ratings groups, and welfare analysis by policy groups.

We all know existing retirement outcome metrics the industry uses are flawed. We believe MDUF v1 is superior. The project took about 18 months to complete, due to robust discussion and deep research. We are proud that we have been able to make MDUF v1 available to all through an open architecture format supported by the Australian Institute of Superannuation Trustees and the Association of Superannuation Funds of Australia, which have jointly taken on the role of custodians of this work.

We encourage the industry to collaborate further on addressing the retirement outcome challenge and we see the sharing of this work as a step in that direction.

The MDUF v1 paper research and framework was unveiled at the Conexus Financial Post Retirement Conference 2017. Ñ

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\ INVESTMENT OPERATIONS

A VIEW

future TO THE

At the 20th CONEXUS FINANCIAL Investment Operations Conference, in February, two pioneers of the industry, who have seen it through 25 years of rapid change, were recognised with a LIFETIME ACHIEVEMENT AWARD. Sunsuper’s Lounarda David and NAB Asset Servicing’s Ravnol ‘Rav’ Gray share their PREDICTIONS FOR THE DECADES AHEAD.

By Dan Purves Photos Matt Fatches

BLOCKCHAIN, ARTIFICIAL INTELLIGENCE, robotics, automated data entry and data mining are some of the big technological trends set to radically disrupt the way the back-office teams of superannuation funds and their service providers do their jobs in the not-too-distant future.

The onslaught of change confronting investment operations teams is not limited to technology, though. The shift in assets to the deaccumulation phase, mergers, growth in funds under management and unrelenting regulatory changes are forcing industry players to make serious decisions about what to prioritise.

Investment operations refers to all the cogs of the financial services machinery, and covers areas such as the implementation of investment transactions, performance reporting, analytics, fund administration, custodial services and operational due diligence.

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At the 20th Conexus Financial Investment Operations Conference, in February, two pioneers of the industry were recognised with a Lifetime Achievement Award. The recipients were Sunsuper chief investment operations officer Lounarda David and NAB Asset Servicing associate director, client relationships, Ravnol ‘Rav’ Gray.

David and Gray spoke to Investment Magazine about the changes they’ve witnessed in the investment operations industry over the first 25 years of compulsory super and shared their predictions for the decades ahead.

Given their track records it would be wise to listen. Both got their start in superannuation investment operations, then a cottage industry, prior to the establishment of the Australian Prudential Regulation Authority (APRA), at a time before smartphones, when most back-office functions were done on paper.

In 1995, the year APRA was established, the total superannuation pool was worth less than $231 billion. Today, the sector is worth roughly 10 times that, regulation is multifold, and funds are under pressure to provide sophisticated digital and mobile services to their members.

Looking ahead, both David and Gray predict the coming 20 years will bring even more change than the previous two decades.

“Dealing with regulatory change, while dealing with fund growth, whilst dealing with volatility and technology transformation, and supporting fund members by trying to get fund products to them faster and better to support them in retirement – it is beyond juggling,” David says.

ONGOING TECHNOLOGICAL INNOVATION

The phenomenal growth of the super sector to $2.1 trillion means investment

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INVESTMENT OPERATIONS \

However, it is hard to predict what this will eventually mean.

“It’s a real dark area for a lot of super funds and their back office, because we are not sure how that will affect us,” Gray says.

David agrees that emerging technology will change the way the industry thinks about investment operations models.

The Australian Securities Exchange has flagged it is considering the use of Blockchain as it updates equities settlement and clearing system CHESS. It would be a world-first to embed Blockchain in a critical piece of market infrastructure.

“The phenomenal increase in data flexibility that would come as a result of the ASX using Blockchain technology would transform how super funds think about data, how they store it and how they use it,” David says.

UNRELENTING REGULATION

Lifetime Achievement Award winners LOUNARDA DAVID Chief investment operations officer | Sunsuper

RAVNOL GRAY Associate director, client relationships | NAB Asset Servicing

operations teams need to be more proactive and innovative on the back end, so the front office can deliver.

A major component of this is managing greater volumes and varieties of data, at faster velocities.

Growing investment teams need different support from the back office, particularly in relation to data, and the ability to cut and splice it into new, informative formats.

“That means the custodians and administrators need to [have] their systems in real time, so they can cater for all the needs of the analysts,” Gray explains.

Reports from Deloitte and McKinsey & Company predict that automation using artificial intelligence – also known as intelligent automation – might be the next big game changer in terms of process efficiency. Gray sees some potential.

“Clients do appreciate us moving to automation as much as possible…because

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as soon as you do have human touch you are open to the risk of error,” Gray says.

“But there will always be a level of manual intervention.”

With rationalisation occurring across the industry from the automation, Gray predicts that in 10 years there will be fewer custodians, partly as a result of mergers between providers and players dropping out of the market.

The winners in this consolidation will probably be those custodians that can also assist super funds in meeting another major challenge – retaining members as they transition to the deaccumulation phase.

“How custodians and other providers can assist [as members transition to retirement] will be the biggest thing we need to look at in the next 5 to 10 years,” Gray forecasts.

To provide this assistance, industry players are increasingly relying on and delving into the electronic wizardry of developments such as Blockchain’s distributed ledger technology.

Coinciding with technological evolution is the unrelenting pace of regulatory change.

Funds are readying for the raft of changes to super tax rules effective July 1, 2017, and the implementation of new fee and costs disclosures ushered in by RG 97 from September 1, 2017.

Gray says the changing regulatory environment will continue to exert massive pressure on industry players into the foreseeable future.

“Every year, regulation seems to double and double,” Gray says. “A couple of years ago, it was only APRA but now we are having the Australian Securities and Investments Commission and the Australian Bureau of Statistics asking for information. It seems to be snowballing.”

The sources of regulatory pressure are not confined to Australia; increasingly, regulations from other parts of the world are being imposed on super funds, as their investment reach crosses overseas.

“It is very difficult, particularly when you go through different time zones,” David says. “The terminology changes [and words] don’t necessarily mean the same thing,” David says.

Luckily for David and Gray, both enjoy a challenge.

“There’s a lot going on in this industry, which is why I like what I’ve done for the past 30 years,” Gray says. “You come in each day and you don’t know what you’re going to be hit with; there are so many changes that just keep you on your toes daily.” Ñ

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\ BUILDING RESILIENCE

BROADER MINDS for

MENTAL HEALTH At the MENTAL HEALTH AND WELLBEING IN THE WORKPLACE seminar, employers found their peers were taking the issue more seriously, and extending the discussion beyond STOPPING SUICIDE.

The Mental Health and Wellbeing in the Workplace event took place on March 8 at the Sydney office of Perpetual, and was sponsored by AIA Insurance and SuperFriend.

MARY ANN BAYNTON Executive director of Mindful Employer Canada and program director for the Centre for Mental Health in the Workplace

By Simon Hoyle Photo Matt Fatches

HOST: Colin Tate, chief executive, Conexus Financial

KEYNOTE SPEAKER Mary Ann Baynton, executive director of Mindful Employer Canada and program director for the Centre for Mental Health in the Workplace

PANELLISTS Teifi Whatley, executive general manager, customer and technology, Sunsuper Margo Lydon, chief executive, SuperFriend Damien Mu, chief executive, AIA Australia Paul Schroder, group executive, membership, AustralianSuper

MODERATOR: Sally Rose, editor, Investment Magazine LIFELINE – 13 11 14 BEYOND BLUE – 1300 22 4636

THE HEALTH AND dental benefits company had a problem. Unrest and dissatisfaction were rife among its call-centre staff, and performance was suffering. The organisation turned to one of Canada’s leading authorities on mental health and wellbeing at work to try to get to the bottom of it.

Mary Ann Baynton, executive director of Mindful Employer Canada and program director for the Centre for Mental Health in the Workplace, says she started to interview the call-centre staff and quickly realised they fell into one of two camps: they either loved – really loved – where they worked, or they hated it.

Baynton went back to the interviews and noticed that staff who loved their jobs had almost all worked in call centres before. They knew what to expect in their current role, and thought the working environment was better than they’d experienced elsewhere. Those who

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hated it, again almost to a person, had never worked in a call centre before, had no helpful points of reference and resented restrictive work practices and rules that went with the job.

“We gave this information back to the employer and they were then able to manage expectations differently, to orient people differently, and even to hire people differently, so they had that expectation coming in,” Baynton says.

The call centre’s story illustrates a major issue all employers face in creating and maintaining psychologically healthy employees. Baynton says a healthy workplace is, simply, one where employees go to work, work hard, feel that what they do matters, and leave at the end of the day with some energy left over.

A heavy workload isn’t necessarily a precursor to mental health issues, Baynton says.

“Think about a time when you were really excited to work on a project, to do something, to

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BUILDING RESILIENCE \

get involved with something at work,” she says. “You were probably working at your highest speed, you were probably producing as much as you possibly could, and I bet you didn’t mind the workload.

“But think of a time when there was just conflict and pressure and you felt that no one was listening to you, you felt you weren’t validated. Well, then any work is too much work. So workload is only an issue if we’re made to feel that our work isn’t valued.”

Psychologically healthy employees are not made to feel powerless, nor subjected to acts of hostility or cruelty by workmates and managers. Enlightened employers and employees alike recognise the symptoms of, and act quickly to prevent, burnout; and employees are supported in developing resilience. Happy and mentally healthy employees are also productive employees.

Workplace mental health is a serious matter, and employers are taking it more seriously. In extreme cases, mental health issues – in and out of the workplace – can lead to suicide. The chief executive of Conexus Financial, Colin Tate, told the 2017 Mental Health and Wellbeing in the Workplace seminar in Sydney on March 8, sponsored by AIA Australia, that there were more than 3000 such cases in 2015 alone, more than 1.5 times the national road toll.

But the discussion about mental health goes beyond suicide.

“Mental health impacts on all of us,” Tate says. “The cost to insurers and to the nation is now many, many billions of dollars a year.

The cost to families in heartache [can’t] be accounted for.”

Margot Lydon, chief executive of the superannuation fund-backed mental health foundation SuperFriend, says that for every suicide, another 135 lives are “directly and substantially affected”.

Lydon says suicide is “at the pointy end of the spectrum” but we need to consider what we can be doing as individuals “to make a significant difference in our workplaces, but also to our own mental health and wellbeing”.

Damian Mu, chief executive of AIA Australia, says addressing mental health has been helped by a shift in public perception.

“The dialogue has changed from one of, ‘How do we get the issue on the table?’ ” Mu said. “We talk about the rising incidence of mental health-related claims in group life.

I don’t know if they’re rising or whether they just weren’t lodged before, but we know that

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it is prevalent and we know we can make a difference by supporting and assisting people – and that starts with your own organisation.”

Baynton says she asks three questions of any employee who is struggling.

The first question is what the employee needs “to be able to come to work, do a good job and leave at the end of the day with some energy left over”.

Then she asks what the employee is going to do to “support your own wellbeing in the workplace”. Finally, she asks what will happen if this new approach doesn’t work.

She says the aim is to get “commitment from them to a solution that allows them to work, rather than compliance with a solution that I give to them”.

Paul Schroder, group executive of membership with AustralianSuper, says the typical components of post-traumatic stress disorder often play out in workplaces – including dealing with unexpected events, incidences of intentional cruelty, and consequent feelings of powerlessness.

He says all managers and leaders within organisations should actively consider “what you can do as a leader to make the people around you feel ‘empowered’ about being in this workplace”.

He said access to employee assistance programs (EAPs) is often extremely helpful, and leaders play an important role in destigmatising such services. Schroder himself was honest and open about his own use of AustralianSuper’s EAP. Asked what staff should be told of his whereabouts when he was getting assistance, Schroder says he replied: “Tell them I’m in an EAP meeting.” His frankness helped to break down barriers for staff who’d previously been reluctant to seek help.

Teifi Whatley, executive general manager of customer and technology at Sunsuper, says

leaders inside organisations need to know “people as people”, and understand that stresses occur for employees both within and outside of work.

Recognising the issues employees encounter, and supporting them the right way in dealing with those issues, helps create more resilient individuals and organisations, Whatley says.

“It doesn’t mean there are not times when people are stressed, and in reality we’re in one of those right now,” she explains.

“We have a lot of things on the go, but we are very, very aware of it and, as leaders, it is our responsibility to help people work through those. But also, to [say] to them we know that, we understand that – and this is what we’re doing about it.”

AIA’s Mu says the insurer works with a range of organisations and employers and they’re all at different stages of recognising the benefits of psychologically healthy workplaces, and how to create them.

“From a [superannuation] fund perspective, those funds that have recognised the importance of it in their own workplace generally have a very good understanding of how that manifests in other workplaces and how what they do can connect to that,” he says.

SuperFriend’s Lydon says that as the chief executive of a national mental-health foundation, “when we recruit somebody into the organisation, they walk in expecting that we are gold standard, that we do this beautifully. We don’t, not always, as my team will attest,” she says. “We try to do it as best we possibly can, but our journey is no different from any other workplace journey. We have stumbled, we have fallen down, we’ve picked ourselves up and brushed the dirt off our knees, and kept going. And we’ve learned from that.” Ñ

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\ EXIT INTERVIE W

How the

RUBBER

HIT THE

ROAD for Tom Garcia

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EXIT INTERVIE W \

From the excitement of changing tyres for Peter Brock in the pit at Bathurst, to the dread of having to call victims of the Westpoint collapse, to battling the government’s planned shake-up of profit-to-member superannuation fund boards as chief executive of the AUSTRALIAN INSTITUTE OF SUPERANNUATION Trustees, it has been a winding road that has brought Tom Garcia to his new role at AustralianSuper.

By Sally Rose Photos Matt Fatches

PROTECTING THE PROFIT-to-member ethos of industry, government and corporate super funds needs to be the top priority for the incoming chief executive of the Australian Institute of Superannuation Trustees, outgoing boss Tom Garcia says.

“If that profit-to-member way of being is not maintained, then there is not a huge difference between us and the retail funds,” he argues.

AIST is the peak body for industry, corporate and government superannuation funds. Garcia steps aside having recently completed a review of the organisation’s reason for existence, satisfied that it continues to fill an important niche.

“In 2016, we did a lot of research into what the value proposition was for AIST, and concluded that the distinguishing feature of our sector is the profit-to-member ethos,” he says. “Previously, our mission statement was to provide retirement income, but a peak body can’t actually do that, only a fund can do that, so we thought more carefully about what it was that AIST did to help funds deliver on that.”

Garcia says that as part of that strategic review, AIST considered “whether it was time to shut up shop”. Most of AIST’s member funds are also members of one of the two other super peak bodies that service profit-tomember funds: Industry Super Australia and the Association of Superannuation Funds of Australia.

“We questioned our reason for existence…I think it is a very healthy thing for an organisation to do…and through that introspection, we concluded that AIST is filling a very important role.”

The organisation is in the early days of a new three-year strategic plan designed to focus its efforts on protecting and promoting the profit-

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to-member model of its member funds.

Central to that will be continuing to fight to preserve the sector’s traditional practice of letting funds’ employer and union stakeholders each appoint an equal number of trustees.

Garcia spoke to Investment Magazine in the days before he officially stepped down as AIST chief executive on March 10, 2017, after four years in the role, having previously been policy and regulatory manager for two years. He announced his resignation in December 2016, having accepted the role of head of product at AustralianSuper, the nation’s largest industry fund.

At the time of our interview, Eva Scheerlinck had just been appointed AIST acting chief executive, as the board continued interviewing applicants for Garcia’s permanent replacement.

Scheerlinck has held the role of AIST executive manager, governance and stewardship, since 2010.

ORIGINS

As a 25-year-old working his dream job changing tyres in the pit for car-racing legend Peter Brock at the Bathurst 1000, it would have seemed inconceivable to Garcia that he would wind up with a career in the superannuation industry.

The young mechanical engineering graduate got his first “real job” in a Sydney dairy before landing the gig with the Holden racing team’s tyre maker, Bridgestone. After a few years with Bridgestone, Garcia moved to rival tyre maker Michelin, where he spent nine years, ending up as head of engineering.

That last year at Michelin was tough.

“Michelin is an organisation with a lot of integrity,” Garcia says. “The company

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\ EXIT INTERVIE W

discovered there was a problem with some of its truck tyres and we had to go through an enormous recall. I was responsible for all the forensic analysis of a series of truck crashes. Fortunately, no one had died, but at the end of that process I was exhausted and needed a change.”

It was a bad investment decision that prompted Garcia to retrain as a financial planner.

“My interest in financial planning came about because I had bought a negatively geared property in an apartment block in Melbourne’s Docklands,” he recalls. “As a Sydneysider, I had been quick to believe that there was no way you could ever go wrong with a north-facing place with a water view…Well, it turns out when they release 6000 of them plenty can go wrong.”

In the wash up, Garcia became frustrated that no one could explain to him how negative gearing worked. It was then he decided his skills honed designing automotive parts could be put to work in financial advice – “engineering for people”.

“Luckily for me, my wife was very supportive of me making a career change, as I didn’t have an income for a while,” he says.

It turned out to be a move from literal car crashes to metaphorical ones.

“The first job I had in the financial planning industry was as a receptionist, and on my very first day, my first task was to ring 200 people and tell them they had to come in and see their planner because more than half of their super had been lost in the collapse of Westpoint Corporation,” he says.

It also soon became apparent that the rules for commissions were different in his new industry.

“It took me a little while to understand the game but what eventually gelled in my mind is that when you sell someone a tyre, you settle on the price and that’s the end of the deal. But in financial services, the hand just never came out of their pocket – whether performance was high or low – and that just didn’t sit right.”

Garcia made such realisations during the period from 2006 to 2007 – which he now leaves blank on his LinkedIn profile – before he joined Industry Fund Services Financial Planning as a paraplanner.

Industry Fund Services is owned by a collection of profit-to-member industry funds.

It was a better cultural fit for Garcia’s desire to help people make the most of their money.

During his time there, Garcia consulted to AustralianSuper as a subject matter expert

APRIL 2017

on the development of their first pension product.

“I took the first phone call for the first AustralianSuper pension, eight years ago, and now I am going back there to work on the next wave of retirement income products.”

Garcia’s new role will cover all areas of product, but the development of Comprehensive Income Products for Retirement (CIPRs) will be a focus in the coming years. The government has stated it will soon require all default funds to offer retiring members a CIPR as an alternative to a lump sum or traditional account-based pension.

“The development of the CIPR framework is an incredibly important piece of policy that will shape the success of the super system over the next 25 years,” Garcia says.

PROUDEST ACHIEVEMENTS

One of the highlights Garcia counts among his proudest achievements as AIST chief executive is the launch of international study tours.

In recent years, AIST has conducted three study tours to Silicon Valley companies – such as Salesforce and Palo Alto Networks – where trustees and senior staff from member funds have learnt about the latest developments in technology, data and customer experience.

These complement AIST’s biennial international conference, Global Dialogue, which is designed to help expose local trustees to the best-practice ideas from major profit-tomember pension funds around the world.

In 2016, about 60 fund executives and directors travelled to Boston in the US to attend the 2016 AIST Global Dialogue at Harvard University. The next one will take place in Amsterdam, the Netherlands, in 2018.

AIST was established to provide

I took the first phone call for the first AustralianSuper pension, eight years ago, and now I am going back there to work on the next wave of retirement income products investmentmagazine.com.au

EXIT INTERVIE W \

at the time about people needing at least $1 million in super to retire on just upset me a lot, so it was good to get out there with some real numbers to show that even a modest super balance helps,” he says. “I did a lot of radio around that research and it was just so satisfying to have pensioners ring up and say, ‘Thank you for telling me I didn’t fail.’ ”

STILL MORE TO DO

professional development and education to the trustees of profit-to-member superannuation funds, but in recent years it has devoted an increasing proportion of its resources to engaging with Canberra types on policy development.

During Garcia’s tenure as chief executive, AIST has made “well over 200 submissions” to government policy reviews, another achievement he is “very proud” of.

“AIST’s relationships with the regulators are very, very good and those relationships are a continued strength for the organisation,” he says.

The industry, corporate and government funds that form AIST’s membership base are regulated in different ways by the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, and the Australian Taxation Office.

In recent years, there have been a handful of big regulatory changes that have kept Garcia, as a super industry spokesperson, in the headlines. The super tax changes announced in the May 2016 federal budget are one obvious example.

Meanwhile, plans to force all super funds to make one-third of their boards independent directors, and a push to shake-up the default fund selection process, have pitted Garcia in a public battle against his counterpart for the retail super lobby, Financial Services Council chief executive Sally Loane. AIST’s collaboration with

investmentmagazine.com.au

Industry Super Australia to commission Bernie Fraser to conduct an alternative governance review was controversial.

But it is less headline-grabbing policy work AIST has notched up during his tenure that Garcia sees as vital to his legacy. That includes accomplishments such as a major project with industry and regulators to rework the rules for how super funds must perform operational due diligence.

The term refers to how funds review the back-office administration and trading execution systems of their external fund managers – as distinct from due diligence on their investment strategies.

AIST helped facilitate an arrangement whereby fund managers now engage an independent operational due diligence provider to review their processes and then that report can be provided to any super fund considering investing with them.

“The benefit for our funds is that they don’t have to go pay for 40 or 50 of these reports, while the big advantage for the fund managers is that they don’t have to deal with 50 requests coming at them from different funds,” Garcia says. “It sounds like a boring achievement but that little project will save tens of millions of dollars for members over time.”

One of the most personally satisfying pieces of policy work for Garcia during his time as AIST chief executive was a 2015 research paper titled “Busting the $1 million retirement myth”.

“All the talk…getting a lot of coverage

Garcia departs AIST with a couple of big projects still on the boil. The most notable being the push to stave off the Turnbull Government’s plans to force all super funds to appoint a minimum of one-third independent directors, including an independent chair.

In February, to coincide with the release of the Fraser Review, which found no need to mandate independent trustees, AIST released a draft of a new governance code designed to lift the quality of boards at profit-to-member super funds.

AIST’s annual general meeting will be held at its Conference of Major Superannuation Funds on the Gold Coast, March 22-24, 2017, where members will vote on whether to adopt the governance code.

“I’m a bit sad I won’t be there to, hopefully, see that pass, but Eva [Scheerlinck] has put so much work into the governance code that it actually seems fitting it will be her.”

The Insurance in Superannuation Industry Working Group is another major project that will remain high on the agenda for the new AIST chief executive.

Garcia is worried about what would happen if group insurance within super were “thrown out with the bathwater” amid ongoing reforms to the broader life-insurance sector.

“Our entire industry needs to realise that group insurance is at risk and adopt a willingness to make significant changes quickly,” he warns. “The individuals involved in the working group all really get this and I am optimistic that can make a big difference.”

Asked what his top piece of advice was for whomever is named his permanent successor, Garcia says it is to not spread themselves too thin.

“There is so much to do, but with limited time and resources, it is important to focus on the big things that will make a material difference.” Ñ

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Time for some retirement girl talk Women need guidance from the industry to help them IMPROVE THEIR ECONOMIC SECURITY. They have longer life expectancies and more timeouts from the workforce, so advisers need to make them aware of ways to reduce the likelihood that they will require financial assistance LATER IN LIFE. AS AN INDUSTRY, it’s time to talk candidly with women about the structural financial challenges they face, so they can put solutions into place.

Women are at a disadvantage when saving for retirement. On average, they live longer, retire earlier, earn less and are more likely to take time out of the workforce to raise children or care for relatives, or work part-time.

Colonial First State Global Asset Management (CFSGAM) has estimated $158.8 billion would be added to the Australian economy each year if the pay gap and workforce participation gaps were eliminated. If parity were achieved in superannuation savings, an additional $455.7 billion would be added to the retirement savings pool.

There is a lot the wealth-management and financial advice industry can do to help women enjoy a more secure financial future, and support the economy at the same time.

A good place to start is helping women understand the superannuation savings gap. Australian women retire with, on average, 46 per cent less super than men.

This problem is made worse by the fact that longer average life expectancies mean women are likely to need more savings.

According to the CommBank Retire Ready Index, women earning an annual income of about $72,000, who are within five years of retirement, will need $410,000 in retirement savings to achieve a comfortable standard of living. Men in the same situation will need $355,000.

However, women retiring today have

APRIL 2017

BY ANNABEL SPRING ___

Annabel Spring is group executive, wealth management, for the Commonwealth Bank of Australia.

Australian women retire with, on average, 46 per cent less super than men.

A problem made worse by longer life expectancies an average of $104,734 of superannuation assets, while men have, on average, $197,054.

As an industry, we can do more to better communicate the long-term effects of career breaks and part-time work so

women can plan ahead.

At Commonwealth Bank, we know through our Women and Advice program research that women approach financial matters differently than men.

While many women are active money managers and eager to learn more about investment, their focus is often directed to their families and day-to-day activities, rather than on building wealth or creating a comfortable lifestyle for the long term.

This can have unintended consequences, as women could end up relying unnecessarily on financial support from their families in retirement.

Joint research by CFSGAM and the University of Western Australia shows that when it comes to investment, women tend to be more risk averse than men. For example, a key finding of the research is that women over 35 tend to hold lower exposures to shares than men.

This again highlights the need for financial advice that is specifically designed for women, to help them make the right investment choices and to generate an understanding of the risks and benefits of their decisions.

Individual life circumstances and costs are reasons why paid financial advice may not suit every woman.

However, by putting referral programs in place, and training staff to make effective referrals, advice providers can ensure that more Australian women have access to the information they need.

All financial services businesses have a responsibility to help with financial literacy more broadly, whether through school and vocational education programs like Start Smart, or through the many digital financial wellbeing tools like the Australian Securities and Investments Commission’s MoneySmart.

There is a tremendous opportunity for the industry to act now to help Australian women secure their financial futures, while opening up investment and economic development opportunities to boost the long-term sustainability of the Australian economy.

The Commonwealth Bank is the principal sponsor of the upcoming Women, Super and Wealth Summit, to be held at the Sofitel Sydney Wentworth on April 27, 2017. To register for the summit, jointly presented by the SMSF Association and Financial Services Council, visit smsfassociation.com/womens-summit/ Ñ

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\ CMSF 2017

Q& A

HOWARD BRINDLE, THE chief operating officer at Universities Superannuation Scheme Investment Management is one of the most experienced investment operations executives in the pension industry. Before joining the £57 billion ($92.2 billion) fund, which runs about two-thirds of its assets in-house, he was head of JP Morgan’s European Transfer Agency Product and chief administration officer for Lehman Brothers Asset Management Europe. Ahead of visiting Australia, to deliver a keynote address on business transformation at the Conference of Major Superannuation Funds, March 2017, he answered a few questions for Investment Magazine.

H OWA R D BRINDLE

Chief operating officer, Universities Superannuation Scheme Investment Management

Q. WHAT IS THE MOST CRITICAL OPERATIONS FACTOR FOR DEALING WITH GROW TH?

A. In my experience, it’s the strength and experience of your people. You need strong, experienced senior staff who understand how investment businesses work. Attracting good quality people involves a number of things, not just remuneration; developing a positive culture is important, certainly in terms of retention, and is something we focus on a lot at USS. Having strong senior staff also helps, as good people tend to hire good people.

Of course, being at one of the biggest and most innovative pension schemes in the country helps, too. Working in a pension fund is an incredibly attractive alternative to hedge funds and big banks.

We provide all the complexity, challenge, variety and pace of those environments, but with less artificial client-related deadlines, and without the internal bureaucracy of a large organisation. As a result, we are able to attract and retain top-quality talent, and can give them as much responsibility as they are able to handle.

Q. WHAT ARE THE CRITICAL SYSTEMS AND PROCESSES SUPERANNUATION FUNDS SHOULD HAVE IN PLACE IF THEY ARE TO BRING ASSETS IN-HOUSE?

A. The benchmarking is clear: when a certain scale is reached – I would say greater than £5 billion per asset class, maybe £10 billion for equities – the cost advantage means that in-house teams perform better. I’d add a caveat to that by saying you should in-house only assets for which you have scale and only when you are confident you will be invested in them for the long term.

For a defined benefit scheme, or any multi-asset fund, the starting point is an investment book of record, with a consolidated record of all assets,

APRIL 2017

NEVER underestimate

TOP QUALTY Whether it’s people or technology, USS chief operating officer HOWARD BRINDLE knows having the best ALLOWS YOU TO SET expectations high.

By Amanda White

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Q A

When a certain scale is reached – I would say greater than £5 billion per asset class, maybe £10 billion for equities – the cost advantage means that in-house teams perform better

linked to a risk system. Asset allocation decisions are the biggest investment decisions a scheme makes. For single-asset, defined contribution funds, an investment book of record is not as relevant.

Q. IS IT ESSENTIAL TO HAVE GOOD PERFORMANCE ANALYSIS TOOLS? SHOULD TRADING BE DONE IN-HOUSE AND, IF SO, WHAT SYSTEMS SHOULD BE USED?

A. For managing the actual underlying assets, portfolio management is the most critical system. Performance reporting, accounting, valuation, collateral management – they can all be outsourced effectively. But a portfolio management system is key. Historically, these were different per asset class, but now there are solutions (e.g., Bloomberg AIM, BlackRock Aladdin) that can cover most asset classes from a single system, and can also support processes from front to back.

Having a simple core system architecture is a huge benefit.

Trade execution can be outsourced, although not as easily. However, we’ve not felt the need to do so, [thanks to] more electronic trading venues, more seamless integration of execution venues with core portfolio management systems, and appropriately skilled portfolio managers.

To get the most out of our core systems, we use a highly skilled in-house development team that enables us to support any new business initiatives, such as integrating new teams, new external managers, new analytic systems, new reporting and so on.

investmentmagazine.com.au

CMSF 2017 \

Q. WHAT T YPE OF STAFF DO YOU NEED TO MANAGE AND MONITOR SYSTEMS?

You need people who are skilled and experienced in investment operations and IT. Find them, employ them, and look after them.

Q. HOW SHOULD YOU REWARD IN-HOUSE INVESTMENT STAFF, AND HOW DO YOU MAKE THEM ACCOUNTABLE?

A. The starting point needs to be the philosophy: what are you willing to pay for above-market performance? With scale, the cost-benefit to the scheme will be there, but the compensation philosophy, the governance and the sponsors need to be aligned.

Investment performance has a significant impact on overall funding levels, so it is arguably in the best interests of our sponsors and members for us to offer largely performance-related packages that attract and retain good-quality staff who can continue to achieve fantastic results on their behalf.

Being a captive asset manager has tremendous benefits if you can take the long view. We measure and reward staff based on performance over a five-year horizon using a formulaic underpinning to compensation, but it cannot be based just on the numbers We always apply a discretionary overlay to ensure pay is fair and proportional to individual contribution and performance.

Q. HOW CAN PENSION FUNDS WORK BETTER WITH THEIR CUSTODIANS AND OTHER PROVIDERS TO GET MORE TRANSPARENCY AROUND THEIR DATA? WHAT IS THE BEST WAY TO USE THE DATA THAT YOU DO HAVE; I.E., HOW DO YOU INTERPRET DATA FOR EFFICIENCY AND BETTER DECISION-MAKING?

A. Larger, more complex, funds like USS can no longer rely on custodians to provide all the data. If you trade exchange-traded derivatives, or over-the-counter derivatives, these may not be cleared through your custodian. Custodian data is also based on confirmed trade data and can be slightly out of date as a result. We reconcile our records to our custodians every day on T+1, but we also reconcile to external manager records, to the clearing houses and valuation agents.

This puts a burden on the in-house operation, but means we are not reliant on a single partner, and operate using multiple custodians and clearers.

Q. WHAT IS A REASONABLE BUDGET FOR TECHNOLOGY? HOW COULD OPERATING BUDGETS BE BEST ALLOCATED AND MANAGED?

A. USS has taught me that it’s better to have quality over quantity, and that you shouldn’t underestimate how much you can deliver if you give good people, who understand the business and technology, the right tools and support. We support a £57 billion fund; about 69 per cent of assets are managed in-house, with more than 100 portfolios and more than 1000 transactions a month. We have an IT team of 10 people and an operations team also of 10 people.

Our investment book of record is internally developed, all our system integration is managed in-house and we are able to respond quickly and efficiently to new demands. We’re quite unique in the UK, which, together with our size and scale, drives our innovative, cost-effective, in-house approach. Ñ

APRIL 2017

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Good governance comes from principles, not prescriptions The Australian Institute of Superannuation Trustees’ incoming GOVERNANCE CODE is a reflection of the profit-to-member sector’s commitment to protecting WORKERS’ BEST INTERESTS. SERVING AS A trustee director on a super fund board is not a job for the faint-hearted or for anyone looking to ease into retirement.

BY The industry is highly regulated, as it EVA SCHEERLINCK should be, with the retirement savings of ___ millions of Australians at stake.

Eva Scheerlinck is acting chief executive A strong regulatory framework of the Australian Institute of helps to protect the roughly $2.3 trillion Superannuation Trustees. superannuation pool and ensure that the industry is accountable to the members, who hand over almost 10 per cent of their pay cheque.

The responsibility of safeguarding people’s savings is taken very seriously by the trustee directors of profit-to-member super funds.

At funds with equal representation of member- and employer-nominated trustees, members’ interests are always at the centre of the decision-making process. Not just in an amorphous way, but represented by a tangible group of people who know and relate to members’ stories.

Super fund governance arrangements have been scrutinised in recent times by government inquiries, regulatory changes As an industry of professionals… and political conjecture. As an industry of we are up to the scrutiny professionals responsible for billions of dollars in a mandated savings system, we are up to the scrutiny. We are also proud of our record of providing great returns for members.

The Australian Institute of Superannuation Trustees has strongly opposed the government’s proposed changes to who can the AIST Governance Code at the 2017 and can’t sit around a superannuation fund Conference of Major Super Funds, on the board table. This does not mean we are Gold Coast, March 22-24, following an complacent about good governance. extensive Australia-wide consultation Our member funds are the strongest and process with profit-to-member funds. most successful in the sector, and want to The code includes more than 20 remain leaders of the pack. AIST supports recommendations across a broad range high standards of governance and we of issues, including: member engagement are committed to a culture of continuous opportunities, equal director voting rights, improvement. That is why we are launching strong risk culture, board renewal, chair

APRIL 2017

appointments, disclosure, transparency and remuneration. There is much more to good governance than who gets to sit around the board table.

Our code also recognises that the governance model of profit-to-member funds is distinctly different to that of for-profit funds and, therefore, requires different governance principles and recommendations.

As former Reserve Bank of Australia governor Bernie Fraser states in his recent report on governance in our sector: “To mandate the same board governance requirements for all super funds – as if they are homogeneous entities pressed from the same mould – would be to ignore the stark differences within the industry. That diversity is a source of competition and strength for the industry and not something to be whittled away, as the current government seems intent on doing.”

Our code has a particular focus on the process by which sponsoring organisations nominate directors. It includes recommendations concerning the mix of skills and experience required on boards, the need for early engagement with sponsoring organisations, the disclosure of the skills mix and the annual review of director performance.

Our code – like the ASX’s corporate governance standards – is based on principles. It recognises that prescriptive approaches to governance are unlikely to produce best outcomes for members.

Where it is considered to be in members’ best interests, AIST supports boards appointing up to a third non-representative directors to complement the value offered by directors whom member and employer organisations nominate. Some of AIST’s members have moved to this model; however, the equal representation of members and employers has remained a key factor in their board structure.

AIST’s code will be mandatory for our member funds and we will ask them to report on their adherence annually to an independent body. Good governance requires a group of people with the right values, skills and experience to make good decisions and demonstrate a strong commitment to the members they serve.

AIST’s code will ensure that these factors are always at play around the board tables in the profit-to-member sector. Ñ

investmentmagazine.com.au

AIST

LEADERSHIP PROGRAMS SUPER GRADS The AIST Super Grads program provides employers with the opportunity to offer recent university graduates – or existing employees – a pathway to leadership in the profit-to-member super industry.

AIST is currently seeking expressions of interest for employers looking to take part in the 12 month program. Recruitment commences in the first half of 2017, with the program commencing in January, 2018.

“The Super Grads program is vital if we want to recruit and develop future leaders who understand the history and ethos of the sector and our unwavering focus on members best interests – whether they are employed in investment, member services, governance or communications. The program injects a cohort of impressive, enthusiastic and diverse young people into the sector.”

For further information contact the AIST Super Grads Team on (03) 8677 3836

Cate Wood, Chair – Member Director, CareSuper

YOUNG SUPER NETWORK AIST’s Young Super Network (YSN) is an organised professional network for people working in the profitto-member superannuation sector which caters to the growing number of young professionals in the industry.

Free to join for AIST members, the Young Super Network currently delivers educational events and social gatherings throughout the year in Melbourne, Sydney, Brisbane, Adelaide and Hobart.

For further information contact the AIST YSN National Program Coordinator, Nicole Vaughan on (03) 8677 3813

aist.asn.au

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Let’s get down to business CONEXUS FINANCIAL wants to see the political system working to implement good, evidence-based public policy. Both major players have contributed to important financial services reform in recent years but THAT WORK MUST CONTINUE APACE.

BY COLIN TATE ___

Colin Tate is the co-founder and chief executive of specialist media publisher and conference producer Conexus Financial, which publishes Investment Magazine.

THE CHANGES MADE to the superannuation tax rules as a result of the 2016 federal budget sent shockwaves through our industry, but they were necessary to address the disproportionate weighting of tax breaks to the wealthy, and to make the system more flexible and inclusive.

Unfortunately, a perception of “constant tinkering” with the rules, by successive governments of all stripes, has left the public feeling that superannuation can’t be trusted.

APRIL 2017

Both retail and industry funds have an important role to play in lifting the transparency, accountability and integrity of our system to rebuild public trust.

Our political leaders could help by taking superannuation policy out of the annual budget cycle, as Labor suggested a number of years ago, and making changes to super only in line with the five-yearly Intergenerational Report.

In January, at the Conexus Financial Chair Forum, Minister for Financial Services Kelly O’Dwyer told me she supported this idea. So, in February, when I had the opportunity to address the Federal Labor Business Forum 2017 Leader and Shadow Ministry dinner, that was one idea I suggested for an initiative where both sides should get cracking on building a bipartisan commitment.

Australia doesn’t have time to waste.

While no one is denying the reality of a constrained federal budget, it is shortsighted to think we can afford any further delays in lifting the super guarantee to at least 12 per cent by 2025.

Labor has promised to do this, and it is a promise I sincerely hope the party honours if elected. Opposing the Turnbull Government’s proposed legislation to define the purpose of super because it lacks any reference to helping people achieve an adequate retirement income is pointless unless we do something practical to help average people achieve this goal.

At Conexus Financial, we want to see the political system working to implement good, evidence-based public policy. That’s why we enthusiastically engage with both sides of politics. Indeed, since 2012, both

major parties have played a key role in introducing reforms to the advice and life-insurance industry.

For the past decade, Investment Magazine’s sister title, Professional Planner, has been at the forefront of agitating for higher professional standards in the advice sector.

So it was pleasing recently to see the latest round of financial planning reforms pass Parliament.

Looking beyond the financial services industry for a moment, one of the biggest social and economic challenges facing Australia is housing affordability. If our nurses, teachers, childcare workers and police can’t afford to live in our major cities, we will all be in big trouble.

Labor took a plan to the last election to reform negative gearing and the capital gains tax discount, and gained ground on the Liberal Party. Labor should persevere with these policies.

Of course, such changes would work best if implemented as part of an agenda of broad-based tax reform. Labor would do itself a disservice if it refused to engage in an intelligent manner with ideas like reducing corporate tax rates or lifting the GST. Our system works best when the opposition is widely perceived as a viable alternative government. Therefore, another piece of unsolicited advice I offered the shadow cabinet was that they needed to do more to engage the business community.

Despite the important contribution of so many Labor-led reforms to our nation – including Medicare, the Higher Education Contribution Scheme, the float of the dollar, the superannuation guarantee, and the 2008 stimulus package – the party still struggles to be seen as a safe pair of hands for the economy.

If Labor wants to be taken more seriously by the financial services industry and business community at large, it needs to get better at communicating with it – banking royal commission or not.

After all, Labor’s pledge is “to look after middle-class and working-class Australians”, and it is impossible to do that without engaging constructively with the nation’s employers.

This column is based on a speech delivered at the Federal Labor Business Forum 2017 Leader and Shadow Ministry dinner, of which Conexus Financial was the official sponsor. Ñ

investmentmagazine.com.au

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The great reflation: a shift from monetary policy to fiscal policy In a world where central banks appear to have lost the ability to influence markets, the election of Donald Trump has invigorated the global reflation theme by foreshadowing substantial infrastructure investment and significant regulatory changes for taxes and banking. Is such optimism sustainable, and how should asset owners position their fixed income exposures in this environment?

It is imperative that asset owners keep their information current in this incredibly uncertain economic climate, in order to meet their fiduciary responsibility. Stay informed by attending the 3rd Fixed Income, Cash and Currency Forum. Come experience the latest analysis, expert opinions, thought leadership and unrivalled networking opportunities.

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f i xe d i n comefo r um. co m. au OR CONTACT Emma Brodie | emma.brodie@conexusfinancial.com.au | 02 9227 5708

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THE WAVE OF uncertainty ushered in across the globe recently is something investors will need to get used to. One of the many areas this ‘new normal’ has affected is discussions on climate policy, in Australia and worldwide.

What remains clear for investors is that if Australia is going to make a smooth transition to a low-carbon economy, policy certainty and clarity are required.

The Australian Council of Superannuation Investors engages with Australia’s top listed companies on behalf of our 35 Australian and international members, which collectively manage about $1.5 trillion on behalf of their beneficiaries, including more than 8 million Australian fund members and retirees.

One of our major engagement priorities is to find out how companies with significant exposure to climate risks are planning for medium- to long-term climate-change scenarios to enhance the sustainability of their businesses. There is a clear need for greater transparency from Australian companies on how they factor these issues into their strategic planning, risk management and capital allocation.

This is vital. As the Investor Group on Climate Change (IGCC) stated in its Investor Briefing on The Taskforce on Climate-related Financial Disclosure at the end of last year: “The market has the capacity to absorb the significant structural adjustments required to de-carbonise the economy over time if there is a reasonable level of carbon risk disclosure. Inadequate disclosure could lead to sudden movements of capital or the abrupt devaluation of assets with the potential to impact the broader market.” We’ve seen some marked improvements in these areas in recent years, as companies come to

clear that climate risk can no longer be seen as a future, or non-financial, risk. “Some climate risks are distinctly ‘financial’ in nature,” Summerhayes said. “Many of these risks are foreseeable, material and actionable now. Climate risks also have potential system-wide implications that APRA and other regulators here and abroad are paying much closer attention to.”

BY

EVEN LOUDER CALLS FOR CLARITY

Momentum continues to build, but as a nation we need to do more.

The federal government must clarify our national energy and Louise Davidson is chief executive climate policy. Even putting aside of the Australian Council of the overwhelming proof of climate Superannuation Investors, change, and the modelling that shows a collective of 35 asset owners dire consequences for the environment, seeking to advocate for the lack of a clear policy framework long-term investing for managing the impact of carbon and goals. energy is undermining investment. That goes for renewable energy, as well as coal and gasrelated infrastructure beyond 2030.

We keenly anticipated December’s release of the terms of reference for the 2017 Climate Policy Review, and were disappointed when an emissions intensity-reduction trading system for the electricity sector was taken off the table.

The Australian Council of grips with the realities of global warming.

Superannuation Investors has written to An increasing number of companies are Australia’s political leaders, as has the IGCC, articulating their position on climate change, calling on them to come together to agree to a as well as taking steps to assess and mitigate long-term climate-change policy framework. specific climate risks.

In line with Australia’s commitments under Now, in a welcome intervention, the the Paris Agreement, that framework must Australian Prudential Regulation Authority integrate the energy sector and emissions has also firmly put the case for climate reduction goals. change risk in the investment process.

It’s not just ACSI and IGCC. There is In a speech in February, APRA executive growing urgency in calls for policy clarity board member Geoff Summerhayes made it from business, industry, the energy sector, and environmental and social groups.

The 2017 Climate Policy Review terms of reference provide an important opportunity to agree on a way forward. All of us, whether in government, industry or investment, seize it as a genuine opportunity to engage productively to deliver the policy certainty vital for environmentally sustainable economic growth. Mechanisms such as an emissions intensity reduction trading regime should be part of the discussion.

We in the investment sector are calling on ENVIRONMENTAL RISK is but one source of uncertainty government to develop policy that includes in the world today, but one thing is clear – if Australia appropriate pricing of climate risks, which is going to make the transition to a LOW-CARBON ECONOMY, would lead to a more sustainable allocation of capital. Ñ the GOVERNMENT must outline a clear way forward.

LOUISE DAVIDSON ___

Climate policy uncertainty must end APRIL 2017

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The

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SYMPOSIUM

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Shifts in the paradigm Geopolitical headwinds, inflation pressures, and the growth outlook for developed and emerging markets, crossed with peaks in liquidity, income inequality, passive investment and globalisation, as well as a surprising trough in volatility – all are key challenges asset owners face. But in this transforming world, there are opportunities to generate trading ideas, optimise fund scale, transition from silo-driven portfolio construction and better understand risk-adjusted returns.

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THE SUPERANNUATION INDUSTRY was born to prepare people for their retirement.

I wonder whether this is more than just managing our members’ money to give them financial returns.

BY As per the recommendation of the 2014 Financial System PETER MURPHY Inquiry, the government plans ___ to legislate the objective of Peter Murphy is chief executive super as “to provide income in of Christian Super, a $1.2 billion retirement to substitute [for] or faith-based superannuation fund. supplement the age pension”.

Many in our industry have argued that this should be changed to “to supplement or substitute [for] the Age Pension to provide an adequate income in retirement”.

Whilst I agree with the change, I think we have focused too heavily on the income generation side of the equation and not

Give, save and spend the rest Stronger financial returns are only one side of the adequate retirement income equation. CONSUMPTION PATTERNS SIT ON THE FORGOTTEN SIDE OF THE LEDGER. Encouraging members to embrace charitable giving during the accumulation phase could leave them BETTER PREPARED FOR RETIREMENT. addressed the other side – our members’ consumption patterns.

We all know the world continues to evolve at a rapid pace. Futurist Richard Swenson argues that the 20th century was a time of historical disruption, rather than historical transition, where all main consumption indices (housing, healthcare, education, etc) moved from linear growth to exponential growth. And this was before the phenomenon of social media.

The result is we are spending more than our grandparents could have conceived of.

To give you a random example, the meat consumption of a German doubled from 30kg a year in 1914 to 60kg a year by 2014. It is nice that our European friends are enjoying more meat (hopefully including some

APRIL 2017

Australian lamb), but it demonstrates how our consumption has exploded dramatically.

Our members’ retirement lifestyle will look different from their elders. The days of a member retiring with a nice lump sum that can be used to pay off the house, buy a car, do some travel and spend money on the grandkids are quickly disappearing. Rising rates of consumer debt suggest that our members will have education debts, travel debts, a car loan and, for the fortunate ones, a mortgage in one of the major capital cities.

Meanwhile, their lifestyle expectations will be higher.

This is not to say that consumption is a bad thing, in and of itself. The 2015 Nobel Laureate in economics, Angus Deaton, argues passionately that we should be

encouraging people in poorer countries to consume more. However, I am wondering whether, in our society, we need to encourage people to consume less. We need to prepare people for their post-work season by educating them in a more holistic way.

At Christian Super, we see our role as not only to provide for our members’ retirement incomes, but also to educate them on their consumption patterns so they can have an adequate income (relative to their consumption) in retirement.

CHARIT Y AND SAVINGS, BEFORE SPENDING

Recently, I’ve been toying with moneymanagement techniques that centre on the principle of ‘Give, Save and Spend the Rest’.

The first step is to give away a predetermined percentage of income to benefit others, whether that be to churches, charities or community organisations. In some sense, it doesn’t matter where members give, it will protect them from falling into the trap of developing consumption patterns that no amount of savings or financial market growth can sustain.

The second step is to save more. Whilst it is ideal for members to put this savings into the superannuation system, what’s most important is creating a mechanism that reduces consumption while providing for the future.

Finally, after giving and saving, then comes spending. It could be argued that simply saving more, rather than giving, will result in greater sums available for retirement. However, an unexpected benefit of giving is that it creates an abundance mindset – you have enough for your own needs and are free to be generous.

A miserly approach will never lead to contentment; no matter how much money you have, it will never feel adequate.

I know that the Give, Save and Spend the Rest member education strategy is counterintuitive and will require massive behavioural changes. But to me, it is a more holistic way of preparing our members to have an adequate income in retirement. Ñ

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COLUMN \

The Wayside C hapel If lIke us you hate lonelIness and love communIty, hate Ignorance and love understandIng, we’d love you to become a frIend of the waysIde and make a regular donatIon.

www.thewaysidechapel.com

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