Investment Magazine December 2016 by Conexus Financial

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 134

DECEMBER 2016

How UniSuper CIO John Pearce’s insourced investment strategy is paying off

DIAMONDS

on the inside

5TH ANNUAL CIO SURVEY LEADERSHIP FORMER QANTAS SUPER CEO JANE PERRY SHARES HER PLANS FOR FEAL GROUP INSURANCE WHY THE INSURANCE IN SUPERANNUATION INDUSTRY WORKING GROUP MUST SUCCEED FINANCIAL INCLUSION TOO MANY INDIGENOUS AUSTRALIANS HAVE GOOD CAUSE NOT TO TRUST SUPER ROBERT SHILLER THE NOBEL PRIZE WINNING ECONOMIST ON WHY FINANCE ISN’T ALL ABOUT THE MONEY

The power of working in unison. A team of riders means greater strength, working together to achieve a single goal. Just like the key elements of our CommInsure group insurance business combine to make our offering exceptional: thought leadership, a commitment to partnership and best member outcomes.

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 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.

CONTENTS DECEMBER 2016

EDITOR’S LETTER More super funds will likely lower their return targets in the year ahead.

INDIGENOUS SUPER Bureaucracy in the implementation of anti-terror rules is still making it harder for people in remote communities to access their super.

CIO PROFILE UniSuper chief investment officer John Pearce reflects on the dangers of being too cautious.

CIO SURVEY The fifth annual Investment Magazine CIO Survey shows Brexit and Trump have put geopolitical risks on the radar for big asset owners.

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FEAL New chairperson of the Fund Executives Association Ltd Jane Perry is a passionate advocate for mentoring.

BEHAVIOURAL FINANCE

Nobel Prize winner professor Robert Shiller is looking for a new narrative.

GROUP INSURANCE Why the Insurance in Superannuation Industry Working Group has its work cut out.

FEE COMPARISONS A recent Centre for International Finance and Regulation study found it’s not so much what members pay but what they get that matters.

ASX LISTING RULES Starfish Ventures investment director Anthony Glenning on why making it harder for small Australian companies to list is a good idea.

D E C E M B E R 201 6

\ 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 PHOTOGRAPHER

Matt Fatches

TRYING TIMES

matt@mattfatches.com.au CHIEF EXECUTIVE

Colin Tate

ERHAPS THE MOST confronting statistic to emerge from the fifth annual Investment Magazine CIO Survey was that 70 per cent of respondents were not confident of meeting their return targets in 2017. That was despite 43 per cent of respondents having already lowered targets in recent months. Chief investment officers faced with a choice between dialling up risk or lowering targets are overwhelmingly deciding the more responsible thing to do is manage expectations, particularly for retired members. It should come as no surprise that chief investment officers are facing an uphill battle to generate alpha in the year ahead. The 40 CIOs surveyed, who bear responsibility for more than $600 billion worth of Australians’ retirement savings, revealed they were increasingly worried about geopolitical risk following the twin shocks of Brexit and Trump. A rising tide of nationalism and antifree trade sentiment ahead of a series of European elections means there are plenty of potential geopolitical triggers for more volatility on the horizon. That makes life extra difficult in a low rates and low growth world. David Neal, chief executive of Australia’s $143 billion Future Fund, recently told the International Forum of Sovereign Wealth Funds he has opened talks with the government about lowering return targets. In our cover story, UniSuper chief investment officer John Pearce explains

DECEMBER 2016

why he recently dropped the return targets on some conservative options, and has a watching brief on targets for the fund’s balanced and growth options. The $55 billion industry fund for academics manages more than half of its money internally. Pearce reckons his in-house investment team are ready to run a bigger book. Elsewhere in this edition, Australian Institute of Superannuation Trustees (AIST) chief executive Tom Garcia opines the Productivity Commission’s review into default super arrangements is treading in dangerous territory. Another issue under consideration by the Productivity Commission, with the potential to disrupt the business model of many funds, is how to improve group insurance. The Insurance in Superannuation Industry Working Group has committed to coming up with a compulsory code of conduct by the end of 2017. The participants have their work cut out for them. Roughly 35 per cent of all disputes handled by the Superannuation Complaints Tribunal (SCT) relate to insurance. SCT chairperson Helen Davis has urged super fund trustees to get a wriggle on, to ensure their group insurance arrangements represent a good deal for their members. Balancing sometimes competing obligations to provide adequate default insurance and protect member balances can be tricky, getting it right must be a priority. Ñ

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ADVISORY BOARD MEMBERS

Graeme Arnott, chief operating officer, First State Super | Richard Brandweiner, director of investment services, First State Super | Joanna Davison, chief executive, FEAL | Brian Delaney, global head of clients, QIC | Mark Delaney, chief investment officer, AustralianSuper | Melda Donnelly, senior adviser, Conexus Financial |Michael Drew, Professor of Finance, Griffith Business School | Michael Dwyer, chief executive officer, First State Super | Kristian Fok, executive manager for investment strategy, Cbus | Rob Hogg, head of global strategies and quant methods, UniSuper | 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 | Fiona Trafford-Walker, director of consulting, Frontier Advisors

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\ INTERVIE W

John Pearce

UniSuper chief investment officer Since: 2009 Industry experience: 25 years plus Previous role: From 2006 to 2008 Pearce was head of global asset management at Ping An, the second largest insurance company in China

Education: Pearce holds a degree in economics, a Masters in Applied Finance, and has completed the Harvard Business School management program

Other current roles:

Non-executive director of

Treasury Corporation of Victoria, since April 2015

…………

UniSuper History: Founded in 2000 via a merger between the Superannuation Scheme for Australian Universities and the Tertiary Education Superannuation Scheme

Shareholder’s: 37 Australian universities Style: UniSuper operates superannuation, defined benefit, and pension accounts

Members: More than 400,000 Funds under management: $54.7 billion Proportion of assets managed in-house: 55 per cent Investment performance: Over the five years to June 30, 2016 UniSuper delivered an average annual return of 8.9 per cent from its conservative option, 10.2 per cent from its balanced option, and 11.6 per cent from its high growth option

Staff: UniSuper employs approximately 600 people Leadership: Chris Cuffe chair, Kevin O’Sullivan chief executive, John Pearce chief investment officer

DECEMBER 2016

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INTERVIE W \

LEADING the LEARNED | T H RO U G H VO L AT I L E T I M E S | With a member base that brags more PhD and other postgraduate titles than any other super fund, the challenges for UniSuper chief investment officer John Pearce are twofold: delivering on his return targets, and convincing his brains trust stakeholders TO STAY THE COURSE.

By Sally Rose and Dan Purves

N THE WEEK leading up to the recent 2016 United States presidential election, UniSuper saw its members make the biggest switch to cash the fund had seen since panic gripped hold at the height of the global financial crisis in 2008. That was enormously frustrating for UniSuper chief investment officer John Pearce. “The thing I always try to impart to members is that the best long-term strategy is to stay the course,” Pearce says. “To me it is quite problematic positioning a portfolio for those big one-off type geopolitical events; even if you had perfect foresight of how the election was going to unfold, it would

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have been impossible to predict the impact on markets”. Many of those members who “got it right” in their prediction of a Trump win, and moved to cash in anticipation, might be feeling pretty smug. But the problem is that in terms of investment outcomes they still got it wrong, and would have been better off sticking with their balanced or growth options. The “risk-off” sentiment in global markets following Trump’s surprise victory lasted just one day before many asset classes got a bump. US bank stocks, which UniSuper had topped-up its holdings of throughout 2016,

DECEMBER 201 6

\ INTERVIE W

added 15 per cent in the three weeks following Trump’s victory. Most members who switched in the GFC did so too late, and more vexingly then left it too late to switch back to growth assets and missed the recovery.

NO LACK OF ENGAGEMENT

Most super funds complain about a lack of member engagement but UniSuper is dealing with a different set of challenges that come with a membership that is “quite inquisitive and active”. Engaging with members via investment updates over email and video is a growing part of Pearce’s remit. UniSuper is the country’s second largest industry fund and sixth largest super fund overall. It consistently ranks as one of the top-performing funds in terms of investment performance. Independent director Nicolette Rubinsztein was already a fan of the chief investment officer when she joined the UniSuper board in 2015. A decade ago Rubinsztein was working for Pearce at Colonial First State when she fell pregnant with her first child. “I was determined to work part time and I was pretty convinced I would lose my general manager role. I was reporting to John and he agreed to me working part time, and I must say, to this day I’ve been incredibly grateful for that decision,” Rubinsztein says. “I would put him in the top two leaders that I’ve worked with. He really is outstanding.” It has been those leadership skills, as much as his investment chops, that have defined Pearce’s tenure at UniSuper. Seven years ago he began “insourcing” investment management, and today his internal team of 35 managers run 55 per cent of UniSuper’s assets in-house. That ratio is tipped to swell. “We have a very scalable operation so we could take on a lot more FUM [funds under management] without hiring a lot more people,” Pearce says. The internal team is focused on “mainstream domestic assets”, such as its large cap Australian shares portfolio. Local small cap mandates are delegated to external managers and most global stock picks are also outsourced. At the core of the in-house strategy are what Pearce refers to as UniSuper’s “fortress assets”, which include major holdings in toll road operator Transurban, Sydney Airport, and various shopping centres.

DECEMBER 2016

The dominant force shaping global financial markets in 2017, “without a doubt”, will be what happens to United State Treasury yields, Pearce predicts.

RECENT TARGET REDUCTIONS

In early November UniSuper lowered the return target on a number of its conservative investment options, including dropping the five-year return target on its capital stable option from CPI +2 per cent to CPI +1.5 per cent. “The mandate for the capital stable option dictates it must be invested in 70 per cent defensive assets, so we can’t avoid having a lot of government bonds in there,” Pearce says. With real interest rates at zero it would be “both impractical and imprudent” to target a decent margin, so members have to be warned to lower their expectations. This is especially important for retired members who may have to adjust their spending habits. The fund’s balanced and growth options have not been lowered, although they remain under ongoing review. A much longer time horizon on balanced and growth options, of between seven to 10 years, gives investment managers more opportunity to meet the average targets. “People panic when they see market corrections, but these are healthy. If we didn’t have market downturns we would have to keep adjusting expected returns because we would be in a bubble situation,” Pearce says. “I’ve been in the market for 30 years and you’ve just got to keep reminding yourself that things are never as good as they seem, and never as bad as they seem”.

WATCHING THE HOUSING MARKET

Over the year ahead Pearce tips European politics to throw up “a fair bit” of volatility. Closer to home, he has a watchful eye on the local housing market. “The question is whether we’ll see a correction or an orderly working through of the excess supply of apartments, particularly in Melbourne and Brisbane”. That is one of the reasons UniSuper reduced its holdings in Australian bank stocks over the past year, redeploying that capital into US bank stocks.

Over the past 12 months UniSuper has also deployed more capital to its US-focused global healthcare share portfolio managed by Janus, global resources portfolio managed by Henderson, and handed a new Indian equities mandate to a Schroders affiliate on the ground. More recently UniSuper has been researching how to invest in emerging-market Asian credit for the first time, and is in the final stages of reviewing a shortlist to select an external manager for the new mandate. Pearce remains hungry for more good infrastructure assets but prefers to invest in listed vehicles. “We tend to stay away from any of the big unlisted deals that look like they are going to get overly competitively bid,” he says, explaining why UniSuper didn’t lob bids in the recent Port of Melbourne or Ausgrid auctions. Not one for fancy mission statements, Pearce says the closest thing he has to an investment philosophy is simply that “superannuation equals life savings”. “That sounds quite motherhood,” he squirms, but it has proven a valuable guiding principle. “It actually rules out a lot of things,” Pearce says. It is why UniSuper does not invest in opaque hedge funds, frontier markets, complex highlyleveraged structures, or private equity and venture capital funds, he says. An aversion to private equity funds should not be misinterpreted as a lack of appetite for private assets. Far from it. He just wants more control and transparency at a lower cost than is possible via a fund structure. Pearce told Investment Magazine he recently almost signed a “really exciting deal in the tech space” with an undisclosed “global business that just happens to be based locally”. “Unfortunately it fell over; I mean, it’s not dead, but it’s a complex deal and there were a few details we couldn’t get our mind around,” he said. Having built a successful in-house team, Pearce is in a better position than ever to drive a hard bargain on fees. UniSuper currently has external mandates with 14 Australian equity managers, 11 international equity managers, 11 property managers, eight fixed income managers and a handful of managers across other asset classes.

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INTERVIE W \

“We have always had the scale to negotiate pretty sharp deals with external managers. I think the in-housing has just added to that competitive strength of ours,” he says. However he thinks investment management fees in Australia are “pretty sharp” and “takes umbrage” with the finding of the David Murray-led 2014 Financial System Inquiry that superannuation is a “high cost” industry. Arnhem Investment Management managing partner George Clapham, who has been doing business with Pearce for “nearly a decade”, including running an Australian small caps mandate for UniSuper, says the investment chief probes his fund managers on a lot more than fees. “John is very active in talking to us about why we make the decisions we do about certain companies,” Clapham says. “He takes an active view on things like executive remuneration.”

Most super funds complain about a lack of member engagement but UniSuper is dealing with a different set of challenges that come with a membership that is “quite inquisitive and active”

UniSuper was one of the institutions that succeeded in putting pressure on Commonwealth Bank of Australia to dump controversial “culture” bonuses in its latest remuneration report. ASX-listed companies should consider themselves on notice that Pearce will continue to pushback about executive pay structures that are not aligned with shareholder value. Ñ

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\ COLUMN

How sovereign wealth funds are innovating

Investors controlling $3 trillion in assets who gathered at the eighth annual INTERNATIONAL FORUM OF SOVEREIGN WEALTH FUNDS in New Zealand revealed how they are dealing with transparency, climate risk and ongoing uncertainty. Santiago Principles – to improve standards in institutional governance and risk management. At the event, all 28 funds in attendance shared a self-assessment on transparency and governance, which informed discussions. Collectively the participants are responsible for upwards of $US 2 trillion (nearly $3 trillion) in assets under management. Australia’s own $143 billion Future Fund revealed it had recently asked the federal government to consider lowering its stated return objective, in the face of forecasts BY for a prolonged period of low rates and AMANDA WHITE sluggish growth. ___ “In the build phase the government wanted a real return of 5 per cent. We Amanda White is the director have begun engaging with government of institutional content for about their expectations,” Future Fund Conexus Financial and the editor of Top1000funds.com. managing director David Neal said. “This is critical as the board is looking for guidance, and we will have to increase risk or reduce the return target.” The Future Fund’s return target was set when it was seeded in 2006, prior to the global financial crisis and ensuing years of extraordinary international monetary policy that is now drawing to a close. Sovereign wealth funds all around the world are struggling to adapt in response HOW TO NAVIGATE difficult investment to the challenging market outlook. markets, bypass external asset managers, and The China Investment Corporation (CIC) mitigate climate change risks were hot topics detailed some of the changes it is making, of conversation when sovereign wealth fund including improvements to its asset allocation executives from 28 countries descended on framework. Auckland, New Zealand in November. CIC’s longstanding chief investment officer The International Forum of Sovereign Li Keping, who is now a senior adviser to the Wealth Funds (IFSWF) is a volunteer fund after retiring last year, said more decisionorganisation formed in 2009 by 23 state-owned making power has been delegated down the global investors. IFSWF was established with chain to individual portfolio managers. the aim of maintaining an open and stable “We have given them more room if they investment climate by setting and following a have the ability,” he said. set of guidelines and practices – known as the

DECEMBER 2016

CIC has also built out its capability in private equity, both internally and in its network, to co-invest and go direct. British Columbia Investment Management Corporation (bcIMC) chief executive and chief investment officer Gordon Fyfe said more sovereign wealth funds should take this approach to better exploit the advantages of holding patient, long-term capital. “One of the competitive advantages we have is we have a large balance sheet, and economies of scale allow us to build big internal teams,” he said. “We also have very long term time periods, so we never have to sell an asset unless it’s at our choosing.” Fyfe questioned why most sovereign wealth funds continue to invest heavily in equities. “We don’t need the liquidity. Why aren’t we looking for opportunities to invest higher up the capital stack and take advantage of that?” he said. Although he warned of the need to reduce the costs associated with private market manager fees. “Paying 3 to 5 per cent per year might be okay when returns are 25 per cent, but when they are 9 to 12 per cent, it makes a big difference,” he said. “Start a new fund with experienced people who you can back and negotiate better terms. Or you can co-invest.” Since Fyfe joined bcIMC that fund has co-invested with Singapore’s sovereign wealth fund GIC on infrastructure and real estate deals. He previously headed PSP Investments, one of Canada’s largest pension funds, when it co-invested with New Zealand Super in Kaingaroa Forest. Fyfe said one of the big attractions of attending events like IFSWF was the chance to meet potential co-investors. For the first time the risk and opportunities associated with climate change featured firmly on the 2016 IFSFW program. New Zealand Super chief investment officer Matt Whineray said the fund has been implementing a strategy to make its portfolio more resilient to climate risks. “These are risks that are not properly priced or fully compensated. They are ‘undue’ risks and our mandate requires us to manage undue risks,” he said. New Zealand Super chief executive Adrian Orr, who is also IFSWF chair, flagged the peak body plans to commission new research into how sovereign wealth funds can make their portfolios more resilient to climate change risks. Ñ

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\ CIO SURVE Y

MANAGING MONEY and EXPECTATIONS IN INTERESTING TIMES In public the chief investment officers of Australiaâ&#x20AC;&#x2122;s biggest superannuation funds have been playing down the threat posed by the Brexit and Trump phenomena to their portfolio strategies. But the latest annual Investment Magazine CIO SURVEY reveals their private worries about the big geopolitical shocks of 2016, and their fears of more to come. A staggering 70 per cent of respondents said they were not confident of meeting their return targets in 2017. Amid the hunt for yield, in a high-risk and low-growth world, there is a glut of capital looking for a home in infrastructure and other real assets.

WE SURVEYED THE INVESTMENT BOSSES OF

40 funds

WITH COLLECTIVE RESPONSIBILITY FOR

603

billion

By Dan Purves and Sally Rose

THE FIFTH ANNUAL Investment Magazine CIO Survey gathered responses from the investment bosses of 40 major Australian institutional investors, collectively responsible for more than $600 billion in funds under management. Chief investment officers from superannuation and pension funds comprised 90 per cent of the sample group, representing both the retail and not-for-profit sectors. The rest of the respondents were investment chiefs at banks or insurers. Their answers, which remain anonymous, provide an insight into how some of countryâ&#x20AC;&#x2122;s most influential investors are positioning their portfolios, in an increasingly volatile and unpredictable world. When asked to nominate the three biggest risks to their portfolio in the year ahead the asset owners revealed a few standout concerns. Falling equity markets were identified as a major portfolio risk by 70 per cent of respondents, rising interest rates by 60 per cent, and geopolitical risks by 53 per cent.

DECEMBER 2016

IN FUNDS UNDER MANAGEMENT.

of them

WERE NOT CONFIDENT OF MEETING THE RETURN TARGET ON THEIR BALANCED PORTFOLIO IN 2017.

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CIO SURVE Y \

Other potential risk factors weighing on the minds of investment chiefs were the threat of a European banking crisis (nominated by 30 per cent of respondents), ultra-low global growth (28 per cent of respondents), and negative bond yields (25 per cent of respondents). It is notable that geopolitics, which barely rated as a concern a year earlier, rocketed into the top three list of worries. Although this is perhaps not surprising given the double whammy of Britain’s shock vote in June to “Brexit” from the European Union, and the surprise victory of United States Presidentelect Donald Trump in November. The 2016 Investment Magazine CIO Survey was completed in the weeks leading up to and immediately following the US election. Anxiety about the impact of Trump’s anti-globalisation, protectionist policies on international trade and free markets loomed large. When asked to nominate the three geopolitical risks most likely to pose a threat to their portfolio in the year ahead 73 per cent of respondents pointed to US politics. Slower growth in China and the potential for other member states to exit the European Union ranked equal second on the list of geopolitical risks, each nominated by 55 per cent of respondents. The potential for catastrophic fallout from a trade war between declining super power the US and regional powerhouse China was something investment chiefs were keenly aware of. Trump has threatened to impose a 45 per cent tariff on Chinese imports into the US. One investment boss said they were concerned “aggressive trade wars led by Trump” might be “only the beginning” of the potential disruption to global markets stemming from the new president of the US. Given that China is Australia’s biggest trading partner, with the US behind Japan as the country’s third largest trading partner, the implementation of this style of policy would likely have a big impact on the domestic economy and the equity markets that local funds are major investors in. Add to that the risk of a break-up of the European Union, the second-largest economy in the world, and the geopolitical landscape looks rocky. Chief investment officers pointed to the risk of nationalist candidates gaining ground in a series of upcoming European elections.

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When asked to nominate the three geopolitical risks most likely to pose a threat to their portfolio in the year ahead 73 per cent of respondents pointed to US politics

Economists have warned that the dissolution of the European Union, which could be brought about by the election of Marine Le Pen in France or a ‘no’ vote in Italy’s referendum on parliamentary powers, could have big implications for global financial markets. One respondent said they were worried about the spread of nationalism worldwide and the risk of “more crazy, populist politicians like Filipino President Rodrigo Duterte”.

LOWERING EXPECTATIONS

In the face of the bleak geopolitical and investment outlook, 17 of the 40 participating institutions revealed they had lowered the return targets for at least one of their investment options over the past year. Most balanced portfolio targets are now huddled in the CPI+ 2.5 to 3.5 per cent range. But a mere 30 per cent of respondents were confident in their fund’s ability to meet the return target on their balanced option in 2017. A staggering 70 per cent of surveyed investment chiefs indicated they do not expect to meet these return targets in the year ahead. While 21 per cent said they definitely did not expect to hit the target, another 49 per cent felt uncertain in their ability to do so. Looking ahead, 28 per cent of the investment chiefs said they would consider lowering return targets in 2017. Even so, few were willing shift to a riskier asset allocation strategy, preferring instead to miss their stated targets in the short term. “We don’t take on additional risk unless it is appropriately compensated,” one said.

Asked the biggest risks to their portfolio in 2017, CIOs nominated:

FALLING EQUITY MARKETS

RISING INTEREST RATES

GEOPOLITICAL RISKS

EUROPEAN BANKING CRISIS

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ULTRA-LOW GLOBAL GROWTH

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Asked the biggest geopolitical risk to their portfolio in 2017, CIOs nominated:

A few investment bosses said they had somewhat increased their risk exposure, but were diversifying into “different types of risk”. One described their strategy as to “just turn over more rocks”. “Yes, we are taking on more growth assets but we are putting on more diversifiers also, if the correlation stays low to negative then the answer is no,” said another. Others said that while the nature of risks in the portfolio had not changed they had taken “a more active approach” to managing them. Infrastructure and other real assets stand to be the biggest beneficiaries of the hunt for yield, with 48 per cent of respondents planning to allocate more capital to this investment class in 2017. Property is also set to see big inflows with 23 per cent of investment chiefs surveyed indicating they planned to divert more capital to real estate. The same proportion of respondents said they were planning to allocate more capital to liquid alternatives, such as hedge funds. Other asset classes investment chiefs said they were keen to deploy more of their assets into were high yield fixed income, emerging market equities, and the private equity and venture capital markets.

HUSTLING ON FEES

With pressure on to squeeze out every basis point in low-returning markets, the scrutiny on manager fees is set to intensify. This will only be compounded by the super funds’ plans to allocate more capital to unlisted, typically more expensive, assets classes such as infrastructure, property, hedge funds and venture capital. When asked how important it was to reduce investment costs, on a scale of one to 10, more than half of the investment heads surveyed picked a rating higher than 7. Negotiating harder with external managers was the preferred choice for doing this, with 87 per cent of respondents saying it was their primary method of tackling the issue. “We would like to do more performancebased fees, but they are too asymmetric in most cases (i.e. too much gain, not enough

DECEMBER 2016

US POLITICS

SLOWER GROWTH IN CHINA

MORE MEMBER STATES LEAVING THE EU

FALLOUT FROM BREXIT

A WAR IN THE SOUTH CHINA SEA

penalty for underperformance) and they’re very difficult in the Australian defined contribution context,” one respondent said. By far the most popular fee structure for the use of a product was a management fee with discretionary discount, with 36 per cent of super funds preferring this structure. Flat fees came in second, preferred by 29 per cent of respondents. Another chief investment officer said they approached fee negotiations on a “horses for courses” basis; typically only paying performance fees on opaque private market assets where creating alignment of interest was critical to achieving strong results. Shifting out of high fee asset classes and allocating more to passive or smart beta strategies were other popular strategies for reducing investment costs. One-in-five chief investment officers surveyed said they were planning to insource more of their investment capabilities, and while pressure to reduce costs featured in this decision a desire for more control was the primary motivator. “We are growing and the benefits of scale should go to members,” said one investment chief who planned to expand their internal team. This desire for greater control was also reflected in what investment chiefs shared when asked what they wanted from their external managers, but weren’t currently getting. “More co-investment opportunities”, “bespoke mandates and side pockets”, and “customised solutions that use their balance sheets to come up with interesting products”, were a few responses. Others spoke of a desire for “greater alignment” and “stronger partnerships”. A “better deal on fees” was another common sentiment. Other investment heads expressed a desire for more honest and robust thought leadership. “Tell us what you believe and fear, not what you think we ought to or want to hear,” one said. More than 80 per cent of respondents said their organisation employed an external adviser as an asset consultant, and this was not expected to change significantly over the next three years. However the type of advice investment chiefs rely on their asset consultants for was tipped to tilt away from actual investment decisions and towards manager research. Ñ

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Masters Program Executive Education for professionals in the superannuation and financial services industry. FEAL and Melbourne Business School have developed a unique postgraduate program for executives in the superannuation and financial services industry. The flexible program structure comprises 12 residential modules. Executives can undertake individual subjects or combine four or more modules to receive a Grad Cert., Grad Dip. or Masters in Organisational Leadership.

Apply now to undertake the next module: TOPIC:

MBS Program - Advanced Negotiations

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22-26 May 2017

LECTURER:

Jennifer Overbeck

In this module students will learn how to lead and manage effective change strategies, improve their influencing skills and negotiate agreement with others. Participants will gain a powerful strategic framework to negotiate successfully and be more influential leaders in their personal and professional lives. This includes strategies to influence others, ways to deal with conflict and cultural diversity and powerful approaches to leadership and managing change.

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\ FINANCIAL INCLUSION

Identity matters TOUGH IDENTIFICATION REQUIREMENTS and inertia within super funds, have made it impossible for many Indigenous people living in remote communities to access their savings. As a result, WIDESPREAD DISTRUST OF THE SYSTEM within communities scarred by the stolen wages era is being further entrenched. By Dan Purves Photos Nathan Boyle, ASIC Indigenous outreach co-ordinator, pictured Lockhart River 2014

IN JANUARY 2016, a woman from a remote Indigenous community aged in her early fifties contacted Financial Counselling Australia looking for help. She was desperate to be granted an early release of $20,000 from her superannuation account to pay for extensive dental surgery. “The client said getting the dental work done would cure the pain she was suffering, but more importantly she wanted to be able to smile in photos with her grandchildren,” Financial Counselling Australia coordinator financial capability and community practice Lynda Edwards says. “She then went on to tell me that her daughter was murdered and there weren’t any good photos of them together smiling.” The client’s claim met the super fund’s conditions for early release on medical grounds, but her inability to provide the required identification documents meant she couldn’t get access to her cash. It took more than six months of Edwards liaising with the fund, but by early August the client’s identity had been satisfactorily confirmed and the money released.

DECEMBER 2016

The challenges experienced by that particular client, who wished to remain anonymous, in proving her identity to her super fund is all too common among members living in remote Indigenous communities, Edwards says. Stringent identification requirements introduced a decade ago via the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 have had dire unintended consequences for many Indigenous people living in remote communities. “Some people don’t have birth certificates, have their name misspelled, have different dates of birth, go by skin names or observe cultural practice to change names when there is a death in the community,” says Amanda Young, the chief executive of First Nations Foundation – a charity that works towards the financial inclusion of Indigenous Australians. In an attempt to reduce hardship the Australian Transaction Reports and Analysis Centre (AUSTRAC) released new guidance to super funds in July 2016 designed to empower them to take a more flexible approach. But six months later most super funds are

still dragging their heels. At the Indigenous Super Summit in November one frustrated financial counsellor challenged the assembled fund executives and trustees as to how many had fully implemented the latest guidance at their fund. Not one could say yes. Fund executives said changing their policies and procedures to accept the new, less onerous, identification rules would take time. Financial counsellors working in Indigenous communities spend the lion’s share of their time dealing with superannuation related issues, mostly around early access, disability insurance, and death benefits. The Australian Securities and Investments Commission (ASIC) wants super fund executives to understand the problem is reinforcing a commonly held view that the system is ‘stolen wages’ in another guise.

FEELS LIKE STOLEN WAGES

Well into the 20th century, Australian governments garnished large portions of Aboriginal and Torres Strait Islander peoples’ wages. In Queensland, half of Indigenous workers’ wages went into government-administered savings accounts, with a further 25 per cent going to income tax and deductions for an ‘Aborigines Welfare Fund’, resulting in a take home pay of only 25 per cent as ‘pocket money’. “Most of the money that was placed through trust funds was never returned to those it belonged to regardless of how hard they tried – and believe me they tried hard to access that money,” says Michael Galluzzo from ASIC’s Indigenous outreach program. “We hear lots of comments like, ‘No, we don’t bother with that super stuff, it’s like stolen wages’,” Galluzzo says. AUSTRAC national manager strategic intelligence and policy Bradley Brown encouraged super funds to embrace the new guidelines.

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FINANCIAL INCLUSION \

“Indigenous people live in some of the most remote parts of this country and it makes it extremely challenging,” Brown says. “We can sit in ivory towers in the cities and not get that.” AUSTRAC’s recent guidance states alternative identification is valid as long as it is reliable and independent. This includes, but is not limited to, an original primary photographic identification document; an original primary non-photographic identification document; and an original secondary identification document. “Alternative identification documents could include references from key members of Indigenous communities such as elders or community leaders, medical practitioners and school principals,” Brown says. Indigenous Superannuation Working Group chair Eva Scheerlinck says some funds are already taking updated protocols to the board for approval, but even then it would likely be June 2017 before they were implemented. The Indigenous Superannuation Working Group is a cross industry collaboration between the Australian Institute of Superannuation Trustees, the Association of Superannuation Funds of Australia, the Financial Services Council, Women in Super, and a handful of super funds. Scheerlinck says super fund trustees will have to be satisfied that any new identification protocols balance the need for financial inclusion and risk management, at a time when there is more cybercrime and attempted identity theft than ever before. Proper training to empower frontline fund staff, such as call centre operators, will be critical, she says.

Some people don’t have birth certificates, have their name misspelled, have different dates of birth, go by skin names or observe cultural practice to change names when there is a death in the community Australians is about 66 per cent for men and 55 per cent for women, compared to rates of 85 per cent for men and 80 per cent for women across the population more generally. Retirement outcomes of Indigenous workers are approximately 27 per cent lower than average. One of the most shameful statistics is that Indigenous Australians remain much less likely to live to an old enough age to access and enjoy the super they have saved. In 2010-2012, life expectancy at birth for Aboriginal and Torres Strait Islander males was 69.1 years, and 73.7 years for women, representing a gap with non-Indigenous Australians of 10.6 years for men and 9.5 years for women. “It is critical that the industry develops a better understanding of the underlying cultural and socioeconomic issues for Aboriginal and Torres Strait Islander peoples in accumulating, accessing and distributing their superannuation,” Australian Human Rights Commission president professor Gillian Triggs told Investment Magazine. ASIC’s Indigenous outreach program wants to help super fund executives gain that understanding and the regulator has begun facilitating visits to regional and remote communities. The senior leadership of QSuper joined ASIC on a fact-finding trip to the Lockhart River community in 2014. Since then QSuper

has implemented a range of practical changes. The $60 billion Queensland public sector fund now identifies postcodes where there is a high risk of mail going astray, often because it is delivered infrequently by plane to a central location rather than direct to the home; and makes more of an effort to contact these members by other channels, such as phone. This is important because a series of returned letters can trigger the transfer of inactive accounts into “lost” super funds administered by the Australian Tax Office. Each fund will need to tailor solutions to the needs of its specific member cohort. At UniSuper, the industry fund for university academics, identification requirements have not posed a challenge for members, manager assurance and reporting, Marlene Sadhai, says. HESTA general manager business development and policy Mary Delahunty says the industry fund for health workers is looking for ways to close the Indigenous super gap, through the development of its Reconciliation Action Plan. ASIC has extended an open invitation to the senior leadership of super funds to join a roadshow to the Anangu Pitjantjatjara Yankunytjatjara Lands, a remote Indigenous community in South Australia, in the second half of 2017. Ñ

SYSTEMIC FINANCIAL EXCLUSION

Identification challenges are yet another obstacle to Indigenous Australians engaging with superannuation, a system that too often excludes them. Superannuation coverage for Indigenous

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DECEMBER 201 6

\ INTERVIE W

TIME TO REFLECT ON

LEADERSHIP Former Qantas Super boss JANE PERRY was easily enticed when asked to head up the board at the FUND EXECUTIVES ASSOCIATION LTD. The organisation combines her interests in superannuation, professional development, promoting good governance, and advancing women in leadership.

By Sally Rose

HAVING RETIRED FROM her post as chief executive at $7 billion corporate fund Qantas Super in December 2015, Perry commenced as chair of the Fund Executives Association Ltd (FEAL) in August 2016. She expects to draw on her early career experiences in management consulting and human resources as much as her latter decades in the wealth management sector to inform her approach to the role. FEAL is a professional development organisation for management staff working in not-for-profit superannuation funds. The body has 32 super funds signed up as corporate members, as well as 40 individual members working in smaller funds. In total, there are roughly 650 individuals who are active members. The organisation’s main activities are in the areas of higher education, mentoring, and running professional development and networking events.

DECEMBER 2016

When FEAL was established in 2001 many funds had just a couple of fulltime staff. Since then the former cottage industry has swollen into a $2 trillion-plus sector, worth more than the total market capitalisation of the local stock exchange or annual gross domestic product. Along with the mammoth increase in scale across the industry, super funds have morphed into more diverse and complex organisations. This means the need to support the ongoing professional development of fund executives has never been greater. Perry will work closely with FEAL chief executive Joanna Davison who is responsible for developing the organisation’s program. Since 2008, 36 people have enrolled in the FEAL Masters in Organisational Leadership at Melbourne Business School. Davison recently accompanied a group on a trip to complete an executive education unit at the London School of Economics and is planning

an upcoming trip to INSEAD Singapore. Since 2014 FEAL has matched 48 fund executives with mentors. Before she helmed the board at FEAL, Perry was a volunteer in its mentoring program. Local Government Super head of projects and IT Kim Heng is one former mentee. Heng told Investment Magazine that while she and Perry never discussed gender issues specifically, it was invaluable to have access to her perspective as a woman who had been successful in taking on different leadership roles. “I was so privileged to be mentored by Jane. She is incredibly supportive but also very honest, and forced me to ask hard questions of myself,” Heng says. “One of the things I learnt from her is the importance of listening to people but also making hard calls when you need to.” Perry says she “just loves” being a mentor. Chairing FEAL is a part-time gig for Perry, who also joined BT Group’s superannuation

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INTERVIE W \

FEAL FACTS

The Fund Executives Association Ltd (FEAL) was founded in 2001 as a professional development and education organisation for executives in the not-for-profit superannuation sector.

Chair Jane Perry

Chief executive Joanna Davison

Membership FEAL has 32 corporate members, 40 individual members, totalling 640 active participants.

Higher Education Since 2008 36 people have enrolled in the FEAL Masters in Organisational Leadership at Melbourne Business School.

Mentoring Since 2014 FEAL has matched 48 fund executives with mentors.

boards in February 2016, following her retirement from Qantas Super in December 2015. She serves on the investment committee and the board audit, risk and compliance committee for all the superannuation funds under the Westpac-owned BT banner. Her BT directorships give Perry a birdseye view of how the executive training and development programs at one of the country’s largest retail super managers differs from practices within the not-for-profit super sector. “They are not better or worse, just different,” she says. “In a big vertically integrated organisation there is the capacity to do a lot more in-house”. The ability for FEAL members to mix with their peers from other funds has its advantages also. In other roles Perry is a director of the Sydney Financial Forum, a member of the Salvation Army advisory board, and a director of the Salvation Army operated

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social enterprise, Employment Plus. First State Super chief executive Michael Dwyer, the founding chair of FEAL, first met Perry when she was head of custody for JPMorgan and he was a client. Dwyer is still a director of FEAL and when the board found themselves hunting for a replacement for outgoing chair Neil Cochrane, Perry was high on their wish list of potential candidates. “Jane had recently left Qantas Super and whoever we asked, her name just kept coming up,” Dwyer says. “She has a formidable reputation for both her intellect and leadership.” It was Cochrane, a former chief executive of REST Industry Super who now chairs First State Super, who first approached Perry to take over as his replacement. “Once I had decided to take the role Neil involved me as a guest in board meetings over a period of about four months, which was terrific and enabled a really sensible transition,” Perry says. She would love to see funds manage their trustee transitions in a similar manner. “Of course, that’s not always possible, but it can be done I think there is a lot of benefit for everyone involved,” Perry says. “And that is equally true when it comes to managing transitions in fund executive roles”. Dwyer sees another nice continuity in the FEAL leadership transition from Cochrane to Perry, being the two individuals’ shared views on the importance of corporate social responsibility.

“An added dimension that Jane brings is that she has always been a great supporter for developing talented young women within the industry.” In 2010, Perry was inducted into the YWCA’s Academy of Women Leaders at a ceremony in New York. It is heartening to see a strong pipeline of women coming through the ranks in the super sector, she says.

SHIFTING GEARS

Perry, who is 58, says she feels “lucky” to have been in a position to shift gears into a fun and challenging non-executive career at a relatively young age. In part that luck was created by taking to heart the message the super industry is at pains to impress upon its members: start to plan and save early. Perry and her husband, who is 10 years her senior, started working with a financial adviser to plan for their retirement in 1997. Since Perry’s husband retired almost a decade ago he has been prompting regular discussions about when she was going do the same, so he could get serious about planning some trips. The pair spent April in Barcelona and southern Spain touring cultural and historic sites, and sampling the local cuisine. Perry’s retirement gift to herself was a caravan because she loves the outback, “but isn’t that into sleeping on the ground”. She is looking forward to a change of pace. Immediately prior to joining Qantas Super Perry spent four years with JPMorgan, finishing as head of the US bank’s local custody business. Previously she had an 11-year career at AXA spanning various executive roles, before the global insurance firm’s local presence was swallowed by AMP Ltd. These included general manager, people; and general manager, adviser and customer service; culminating with her holding the title of chief operations officer. Perry never had a formal mentor herself, but credits two former AXA Asia group chief executives, Les Owen and now Telstra boss Andrew ‘Andy’ Penn, as having both played a pivotal role in supporting her professional development. Before joining AXA in 1988 Perry worked as a management consultant, including stints with KPMG and the Commonwealth Public Service. Ñ

DECEMBER 201 6

\ COLUMN

HAVING BEEN INVOLVED in the growing field of behavioural finance now for 30 years, and being married to a psychologist, I doubt markets are efficient and believe there is a bigger human element at play. The field of neuroscience is just as revolutionary as the field of artificial intelligence because it’s changing our view of ourselves, and so we don’t fit the theoretical model of finance. In order to make civil society work, it’s like an engine. It has to be tuned and managed right. Throughout history there are people with a civil society mode of thinking who propose innovations, like those in Amsterdam who set up the first public stock market in 1602, or those New Yorkers who were the first to really establish securities law in 1811. An invention coming out of civil society, which hasn’t happened yet on any scale, is GDP-linked debt. That is something I’ve been advocating for; now others are advocating it too as a risk-sharing device between countries, investors and governments.

conflicting objectives is not defined in the law, you just have to pay attention to both of them. But the idea that your company has a moral purpose may Professor Robert Shiller won the 2013 change their whole environment. Nobel Prize in Economics, alongside Making money might be described Eugene Fama and Lars Pete Hansen as a moral purpose but it’s kind of of the University of Chicago. tainted in some people’s eyes. There He is the author of should be some other moral purpose. Irrational Exuberance. To the extent that their clients allow them to, asset managers and asset owners should incorporate environment, social and governance risks. I would. I think in the long run, the question is, “how big a hit does it take on your profits?” You might not want to invest in certain companies that are morally challenged. And I can live with that. I’d expect maybe a somewhat lower return. On the other hand, I’m not even sure it will have a lower return. Because it puts you in a different space and it puts you into a different mode of thought. You attract a different kind of people in your enterprise. I’m working on an address I have to give in January as president of the American Economic Association. The tentative title for it is Narrative Economics. And what I’m talking about is how social science economics, and also finance, differs from other social sciences in that we almost never use the word ‘narrative’. Journalists are the people who use it the most. You read the newspaper and they’ll say, ‘the narrative from Donald Trump is this’, or ‘the narrative about The Nobel Prize winner and Sterling Professor of Hilary Clinton is this’. But economists Economics at Yale University reminds us why finance don’t do that. The human mind is very impressed by IS NOT JUST ABOUT MAKING MONEY. stories and they tend to be human-interest stories. And these stories inform people’s and the functioning of our institutions. feelings and emotions. Ethical investing is another recent If we’re trying to understand business We have to think through how financial adventure and the benefit corporation, fluctuations, we have to try to understand institutions can be part of civil society. something between a company and nonWe have a celebrity society, where people their animal spirits. Why sometimes they’re profit, is an invention of the past decade. are admired who are not really doing much. excited and willing to work very hard, and These innovations don’t seem to happen other times they’re despairing, trying to We’re living in a social media age where by the profit motive alone. They happen certain things go viral. hoard cash and not do anything. when there is someone in civil society What determines those things? It is, I think, So, how to engineer around that? I advocating them. Usually with the help mentioned the benefit corporation, which a story. What I’m interested in looking at is the of lobbyists. stories behind big economic events. Ñ is a new thing in the United States. A I think that this is a particularly risky benefit corporation has in its charter a time in history. Our risk of inequality is profit motive, but also some other stated great because people’s sources of incomes This column is based on an extract of a speech motive like the environment or alleviating are rapidly being challenged. delivered to the Conexus Financial Fiduciary poverty or creating opportunity. At the same time, I think we’re more Investors Symposium at the Yale School of How benefit corporations weigh understanding of the role of psychology Management, October 23 – 25, 2016. BY

ROBERT SHILLER ___

Finding a new narrative for finance

DECEMBER 2016

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The

20th Annual

CONFERENCE

INVESTMENT OPERATIONS CONFERENCE

FEBRUARY 21, 2017 THE WESTIN, SYDNEY, NSW

INVESTMENT OPERATIONS: SOLVING THE CHALLENGES OF REGULATION, TECHNOLOGY AND DUE DILIGENCE Investment operations professionals must respond to increasing regulatory complexity. How are funds solving the challenges of even more complex regulatory frameworks and operational due diligence, while fostering product innovation and increasing member engagement? These issues, along with a discussion on the hybrid operational model that combines insourcing with outsourcing, will be canvassed in the program. In 2017, we celebrate the 20th anniversary of the Investment Operations Conference, the leading one-day event for middle office professionals from super funds and investment managers. The line-up of speakers and panellists includes leaders from the Australian Securities and Investments Commission, The Future Laboratory, TCorp, Cbus, Sunsuper, Local Government Super, AustralianSuper, Mercer, and more. Join your peers for the ultimate investment operations learning and networking experience.

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ASSOCIATION PARTNER

\ AIST

Default funds a consumer protection worth keeping As the Productivity Commission considers alternative options to the employer nominated default superannuation fund selection process, it is vital not to undervalue the IMPORTANT LAYER OF CONSUMER PROTECTION the current system provides for Australian workers. THE INDUSTRY IS working hard to get members more engaged with their super, but there will always be a need for strong defaults. Convincing younger workers to think about retirement is tough and, even among older workers, many lack the financial literacy to make a truly informed choice. Regardless of product features, retirement is simply too far away for many people to take an active interest in the process. For twentysomethings, selecting super will never compete with more immediate concerns such as their hourly pay rates, workplace conditions or even where to find a decent coffee. Low financial literacy is another roadblock. It is also the reason why many of those who do choose their own fund wind up worse off. Worse retirement outcomes for those individuals is not the only negative consequence, with all of us bearing the load of a higher age pension bill. A 2016 study commissioned by the Australian Securities and Investments Commission found only one in three of those surveyed had ever heard of, or understood, the concept of “risk-return trade-off”. Two in five people had never heard of the concept of “portfolio diversification”. An understanding of both concepts is arguably important when choosing a super fund. It is estimated that almost two thirds of fund members rely on their employer’s default fund.

This includes individuals who make an active choice to stick with the default fund, trusting it to serve their best interests. And for as long as compulsory super has been around, this trust has been well placed. The Productivity Commission, which the government has tasked with developing an alternative to the current default system, found in 2010 that the mostly not-for-profit default funds named in modern awards had generally outperformed choice products. Around $400 billion of savings are invested in default funds under the industrial relations selection framework, currently overseen by the Fair Work Commission. The bank-owned super funds pushing to open up the default market claim the market for super needs to be more competitive. But compared to the banking sector, super is already highly competitive. As large as $400 billion sounds, this represents less than 20 per cent of the total market. In terms of overall market share, super funds owned by banks and other financial institutions manage about one third of the super savings pool, roughly the same amount as that managed by the non-profit super sector, with the remaining third being self-managed super funds. The Australian Institute of Superannuation Trustees believes that the complexities involved in selecting a super fund support the need to

22-24 March 2017

Gold Coast Convention and Exhibition Centre

REGISTRATIONS NOW OPEN For program highlights, speakers and to register visit www.aist.asn.au/cmsf

BY TOM GARCIA ___

Tom Garcia is chief executive officer of The Australian Institute of Superannuation Trustees.

maintain existing merit-based regulation of default fund selection arrangements. We see lessons to be learned from what happened when the Victorian energy market was opened to new entrants, only to see providers emerge as the clear winners rather than consumers. There are strong parallels. Like super, there is a high level of consumer disengagement in the electricity market. Complex financial decisions are required to differentiate between the pricing alternatives offered by the various providers. Low levels of financial literacy combined with inadequate information and search costs have resulted in low active choice levels. The existing default super fund selection process, overseen by the Fair Work Commission, helps instill confidence. It is also a process that has been strongly supported by employers, who do not want to take on the cost and burden of default fund selection. Regardless of their level of engagement, all working Australians should be able to trust that our compulsory super system comes with a functioning safety net that provides adequate consumer protection. Ñ

AIST TRUSTEE OF THE YEAR AWARD 2017 “ Trustee directors are an integral part of the Australian retirement incomes system. Their fiduciary responsibility to deliver the best possible retirement outcome requires them to be diligent, innovative, driven and empathetic to the needs of their members. In recognition of this vital role I’d like to invite nominations for the AIST Trustee of the Year award.” – Tom Garcia, CEO, AIST Being a trustee director of a superannuation fund is an enormous privilege and comes with great responsibility. Collectively, trustee directors ensure the financial stability of millions of members and billions of dollars across the country. The not-for-profit super sector has many committed, hard-working trustees who recognise the needs of a changing environment, value ongoing professional development, and are committed to improving their members’ retirement outcomes. To recognise an individual’s outstanding and significant contribution to the superannuation industry, AIST is proud to offer the annual Trustee of the Year Award.

The prize The award winner receives a scholarship to attend AIST’s Global Dialogue in 2018. The scholarship is valued at approximately AUD$20,000 and includes conference registration, accommodation, associated functions and return economy airfares.

How to enter Nominations should address the criteria in no more than 1,000 words and be received by Friday 3 February, 2017. The AIST Trustee of the Year Award winner will be announced at CMSF 22 – 24 March, 2017. For full details and terms & conditions visit: www.aist.asn.au/toyaward

The AIST Trustee of the Year Award is proudly supported by Schroders

\ INSURANCE

R e think in g

GROU P I N S U R A NCE A media scandal, leading to an embarrassing investigation by the regulators, meant efforts to lift group insurance standards got a kick up the pants in 2016. Finally, after years of talking about it, the superannuation industry seems to be GETTING SERIOUS ABOUT MAKING SURE ITS MEMBERS GET A BETTER DEAL for the roughly $8 billion a year in life insurance premiums they automatically deduct from workers’ compulsory retirement saving accounts. The year ahead will reveal whether the INSURANCE IN SUPERANNUATION INDUSTRY WORKING GROUP can produce genuine reform. ON THE FIRST Saturday in March 2016 Jenny Oliver was at her local netball courts in Sydney, but she wasn’t watching when her daughter scored a goal. Oliver, who heads up the group insurance division of Australia’s largest life insurer TAL Life, had missed it because both eyes were glued to her smartphone watching the comments unfold on a story the Sydney Morning Herald was running about alleged improper claims handling practices at rival CommInsure. The media investigation, led by journalist Adele Ferguson for Fairfax Media and the ABC’s Four Corners program, centred on revelations made by CommInsure’s former chief medical officer turned whistleblower Dr Benjamin Koh about the use of inconsistent and outdated medical definitions. It also contained video testimonials from disgruntled customers with heart-wrenching personal stories.

DECEMBER 2016

By Sally Rose I N S U R A N C E R E L AT E D C O M PL A I N T S

29% 33%

4% 7%

Deduction of insurance TTD claim D eduction of insurance premium

25%

Insurance cover in dispute Insurance cover in dispute (death benefit) Terminal illness benefit

Source Superannuation Complaints Tribunal

Commonwealth Bank of Australia chief executive Ian Narev had apologised, while strongly denying any systemic wrongdoing inside the bank’s life insurance division. All the CommInsure clients interviewed by Ferguson had taken out their policies either directly or under advice, but the news story going viral online drew attention to the fact that most Australians are automatically signed up for default life insurance cover via their superannuation fund. It was the start of a public relations nightmare for the whole sector. “I think a lot of people in the industry remember where they were when the news broke that Saturday morning about the denied claims,” REST Industry Super chief operating officer Andrew Howard says. “I was in a campsite with a bunch of families and I remember thinking ‘this is not good’.” Howard and Oliver shared their candid recollections at the Association of Superannuation Funds of Australia (ASFA) annual conference on the Gold Coast in November, while participating in a panel discussion titled ‘Insurance in super: restoring consumer and stakeholder confidence’. Both executives are part of the Insurance in Superannuation Industry Working Group, which has pledged to create a compulsory code of conduct to lift standards in the sector by the end of 2017. That announcement was made in October, on the eve of the release of the latest slap down from the regulators. Back in March, amid the media scandal, the Turnbull government had

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INSURANCE \

ordered the Australian Securities and Investments Commission (ASIC) to launch yet another review into the life insurance industry, which it has since completed in collaboration with the Australian Prudential Regulation Authority (APRA). That report found that while 90 per cent of claims were paid out, there were pockets of the industry where denial rates were alarmingly high. One insurer, later revealed to be the Westpac Bank-owned BT Life, had denied one in three disability claims. The group life insurance code will be based on the new life insurance code of practice, unveiled by the Financial Services Council (FSC) in October 2016, which covers life insurance sold outside of superannuation. The FSC is the peak body for both the retail wealth management industry and the life insurance sector. The working group, which includes representatives of all the major insurers and super funds, was formed with the backing of ASFA, the FSC and three other industry bodies: the Australian Institute of Superannuation Trustees, Industry Super Australia, and Industry Funds Forum. To date the regulators’ investigations have focused on life insurance sold directly and through advisers, but their attention has now turned to the group policies sold in bulk as a default component of super. All MySuper products, the basic type of super account that is eligible for default fund

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status, auto-enroll members into a group insurance policy that includes a combination of death, total permanent disability (TPD), and income protection cover. In the financial year ended June 2015, $7.9 billion worth of premiums were collected from group insurance sold via super funds. That year the sector paid out $4.4 billion in successful claims. ASIC and APRA have written to the trustees of every super fund in the country putting them on notice to lift their game on benefit design, policy maintenance, and claims handling. Political pressure on the industry is only set to increase in the year ahead. Nationals Senator John Williams has stated a Parliamentary Joint Committee inquiry into the life insurance sector will focus on the group policies sold via super funds, and flagged it may even consider whether life insurance should remain a default inclusion. Former Labor MP and Shadow Minister for Financial Services Bernie Rippoll, who has been helping to facilitate the Insurance in Superannuation Industry Working Group, says it is wrong to characterise the self-regulation initiative as a kneejerk reaction to mounting pressure from government. “Since 2013 there has been a lot of focus on how to improve group life insurance. The sector has acknowledged there are

issues and the working group is trying to find the best way to work through those and collectively lift standards,” Rippoll told Investment Magazine. More than one third of all complaints lodged with the Superannuation Complaints Tribunal (SCT) in the 2016 financial year related to insurance, up from 20 per cent five years earlier. Trustees need to question whether their policy could be structured differently to better meet the needs of their member cohort, SCT chairperson Helen Davis says. Aside from policy design, lengthy and unexpected delays often compound member dissatisfaction, she says. Former ASFA chief executive Pauline Vamos says an increasing number of people are turning to lawyers to lodge insurance claims on their behalf, which risks making the sector more legalistic and driving up member fees. Berrill & Watson Lawyers principal John Berrill says there are many reasons for this trend, not least the “staggering volume of documentation” claimants are required to provide. “A lot of people are daunted by that, especially when they are dealing with health issues and all sort of other challenges that come at these times,” Berrill says. He would like to see the introduction of standardised claim and medical examiner forms. Another problem is that too many funds take a “tick box mentality” to dealing with claimants, he says. “One fund has got a voicemail message saying someone will return your call in four days. Then if they return the call and you don’t answer it you’ve got to go through the whole process again,” Berrill says. “This is the sort of stuff that drives people to look to lawyers to help advocate for them.” Davis wants super funds to act with urgency to improve their insurance claims handling processes to help stem the rising tide of complaints. “If the industry can reach a standard that’s terrific. But there is nothing that stops a fund from improving its own process today,” she says. “And remember that just because someone may not qualify under the policy it doesn’t mean they are not unwell, it doesn’t mean they aren’t out of work and having a difficult time, so just bear that in mind.” Ñ

DECEMBER 201 6

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The case for more transparent super fund investment fees A study by the Centre for International Finance and Regulation into investment fees charged by super funds recommends even more onerous disclosure requirements than THE PLANNED RG97 REGIME. THE DANGER WITH all the argy bargy about the need to reduce superannuation investment fees is that crude price comparisons fail to account for the different underlying asset allocation members are paying for. Superannuation fees have come under intense scrutiny in recent years, especially since the 2014 Financial System Inquiry concluded that on average, they were too high. The inquiry, led by former Commonwealth Bank boss David Murray, noted the fees charged by Australian super funds are among the highest charged in all Organisation for Economic Co-operation and Development member countries. The Murray inquiry also found that the wealth management industry had failed to harness economies of scale, with investment fees relatively static despite massive growth in the sector over the past two decades. This is a significant issue for investors and advisers, as incremental differences in fees could deliver markedly different retirement outcomes. Across a $2 trillion pool of assets, excess fees of just 10 basis points could cost investors $2 billion annually. Lower fees can clearly contribute to stronger net returns, but assessing whether an investment fee is appropriate or not is a far more complex task than picking the lowest fee option. Nor is it merely a question of picking the fund with the track record of higher returns, as it is also necessary to consider the broader risk characteristics and investment choices of the fund.

INFLUENCING FACTORS

With these nuances in mind, the Centre for International Finance and Regulation (CIFR) recently conducted a research project to gain a better understanding of the factors that influence the investment fees charged by super funds. The study analysed data compiled by research house Chant West between 2007

DECEMBER 2016

apparent relation between fund performance and fees. As such, high-fee funds were found to perform indifferently from low-fee funds on a benchmark-adjusted basis, after fees. These findings were largely unaffected by the inclusion of administration fees.

A NEED FOR MORE TRANSPARENCY

BY ANDREW AINSWORTH ___

Dr Andrew Ainsworth is a senior lecturer at The University of Sydney, and was the lead researcher for the Centre for International Finance and Regulation (CIFR) study referenced in this article.

and 2015, to compare the investment fees and corresponding asset allocation of 174 investment options from 49 super funds. My fellow researchers and I found that asset allocation was a key factor underpinning the investment fees charged by super funds. Hedge funds and private equity had the greatest impact on total fees, followed by infrastructure. But these asset classes had also delivered stronger long-term returns. Among those super funds with a higher asset allocation to unlisted assets, we found corporate and public sector funds charged the lowest investment fees, followed by industry funds. Retail funds, on average, charged a higher fee. In terms of performance, we found that funds with higher fees did, on average, deliver higher returns. However, after adjusting returns for benchmark indices and asset pricing risk factors, there was no

Based on the findings of the study, my fellow researchers and I would recommend additional disclosure requirements for super funds. In addition to the strategic weights in each asset allocation class, we propose that funds should disclose: 1 | The returns earned for each asset class 2 | The investment fee charged for each asset class 3 | The proportion of each asset class that is passively managed. These disclosures would facilitate an improved flow of information to super fund members and assist them in gaining a better understanding of investment performance. Furthermore, they would provide analysts and ratings companies with an opportunity to benchmark super fundsâ&#x20AC;&#x2122; performance across different asset classes in a more rigorous manner than is currently possible using publicly available information. This would make it much easier for performance to be compared on a riskadjusted basis. These disclosures would also enable investment fees to be accurately benchmarked. In turn, this would enable members to identify where fees are eroding their account balances, and provide them with a basis upon which to decide whether the fees are worthy of the returns being generated. Investors should be cautious when making investment decisions based solely on fee levels. Similarly, fund managers should not be forced to reduce investment fees solely to remain competitive. This could lead to divestment from certain asset classes that provide high after-fee returns, which would adversely affect retirement balances. Ă&#x2018;

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\ INNOVATION

2017 WINNERS K E E P PA C E An ability to EMBRACE CHANGE and find new and INNOVATIVE WAYS of operating has never been A MORE IMPORTANT ATTRIBUTE for leaders in the superannuation industry. By Dan Purves

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THE SUPERANNUATION SECTOR was besieged by change in 2016, a trend set to continue in 2017. On the regulatory front funds are grappling with the biggest package of tax changes since the compulsory retirement savings system was introduced, new adviser standards, and a push to develop new retirement products. In the wings are extensive changes to the fee and product disclosure rules, a new code of conduct for group insurance, and a looming shake-up of the default fund selection process. Meanwhile competitive pressures have never been greater, and investments chiefs face the toughest market outlook in years. When the winners of 2016 Conexus Financial Superannuation Awards were revealed back in March the decision to withhold the innovation award, due to a lack of standout entries, caused a bit of a stir.

DECEMBER 2016

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With the 2017 awards just around the corner it seemed timely to catch up with the 2016 winners. We found that they have all been embracing change.

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chief investment officer of the year Richard Brandweiner chief investment officer, First State Super (now Leapfrog partner)

CIO OF THE YEAR RICHARD BRANDWEINER LEAPFROGS OUT

Richard Brandweiner, who won the coveted gong for chief investment officer of the year at the 2016 Conexus Financial Superannuation Awards, announced in August that he was

leaving First State Super after just three years. In that relatively short time he was instrumental in the rollout of the $56 billion fund’s road map to $70 billion, including a reset on its approach to asset allocation, portfolio construction and internal management. “Part of me moving on is that the foundations, to a large extent, have been laid for the future growth of the organisation,” Brandweiner says. He will commence in his new role in January 2017, as a partner with Leapfrog Investments; an emerging markets financial services and insurance provider that describes itself as a “social impact” company. Brandweiner tips the nascent impact investment sector will be one of the few asset classes capable of delivering strong returns in the challenging markets ahead and wants to create “institutional grade” deals.

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INNOVATION \

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pension fund of the year and large fund of the year QSuper Michael Pennisi, chief executive

QSUPER FINDING MORE AREAS TO RETURN MONEY TO MEMBERS

It is hard to think of a super fund that is pursuing change on more fronts than $60 billion Queensland public sector fund QSuper. In early 2016 QSuper lowered its administration fee, and fee cap, so that no member is charged more than $1,000 a year regardless of their balance. “We remain committed to using our scale and efficiencies to keep these fees as low as possible,” QSuper chief executive Michael Pennisi says. QSuper won pension fund of the year as well as large fund of the year at the 2016 Conexus Financial Superannuation Awards. In June, the fund launched its “Income Account Transfer Bonus”. The first of its kind in Australia, the rebate passes on the capital gains and other tax savings that are achieved when a retiring member transfers their balance to a retirement account, rather than withdrawing a lump sum. More than $4.6 million was paid out to about 3000 members in the first three months. But Pennisi says the most significant initiative undertaken in 2016 was a project to become the first super fund in the country to launch a wholly-owned insurance business. It is sure to be another big year ahead, with QSuper poised to transform into a public offer fund in 2017.

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best default fund and best fund o ve ral l UniSuper Kevin O’Sullivan, chief executive

UNISUPER BUILDING A FORTRESS

A need to deliver above market returns to service its defined benefit fund liabilities puts an extra level of pressure on the team at UniSuper. In response, the $55 billion industry fund for university staff has pursued a strategy of insourcing large chunks of its asset management. “We have a different model to many other funds, with more than half of our assets managed

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internally by seasoned investment professionals,” UniSuper chief executive Kevin O’Sullivan says. UniSuper was recognised with two trophies at the 2016 Conexus Financial Superannuation Awards, for best default fund and best fund overall. O’Sullivan flagged to Investment Magazine that the fund is in the midst of developing a new flagship pension product that should be ready for release in 2018.

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medium-sized fund of the year Local Government Super Peter Lambert, chief executive

of the most hotly debated issues in the sector right now. Kinetic Super, winner of small fund of the year at the 2016 Conexus Financial Superannuation Awards, now “switches off” insurance for employer-sponsored members with account balances of $6000 or less who have not received super contributions from their employer for 10 months or more. Analysis of Kinetic’s database found those members were at serious risk of their balance decreasing to zero if they kept paying for insurance cover. “We believe that insurance cover is a great idea, but only when it is affordable and appropriate to the circumstances of our members,” Kinetic Super spokeswoman Tania Smith says.

STREAMLINING AT LOCAL GOVERNMENT SUPER

Local Government Super has simplified its investment framework by pooling two separate schemes into a single entity. “Merging Pool A and Pool B funds into one superannuation entity enables us to lower some of our ongoing costs, provide a more competitive structure and reduce our operational risk,” Local Government Super chief executive Peter Lambert says. The fund has also continued to build on its speciality investing in line with environmental, social and governance principles to achieve a “deeper green” in its sustainable Australian shares option, Lambert says. Ensuring more members approaching retirement get financial advice is another priority for the fund, which appointed Andrew Dunkerley, former head of financial planning at NGS Super to the newly created role of chief advice officer in May. Local Government Super won medium-sized fund of the year at the 2016 Conexus Financial Superannuation Awards.

2 016 w i n n e r small fund of the year Kinetic Super Andrew Barnett, chief executive

KINETIC SUPER SAVING YOUNG MEMBERS ON INSURANCE

How to strike the right balance between providing adequate default insurance and ensuring young and low income members’ balances aren’t eroded by premiums is one

2 016 w i n n e r best member service Plum Super Simonne Hogan, general manager member experience, NAB Wealth

BRAND CONSOLIDATION AT NAB WEALTH

It was a turbulent year at NAB Wealth, the division of National Australia Bank that houses MLC and Plum Super. In late 2015 NAB sold 80 per cent of its wealth and life insurance business to Japan’s Nippon Life for $2.4 billion, sparking a major back-office restructure in 2016. This included the merger of Plum with four other super funds within the NAB stable into its flagship $70 billion MLC Super Fund. “Plum is still a brand, but it is now a sub-clan of the MLC Super Fund,” NAB Wealth general manager member experience Simonne Hogan said. Plum was recognised for best member service at the 2016 Conexus Financial Superannuation Awards. Hogan says Plum members are already benefiting from lower fees and access to discounts on banking products and services. Ñ

The winners of the 2017 Conexus Financial Superannuation Awards will be announced in a ceremony at Ivy Ballroom, Sydney on March 9. Tickets can be purchased at conexussuperawards. com.au. Details of the 2017 finalists can be found at investmentmagazine.com.au. Conexus Financial is the publisher of Investment Magazine.

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New ASX listing rules the right move A tightening of the ASX listing rules will block some very early stage companies from going public, but that’s A GOOD THING FOR EVERYONE. THE LATEST RAFT of changes to the ASX listing rules are a welcome BY development that will protect the ANTHONY GLENNING international reputation of the ___ bourse, while still enabling good local growth companies to attract Anthony Glenning is the much-needed capital. investment director of From December 19, 2016 the Starfish Ventures. Australian Securities Exchange will have greater powers to block very early stage companies from listing on the public bourse to raise capital. The key changes to the ASX-listing admission rules are: • Increasing the requirement for profit test entities to have consolidated profits for the 12 months prior to admission from $400,000 to $500,000 • Increasing the net tangible assets test from $3 million to $4 million • Increasing the market capitalisation test from $10 million to $15 million • Introducing a 20 per cent minimum free float requirement • Creating a single tier spread test of at least 300 security holders each holding at least $2,000 of securities ASX retains current institutional investors, • Requiring asset test entities to disclose while attracting new capital to the market. to the market two full financial years of As a country we need to boost general audited accounts and any significant entity investment and attract more quality companies or business that it has acquired in the 12 looking to list; to do both we must ensure a months prior to applying for admission robust stock market continues. or that it proposes to acquire in connection with its listing • Standardising the $1.5 million working capital requirement for those admitted under the assets test. Many in the start-up community have baulked at some of these changes, but I support them. The incoming changes are necessary to Requiring companies to be enhance the credibility and reputation of the a certain size in order to list ASX for all stakeholders, from institutional does not seem unreasonable, investors, through to entrepreneurs. Having a considering the high stakes healthy stock market is crucial to ensuring the

DECEMBER 2016

I would argue that the mechanisms proposed will increase the quality of companies coming onto market, ultimately saving time for institutional investors looking for the next viable investment venture. So, what do these changes actually mean for growing companies? There are two primary reasons why a company decides to pursue and initial public offer (IPO): to raise capital, or provide liquidity to existing shareholders. While an IPO is often described as an ‘exit strategy’, it is more accurately an avenue to provide liquidity to shareholders. One of the biggest misconceptions among owners of young businesses is that an IPO is the ultimate marker of success, and that anything else is a sign of failure. In a way, this is understandable. Aside from the prestige, an IPO can provide a cash injection that hopefully enables a developing company to go on to bigger and better things, while allowing a CEO to remain at the helm of the business they’ve built from the ground up. This is perhaps at the heart of why the new ASX listing rules have caused some concern in the start-up space. Some people are worried the changes could dampen innovation by reducing the willingness of entrepreneurs to take risks if the hurdles are higher when it comes time to list. But it is important to recognise that the move to restrict public listings is a necessary step to protect investors. Requiring companies to be a certain size in order to list does not seem unreasonable, considering the high stakes. A market cap of $15 million or assets of $4 million or more, while higher barriers to entry, are not that substantial for a public company and shouldn’t have significant impact on quality companies looking to list. Companies that will not be able to list under the new rules still have opportunities to make a trade sale to exit, or look to the venture capital market to raise growth capital. Access to venture capital was very tight in the five years to 2015, but in the past financial year more than $1 billion has been raised by Australian VC funds, making it an increasingly viable option. The new listing rules demonstrate that the ASX is taking steps to protect the quality of Australian stocks, for investors, and this is paramount to a healthy public market in the long term. Ultimately, this will work to the benefit of business owners and investors alike. Ñ

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