Investment Magazine May 2017

INTELLIGENCE FOR INSTITUTIONAL INVESTORS

ISSUE 138

MAY 2017

+

T H E I N AU G U R A L

Investment Magazine

RETAIL SUPER SALARY SNAPSHOT

Turnaround

COMPLETE MTAA Super investment chief PHILIP BROWN has implemented big changes since 2008 that continue to pay off

OUTFLOW WOES NEW SUPERRATINGS RESEARCH FINDS 23 PER CENT OF SUPER FUNDS ARE FAILING APRA’S SCALE TEST FUTURE MAKERS HOW SOME OF THE COUNTRY’S BIGGEST INSTITUTIONS ARE TAKING A PRAGMATIC APPROACH TO ESG INVESTING GROUP THERAPY THE GROUP LIFE INSURANCE SECTOR IS EMBRACING BIG DATA AND MORE TO IMPROVE MEMBER ENGAGEMENT TALKING POLITICS MINISTER KELLY O’DWYER AND SENATOR KATY GALLAGHER SQUARE OFF OVER THE PURPOSE OF SUPER

WORKSHOPS

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Organisational Resilience > How to nurture a feedback culture; the foundations of a resilient organisation > How to ensure each part of the organisation is working alongside one another

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CONTENTS MAY 2017

12

PROFILE

“We’re on a journey, still, of continuous improvement, as every organisation should be” PHILIP BROWN MTAA SUPER EXECUTIVE MANAGER INVESTMENTS

04

EDITOR’S LETTER Bribing young voters by letting them tap their super for a mortgage would be reckless.

Perhaps there is a smarter fix?

06

EXECUTIVE REMUNERATION The inaugural Investment Magazine Retail Super Salary Snapshot shows it’s hard to know what the retail super kingpins earn.

16

WORKERS’ CAPITAL AIST chief executive Eva Scheerlinck rails against the Productivity Commission’s plans to shake up default rules.

investmentmagazine.com.au

18

FUTURE MAKERS At a roundtable hosted by Investment Magazine and Mercer, asset owners revealed a pragmatic approach to ESG investing.

22

RETIREMENT INCOME A report sponsored by Standard Life Investments examines how super funds match their portfolios to the needs of retirees.

24

TALKING POLITICS The minister and shadow minister for financial services, Kelly O’Dwyer and Katy Gallagher, face off over defining the purpose of super.

26

SCALE TEST New research from SuperRatings benchmarks the industry against APRA’s scale test and finds nearly a quarter of funds failing.

28

GROUP INSURANCE Intense regulatory pressure on the $8 billion-a-year sector has key players focused on how to better engage with members.

30

ESG HITS MAINSTREAM ACSI chief executive Louise Davidson is heartened by the uptick in big institutions incorporating ESG principles into their decisions.

M AY 201 7

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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

Amanda White

A LETTER from the editor

A

A BETTER IDEA FOR AFFORDABLE HOUSING

JOURNALIST

Dan Purves EDITOR-AT-LARGE

Simon Hoyle HEAD OF DESIGN

Kelly Patterson ART DIRECTOR

Suzanne Elworthy SUB-EDITOR

Haki P. Crisden PHOTOGRAPHER

AS THE MAY 2017 issue of Investment Magazine went to print, Prime Minister Malcolm Turnbull had all but ruled out allowing young people to tap their superannuation for a first home deposit as part of the federal budget to be unveiled on May 9.

It is embarrassing for the PM that senior members of cabinet, including Treasurer Scott Morrison, stoked public debate about the idea in the first place.

This is the same government that is seeking to enshrine in legislation that the objective of the superannuation system is “to provide income in retirement that substitutes or supplements the age pension”. Allowing 20-somethings early access to super for a deposit to get into an overheating property market would deprive them of the benefits of compound interest accumulating in their retirement savings.

It would also add significantly to the budget deficit by re-directing capital form super, which is taxed, into owner-occupied housing, which is not.

But worst of all, it would be sure to do the exact opposite of improving housing affordability. Just like firsthomebuyer grants – a vote hustling policy both major parties have perpetuated over the past two decades – it would merely fuel demand, adding to price pressure.

Perhaps the most offensive part of Morrison’s flirtation with the idea of tapping super for housing is that he has ruled out reforming negative gearing and the capital gains tax discount or curtailing the ability

MAY 2017

of SMSFs to invest in residential property.

Those were just three of 13 policy ideas put forward by independent economist Saul Eslake in his recent report, No Place Like Home, commissioned by the Australian Institute of Superannuation Trustees, that the government could consider if it were serious about improving housing affordability.

Eslake’s report highlights that while letting young people raid their super for a home deposit would be a disaster, both for individuals and the economy, something does need to be done about the worsening housing affordability crisis.

Home ownership rates are declining, meaning more people are set to retire while still renting or paying off a mortgage. Meanwhile, it is getting tougher for retirees to find affordable rental accommodation.

Maybe there is another way the superannuation system can help provide part of the fix to our nation’s housing problem. Rather than encouraging individuals to drain their retirement savings prematurely to throw fuel on the housing price fire, what if super funds were given better incentives to invest in affordable housing?

A number of large industry funds are already working behind the scenes to research how they might be able to form consortiums, with one another and with private developers, to do just that. Collaboration with federal and state governments would also be essential. Fingers crossed we hear something about that in the budget.

Matt Fatches matt@mattfatches.com.au CHIEF EXECUTIVE

Colin Tate

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Karlee Samuels

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

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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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\ EXECUTIVE REMUNERATION

Almost

T H E I N AU G U R A L

Investment Magazine

RETAIL SUPER SALARY SNAPSHOT

BEYOND COMPARE The inaugural Investment Magazine RETAIL SUPER SALARY SNAPSHOT highlights how hard it is to determine what individuals managing superannuation money in the country’s biggest bank-owned funds are paid. Even so, it is clear they tend to earn more than their industry-fund peers.

By Dan Purves

RETAIL SUPER FUND executives are overpaid, underperform and put the best interests of shareholders before those of fund members – so the line of the industry fund lobby goes. But is that a fair characterisation?

The inaugural Investment Magazine Retail Super Salary Snapshot attempts to penetrate the rhetoric to examine how the executive remuneration policies at the country’s biggest retail super funds compare with those in the industry fund sector.

It’s no easy task. The complex, vertically integrated corporate structures of retail wealth-management firms, and inconsistent disclosure formats, make it impossible to get a like-for-like comparison on pay policies across the broader super sector.

Since July 1, 2014, all superannuation funds regulated by the Australian Prudential Regulation Authority (APRA) have been required to disclose executive and director remuneration, under the Superannuation Industry Supervision (SIS) Act section 29QB. For the last three years, the annual Investment Magazine Salary Survey has combed those disclosures to determine the highest-paid chief executives, chief investment officers and chairs across the super industry.

MAY 2017

However, this research has only ever painted half the picture.

This is because the disclosure requirements of the SIS Act do not apply to any salaries the parent entities of retail super funds pay.

In most cases, only partial remuneration disclosures are made relating to retail super executives and chairs, and in some cases there are no related pay disclosures at all.

So retail super chiefs on multimillion-dollar salaries, often double what their industry fund counterparts earn, have never appeared atop Investment Magazine’s annual survey.

Another big stumbling block when it comes to comparing the executive remuneration policies of the industry and retail fund sectors is that none of the big five retail players has a dedicated chief executive or chief investment officer for their superannuation business.

In each case, the key roles with responsibility for superannuation clients are tangled up with other parts of the wealth-management business, and often multiple executives have intersecting areas of responsibility.

“In this [regulatory] regime, trying to compare remuneration between sectors is like comparing apples with fish. It’s not even apples with oranges,” professional director Anne Ward says.

Ward is the chair of Commonwealth Bank’s three superannuation trustees and also chair

of one of the country’s biggest corporate funds, Qantas Super. She also regularly chairs the remuneration committees of those funds, giving her a unique insight into the differences in pay structures across the broader industry.

For the external observer, accountability around pay is also harder to track in retail super players, because of their vertically integrated business models. Each of the big five retail super trustees has a number of business relationships with other arms of their parent company. Typical related-party transactions that retail super funds participate in include funds management mandates, cash and currency management, group insurance, and administration services.

Proponents of the vertically integrated model argue benefits can flow from investing through related parties, such as reduced transactional activity and associated costs, the negotiation of better terms, greater efficiencies, better access to information and more control over governance. But both APRA and the Australian Securities and Investments Commission (ASIC) have voiced concerns about how the industry is managing potential conflicts of interest in these relationships.

INSIDE THE BIG FIVE

The inaugural Investment Magazine Retail Super Salary Snapshot focuses on the five biggest players in the retail superannuation sector: AMP, National Australia Bank, Westpac Banking Corp, Commonwealth Bank of Australia (CBA), and ANZ Banking Group.

Between them, AMP and the big four banks, which all operate under vertically integrated business models, have more than $400 billion of the $570 billion retail

investmentmagazine.com.au

EXECUTIVE REMUNERATION \

superannuation market. And they are all hungry to win a bigger slice of the $2.2 trillion super pool by convincing more customers from other parts of their businesses, such as banking and life insurance, to roll over their compulsory retirement savings.

The diagrams accompanying this article aim to depict the web of commercial relationships between related parties affecting superannuation assets within these five biggest players, while noting any disclosed remuneration relating to superannuation duties of chairs and other individuals with responsibilities comparable to that of a super fund chief executive or chief investment officer.

NATIONAL AUSTRALIA BANK

In the year to September 2016, National Australia Bank spent a total of $9.1 million on director and executive remuneration in relation to its superannuation businesses.

That’s roughly 54 per cent more than the $5.9 million bill for director and executive remuneration at the country’s largest industry super fund, AustralianSuper, in the comparable financial year. Both AustralianSuper and NAB’s MLC Super have about $109 billion under management.

At NAB, more than $2 million of superrelated remuneration went to one individual – group chief customer officer, consumer and wealth, Andrew Hagger. His total remuneration, including his broader duties outside of superannuation, came to nearly $4.1 million.

In comparison, AustralianSuper chief executive Ian Silk earned total remuneration of $798,186, while the fund’s chief investment officer and deputy chief executive, Mark Delaney, out-earned his boss, after qualifying for a $548,207 bonus to bring his total annual remuneration to just under $1.24 million.

Total annual remuneration for NAB asset management executive general

KEY Parent company Related party business

Trustee

Super fund

manager and acting executive general manager, wealth products, Garry Mulcahy, is unknown; however, it was disclosed that he received $986,493 for his duties related to superannuation. Within the NAB-owned wealth-management business MLC Ltd sit chief investment officer Jonathan Armitage and head of investments Susan Gosling but no remuneration is disclosed for either of them.

Not only do retail super funds tend to pay their executives more for equivalent roles, they also tend to have more layers of highly paid executives. For example, MLC is a part of NAB Wealth, which has its own senior executive team. NAB Wealth executive manager super and investment platforms, Paul Carter, was paid $684,602 last financial year for his super duties. Carter’s total remuneration for the period is unknown.

As for trustees in NAB’s superannuation business, Nicole Smith – the chair of NULIS Nominees, the trustee for MLC’s five super funds – received $302,500 for her duties, making her the highest-paid super fund chair in the country. In comparison, AustralianSuper’s Heather Ridout earned $187,355.

NAB restructured its wealth-management division in late 2016, following the sale of 80 per cent of the group’s life insurance business to Japan’s Nippon Life.

CBA GROUP

The country’s biggest bank, CBA Group, paid its group executive, wealth management, Annabel Spring, more than $4.6 million in the financial year ended June 2016. It is not known how much of this is linked to Spring’s oversight of the banking giant’s superannuation businesses.

Sitting within CBA’s wealth management business that reports to Spring is Colonial First State (CFS), which includes three separate super trustees with responsibility for a dozen super fund businesses.

Separately, CBA has a fourth trustee responsible for its corporate super fund.

Colonial First State executive general manager Linda Elkins was paid $649,530 in relation to her superannuation duties last financial year. Her total remuneration was not disclosed.

Colonial First State head of investments Scott Tully is probably one of the most highly paid investment chiefs in the country running super assets, but his remuneration is not disclosed.

Other highly paid super executives within the group include Colonial First State Investments general manager, product and investments, Peter Chun, who pockets $282,117 for his super-related duties. Chun’s total remuneration is unknown. Colonial

AMP LTD

CHAIR Catherine Brenner total AMP LTD remuneration $529,000 | CEO Craig Meller total AMP LTD remuneration $6,175,000 GROUP EXECUTIVE, WEALTH SOLUTIONS AND CUSTOMER Paul Sainsbury total AMP Limited remuneration $2,175,000

AMP CAPITAL

AMP BANK

CHAIR Vanessa Wallace total remuneration not yet disclosed. Former chair received $367,000 CEO Adam Tindall total AMP Capital remuneration $4,119,000 CIO Sean Henaghan no remuneration disclosed

AMP LIFE CHAIR Trevor Matthews total AMP Life remuneration $457,000 CEO Megan Beer total remuneration not yet disclosed. Former CEO received $2,291,000 CIO Mark Beardow no remuneration disclosed

AMP SUPERANNUATION LIMITED $70.7 BILLION

N. M. SUPERANNUATION PROPRIETARY LIMITED $38.7 BILLION

CHAIR Richard Allert superannuation remuneration $41,925 part-year

CHAIR Richard Allert superannuation remuneration $41,925 part-year

AMP Superannuation Savings Trust AMP Retirement Trust AMP Eligible Rollover Fund

Wealth Personal Superannuation and Pension Fund The Retirement Plan Super Directions Fund National Mutual Retirement Fund National Mutual Pro-Super Fund

Related party fund flow

Remuneration, year ending December 2016

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\ EXECUTIVE REMUNERATION

Mutual Superannuation general manager superannuation and investments, Greg Ballard, received $83,305 for his superrelated duties.

“I don’t think there are any staff in management who you could say work solely in relation to one super fund,” says Ward, who chairs three of CBA’s super trustees.

“They all have roles that span a range of activities, as do the board members.”

Last financial year, Ward received $266,472 for her super fund duties.

WESTPAC BANKING CORP

BT Financial Group, the wealth-management arm of Westpac Banking Corp, houses three separate superannuation trustees that run a total of two dozen super products, including wrap platforms.

In the financial year ended September 2016, BT Financial Group chief executive Brad Cooper received total remuneration of $3.48 million, of which $282,246 – or 8.1 per cent – was for time spent on superannuationrelated duties. BT Financial Group general

manager, superannuation, Melinda Howes, received $432,194 related to superannuation duties; her total remuneration for the period is unknown.

The three Westpac-owned trustees each paid Cooper $94,082 last financial year, bringing his remuneration related to superannuation duties to $282,246. His total remuneration was not disclosed. BT Funds Management chief investment officer Corrin Collocott was paid just a total of $25,269 by the group’s super trustees.

Collocott’s total remuneration was not disclosed.

BT Financial Group chair David Plumb received $63,224 from each of the three trustees, totalling $189,672.

ANZ BANKING GROUP

As with the rest of the big retail players, there is little transparency on what executives are paid in the superannuation business of ANZ Banking Group.

In the most recently reported financial year, ending September 2016, no pay disclosures were reported for ANZ Wealth Management group executive Alexis George.

ANZ Wealth Management managing director

COMMONWEALTH BANK OF AUSTRALIA Commonwealth Bank Officers Superannuation Corporation Pty Ltd

NAB GROUP

CHAIR Kenneth Henry total remuneration $689,598 for part-year. Former chair’s total remuneration $770,000 | CEO Andrew Thorburn total remuneration $ 6,709,667 CHIEF CUSTOMER OFFICER, CONSUMER AND WEALTH Andrew Hagger total remuneration $4,082,068; of which, superannuation remuneration was $2,055,729

NATIONAL AUSTRALIA BANK LIMITED NAB WEALTH GENERAL MANAGER, SUPER AND INVESTMENT PLATFORMS Paul Carter total NAB Wealth remuneration not disclosed; superannuation remuneration $684,602 EXECUTIVE GM, NAB ASSET MANAGEMENT Garry Mulcahy total NAB Wealth remuneration not disclosed; superannuation remuneration $986,493

MLC LIMITED

CEO Andrew Hagger total MLC remuneration not disclosed | CIO Jonathan Armitage no remuneration disclosed HEAD OF INVESTMENT Susan Gosling no remuneration disclosed

NULIS NOMINEES (AUSTRALIA) LIMITED CHAIR Nicole Smith superannuation remuneration $302,500 CHIEF CUSTOMER OFFICER, CONSUMER AND WEALTH Andrew Hagger superannuation remuneration $2,055,729

JANA JANA Investment Advisers Pty Limited

DPM Retirement Service MLC Pooled Superannuation Trust MLC Super Fund MLC Superannuation Fund Premiumchoice Retirement Service

JANA Corporate Investment Service Limited

MLC INVESTMENTS CIO Jonathan Armitage no remuneration disclosed Navigator Australia Limited

ANTARES CAPITAL PARTNERS LIMITED

NABINVEST CAPITAL PARTNERS PTY LTD

GENERAL MANAGER Brendan Donohoe no remuneration disclosed

MANAGING DIRECTOR David MacGregor no remuneration disclosed

National Wealth Management Services Limited

Remuneration, year ending September 2016

MAY 2017

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EXECUTIVE REMUNERATION \

pensions and investments Peter Mullin was paid $205,828 for superannuation-related duties, although his total remuneration is unknown.

ANZ Wealth Management chief investment officer Mark Rider was appointed after the reporting period.

Former ANZ Wealth chief investment officer Stewart Brentnall received $89,076 for his super fund duties during the period; no information was available on his total remuneration either.

Victoria Weekes, who chairs the ANZ Banking Group’s super funds, addressed

the topic of related-party transactions.

In addition to arguing they offer benefits, she notes that related-party appointments are not given carte blanche. ANZ’s trustee boards have a comprehensive program of reviewing executive remuneration, along with staff remuneration and incentive programs more broadly, she says.

“That extends to any related-party provider that has a material impact on the superannuation funds, including the funds’ managers, and hence their executive remuneration,” Weekes explains. “Our role in remuneration oversight includes reviewing

and approving performance objectives, the remuneration framework and benchmarks, and the recommended performance outcomes and resulting remuneration.

This arguably gives us more oversight and control than we have over independent, third-party arrangements.”

She cited a recent decision to outsource the OnePath wrap platform to Macquarie Investment Management as evidence of trustees putting the interests of super fund members first.

Weekes received $146,184 for her duties as chair of the two super fund trustees.

CBA GROUP

CHAIR, Catherine Livingstone no remuneration data yet. Former chair’s total remuneration $874,195 | CEO, Ian Narev total remuneration $12,304,307.

GROUP EXECUTIVE WEALTH MANAGEMENT, Annabel Spring total remuneration $4,606,020.

COMMONWEALTH WEALTH MANAGEMENT COLONIAL FIRST STATE EXECUTIVE GENERAL MANAGER Linda Elkins total CFS remuneration not disclosed | GM PRODUCT & INVESTMENTS Peter Chun total CFS remuneration not disclosed HEAD OF INVESTMENTS Scott Tully no remuneration disclosed

COLONIAL FIRST STATE INVESTMENTS LIMITED CHAIR Anne Ward total CFSIL remuneration not disclosed; superannuation remuneration $101,565 EXECUTIVE GENERAL MANAGER Linda Elkins total CFSIL remuneration not disclosed; superannuation remuneration $441,680 GM PRODUCT & INVESTMENTS Peter Chun total CFSIL remuneration not disclosed; superannuation remuneration $282,117 CFSIL is a Responsible Entity for managed investment schemes

COLONIAL MUTUAL SUPERANNUATION PTY LTD

AVANTEOS INVESTMENTS LIMITED

CHAIR Anne Ward superannuation remuneration $85,218 EXECUTIVE GENERAL MANAGER Linda Elkins superannuation remuneration $25,981 GM, SUPERANNUATION AND INVESTMENTS Greg Ballard superannuation remuneration $83,305

CHAIR Anne Ward superannuation remuneration $99,689 EXECUTIVE GENERAL MANAGER Linda Elkins superannuation remuneration $181,869

Colonial Super Retirement Fund SuperTrace Eligible Rollover Fund Commonwealth Bank Approved Deposit Fund The State Bank Supersafe Approved Deposit Fund

Avanteos Superannuation Trust Symetry Personal Retirement Fund Encircle Superannuation Fund Star Portfolio Superannuation Fund Ultimate Superannuation Fund

Colonial First State FirstChoice Superannuation Trust Colonial First State Rollover & Superannuation Fund Commonwealth Essential Super

Count Financial Limited

COLONIAL FIRST STATE GLOBAL ASSET MANAGEMENT

COLONIAL FIRST STATE ASSET MANAGEMENT AUSTRALIA LIMITED

REALINDEX INVESTMENTS PTY LIMITED

CEO Mark Lazberger no remuneration disclosed

CEO Andrew Francis no remuneration disclosed

CIO, FIXED INCOME AND MULTI ASSET SOLUTIONS Paul Griffiths no remuneration disclosed

THE COLONIAL MUTUAL LIFE ASSURANCE SOCIETY LIMITED

Australian Investment Exchange Limited

Commonwealth Private Limited

Avanteos Pty Ltd

Commonwealth Financial Planning Limited

(aka CommInsure)

CEO Helen Troup no remuneration disclosed HEAD OF INVESTMENT Anthony Carey no remuneration disclosed

BW Financial Advice Limited (In wind-up)

CIO, EQUITIES David Dixon no remuneration disclosed

Financial Wisdom Limited

Remuneration, year ending June 2016

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\ EXECUTIVE REMUNERATION

Trying to compare remuneration between sectors is like comparing apples with fish AMP LTD

AMP Life, the life insurance division of diversified wealth management company AMP Ltd, contains two superannuation trustees that together run eight super businesses.

AMP Life outsources a substantial set of functions to AMP Capital. This includes investment management of a significant portion of the individual assets and investment options offered through AMP Life.

In the year ended December 2016, AMP Capital chief executive Adam Tindall received total remuneration of $4.12 million, although none of this was reported as related to superannuation duties. No remuneration was disclosed for AMP Capital chief investment officer Sean Henaghan.

The former chief executive of AMP Life received total remuneration of $2.29 million; again, none of this was reported as related to superannuation duties. No remuneration was disclosed for AMP Life chief investment officer Mark Beardow.

AMP Group executive, wealth solutions and customer, Paul Sainsbury, has

responsibility for the management of superannuation, retirement and investment platforms. The role is newly created after a leadership restructure in November 2016 and does not yet have remuneration data. For a similar level role in 2016, Sainsbury earned $2.2 million.

He reports to group chief executive Craig Meller, who earned $6.2 million in 2016.

Richard Allert, chair of AMP’s super funds, received $83,850 for super fund duties for his partial year as chair in calendar year 2016.

CBA’s Ward tells Investment Magazine she is fan of fixed remuneration plus an ‘at-risk’ component, with the latter dependent on performing above expectations. However, she says there is no one remuneration structure to suit every organisation.

“Even within the same sector, you can’t compare remuneration structures because the business model and legal structures are quite [varied],” she says. “For instance, the numbers that have been disclosed for me in relation to Colonial are not comparable

FOLLOW THE MONEY

WESTPAC INSTITUTIONAL BANK

Despite all the challenges with making direct comparisons, it is clear that senior individuals can typically expect to earn an order of magnitude more working at a retail super fund than at an industry fund.

Rather than a simple game of pay-packet envy, however, the more interesting and important issue is whether the pay deals in the retail super world are structured in a way that adequately protects the interests of consumers by aligning pay incentives with good practice.

QVALENT Pty Ltd

ANZ BANKING GROUP

CHAIR David Gonski total ANZ Banking Group remuneration $825,000 | CEO Shayne Elliott total ANZ Banking Group remuneration $3,454,610

WEALTH AUSTRALIA GROUP EXECUTIVE, WEALTH AUSTRALIA Alexis George total Wealth Australia remuneration not disclosed MANAGING DIRECTOR, PENSIONS AND INVESTMENTS Peter Mullin total Wealth Australia remuneration not disclosed; superannuation remuneration $205,828 CHIEF INVESTMENT OFFICER Mark Rider total Wealth Australia remuneration not disclosed

ONEPATH FUNDS MANAGEMENT CHAIR Victoria Weekes total OnePath Funds Management remuneration not disclosed OnePath Funds Management is a Responsible Entity for a managed investment scheme. OnePath Funds Management is entitled to fee income from the Trustee’s investments, which are invested directly with OnePath Funds Management Limited or indirectly through OnePath Life Limited.

OASIS FUND MANAGEMENT LIMITED $5.3 BILLION

ONEPATH CUSTODIANS PTY LIMITED $34.4 BILLION

ONEPATH LIFE LIMITED

CHAIR Victoria Weekes superannuation remuneration $48,729 GROUP EXECUTIVE, WEALTH AUSTRALIA Alexis George superannuation remuneration $14,559 CHIEF INVESTMENT OFFICER Mark Rider total remuneration not yet disclosed. Former CIO’s superannuation remuneration $43,538

CHAIR Victoria Weekes superannuation remuneration $97,455 GROUP EXECUTIVE WEALTH AUSTRALIA Alexis George superannuation remuneration $72,836 CHIEF INVESTMENT OFFICER Mark Rider total remuneration not yet disclosed. Former CIO’s superannuation remuneration $43,538

GROUP EXECUTIVE WEALTH AUSTRALIA Alexis George total OnePath Life remuneration not disclosed

Oasis Superannuation Master Trust

OnePath Masterfund Retirement Portfolio Services

Remuneration, year ending September 2016

MAY 2017

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EXECUTIVE REMUNERATION \

to the information disclosed for me in relation to Qantas Super.”

NAB general manager corporate super, Lara Bourguignon, says that since the Future of Financial Advice (FoFA) reforms came into force on July 1, 2013, there have been no salesbased metrics on executives’ scorecards, so she and her colleagues cannot be incentivised to bring in new business.

Bourguignon says: “Our incentives are not linked in any way to sales or retention of members; it is very much focused on having engaged people operating in a

climate that manages risk and is focused on lifting capability.”

She says the holy grail of conflict management in NAB’s super business is the roles and responsibilities charter – a tripartite agreement between NAB, the trustee board and the service company.

“Essentially, that agreement makes it very clear that the trustee’s number one responsibility is members’ best interest.

Assuming members best interest is satisfied, the trustee needs to manage the commercial arrangements. It’s an ‘and’ not an ‘or’.”

KPMG partner, performance and reward, Tim Nice, says remuneration practices across the retail super sector are “heading towards global best practice”. One of the ways this is being accomplished, he says, is by deferring manager pay, so they are incentivised to consider the wider vision.

“An equity plan may not directly link to the manager’s individual success, but it does keep the focus not just on shareholders, but also on other stakeholders [such as members], because share price reflects a combination of views on an organisation.”

WESTPAC BANKING CORPORATION

CHAIR Lindsay Maxsted total remuneration $829,540 | CEO Brian Hartzer total remuneration $6,752,017

BT FINANCIAL GROUP

CEO Brad Cooper total BTFG remuneration $3,484,514 | CIO Corrin Collocott total BTFG remuneration not disclosed GENERAL MANAGER, SUPERANNUATION Melinda Howes total BTFG remuneration not disclosed; superannuation remuneration $432,194

WESTPAC SECURITIES ADMINISTRATION LIMITED CHAIR David Plumb total WSAL remuneration not disclosed; superannuation remuneration $63,224 CEO Brad Cooper total WSAL remuneration not disclosed; superannuation remuneration $94,082 BT Institutional Diversified Balanced PST BT Superannuation Savings Fund Westpac Mastertrust – Superannuation Division Westpac Personal Superannuation Fund

Westpac Life Insurance Services Ltd

ASGARD Capital Management Ltd

BT FUNDS MANAGEMENT LIMITED

BT FUNDS MANAGEMENT LIMITED NO. 2

CHAIR David Plumb total BTFM remuneration not disclosed; superannuation remuneration $63,224 CEO Brad Cooper total BTFM remuneration not disclosed; superannuation remuneration $94,082 CIO Corrin Collocott total BTFM remuneration not disclosed; superannuation remuneration not yet disclosed. Former CIO’s superannuation remuneration $16,846

CHAIR David Plumb total BTFM No. 2 remuneration not disclosed; superannuation remuneration $63,224 CEO Brad Cooper total BTFM No. 2 remuneration not disclosed; superannuation remuneration $94,082 CIO Corrin Collocott total BTFM No. 2 remuneration not disclosed; superannuation remuneration not yet disclosed. Former CIO’s superannuation remuneration $8423

BTFM is Responsible Entity of managed investment schemes and investor directed portfolio services.

BTFM No. 2 is Responsible Entity of managed investment schemes and investor directed portfolio services.

ASGARD Independence Plan Division Four ASGARD Independence Plan Division Two Advance Pooled Superannuation Trust Advance Retirement Suite BT Balanced Returns PST BT Conservative Outlook PST BT Institutional Conservative Growth PST BT Institutional Retirement PST BT Institutional Stable Growth PST BT Lifetime Super BT Specialist PST BT Super Trust – Investment Fund BT Super Trust Capital Stable Fund Beacon Superannuation Plan Retirement Wrap

BT Active Balanced PST BT Classic Lifetime BT Core Australian Share PST BT DIY Active Balanced PST BT Property Securities PST

BT Portfolio Services Ltd

WESTPAC FINANCIAL SERVICES LIMITED

BT INVESTMENT MANAGEMENT LIMITED GROUP CHIEF EXECUTIVE AND MANAGING DIRECTOR Emilio Gonzalez no remuneration disclosed

ADVANCE AUSTRALIA ASSET MANAGEMENT LIMITED ACTING CIO AND HEAD OF ASSET ALLOCATION, Corrin Collocott no remuneration disclosed

Remuneration, year ending September 2016

investmentmagazine.com.au

MAY 201 7

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\ CIO PROFILE

B AonC K TOP MTAA SUPER investment chief Philip Brown reflects on coming out the other side of a turnaround MORE RESILIENT THAN EVER.

By Simon Hoyle Photos Graham Tidy

IN JANUARY THIS year, the value of assets held by MTAA Super ticked over the $10 billion mark for the first time in the fund’s 26-year history. If the value remains above that threshold, then the Conexus Financial Superannuation Awards 2017 Medium Fund of the Year winner will next year find itself competing for recognition against the giants of the industry.

MTAA Super’s executive manager of investments, Philip Brown, says the funds-undermanagement milestone marks “an important time for the organisation – not just the investments team but the whole organisation – to stop and reflect on what we’ve achieved over 26 years”.

MAY 2017

investmentmagazine.com.au

CIO PROFILE \

Ph i l i p B ro w n EXECUTIVE MANAGER, INVESTMENTS, MTAA SUPER Since 2005 2002-05: Joined the Private Health Insurance Administration Council (PHIAC) as a prudential supervisor of regulated private health insurance funds. PHIAC has since been subsumed into the Australian Prudential Regulation Authority (APRA).

1998-2001: Moved to Medibank Private as assistant investment manager; one member of a two-person team.

1991-98: Joined the Australian Bureau of Statistics as a statistical analyst.

1990: Graduated from the University of Tasmania with a bachelor’s degree in economics.

“Not just the people here now, but those who came before us,” he says. “It was a milestone for everybody, and every little piece of effort adds up to the $10 billion, in my view.”

MTAA Super has bounced back since 2008-09, when it posted a nearly $1.7 billion investment loss on a portfolio then valued at less than $6 billion, and became the target of an Australian Prudential Regulation Authority investigation into its governance and investment performance.

Back then, about 45 per cent of the fund’s portfolio was invested in unlisted, illiquid assets. Today, the allocation to unlisted assets has been reduced to less than 30 per cent, following a strategy overhaul.

Brown, who has been with the industry fund for motor trades workers for 12 years, joined as “the fund’s first dedicated investment resource”, looking after MTAA’s in-house assets.

The investment chief now heads a team of five, charged with managing the fund’s relationships with suppliers – including external fund managers and investment advisers – and with managing a portfolio of property and infrastructure assets in-house.

It’s a small team, Brown says, but “small teams can punch above their weight often”.

“We do that,” he says. “We don’t necessarily manage a lot of the money inhouse in the traditional sense…But [our team] manages a lot of external relationships and an investment operations function.

“A lot of time and effort is employed in managing our alternatives, or the unlisted part of our portfolio, which is about 26 to 30 per cent, depending on whether you look at the actual or strategic weights…We do

investmentmagazine.com.au

directly own and manage those assets. That’s the closest we have to in-house assets, and we do that under the guidance of advisers.”

THE GOLDILOCKS ZONE

Brown says that, for the foreseeable future, MTAA Super will enjoy the best of both worlds – capitalising on economies of scale but remaining agile.

“At our size, we’re not too big to be locked out of investment opportunities, not too small to be able to access them with some efficiency.

We think we’re still enjoying quite a good sweet spot,” he says. “It’s hard to be precise about what that range is, but it’s around our size.

“In particular, we can access some very good investment opportunities that large funds, I believe, couldn’t because [the opportunities] are too small to be effective.

We can access some fund managers and build the listed part of our portfolio in a way that some of the larger funds can’t, and some of the smaller funds can’t justify on a fee-efficiency argument.”

There are pluses and minuses to managing a small investment team. On the one hand, it’s small enough not to require layers of reporting; on the other hand, everyone has to be on the ball, all the time, and there’s nowhere to hide.

In this context, Brown says his approach to managing the team is “less structured than some managers’ ”.

“My personal style is I expect my staff to be self-starting and manage their own workflows. I allow them to proceed with their work and come to me as a sounding board. We have a fairly fluid approach,” he says. “We like to enjoy what we do and we see

MAY 201 7

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\ CIO PROFILE

MTAA SUPER Number of members: 242,000 Mean account balance: about $36,000

Some of the advisers are the same but the portfolio construction has been fundamentally enhanced and rewritten

Proportion of members in accumulation: 98.7 per cent Total funds under management: $10.2 billion Proportion of funds managed internally: Fund directly owns unlisted assets and uses advisers to assist in managing them, but trustee retains discretion over buying and selling.

Total staff: 44

the lighter side of things but, of course, what we do is very serious, in terms of looking after members’ money.”

EVOLUTION IN MANAGEMENT

Brown says that as the fund continues to grow and the investment team expands to match, it will require more structure and a change in his own role. He says this will necessitate an evolution in his management approach, “because when I started here, I was a doer”.

“I’m still a bit of a doer, and I need to be a little bit more of a manager,” he says.

“I can lead the team by my example and my work ethic, but ultimately we are looking to enhance and empower the team more and for me to have more of an oversight role, as someone in my [position] should.

“I still consider myself one of the team in terms of task allocation day to day, as opposed to just being a manager. But it’s a personal goal and challenge for me to have the team doing more and me doing less.

“Given the interesting things we do here, it’s something I’ve always liked to be involved in; so it’s just a personal approach and a character trait.”

WINNING TURNAROUND

Since the arrival of MTAA Super chair John Brumby and chief executive Leeanne Turner in 2011, the fund’s investment approach has changed considerably from when it was about 45 per cent invested in illiquid assets and got caught out when the global financial crisis hit.

Turner says it was the former board, rather than Brown, that had decided to position the fund so deeply into illiquid assets, and that the investment chief has been instrumental in implementing the strategy that has underpinned the improvement in the fund’s fortunes since then.

“We did have to undertake a divestment

MAY 2017

program at that point,” Turner says. “Phil had pretty much sole carriage and responsibility for that. It had to be carried out in a very measured and strategic way, so we weren’t diluting members’ returns and we weren’t in any sort of fire sale situation at all. That was down to Phil’s expertise.

“Phil was a large part of the solution, and I felt so strongly about that I nominated him for an award.”

In 2013, Brown was awarded the Super Investment Award for Excellence by the Australian Institute of Superannuation Trustees.

Turner says she and Brown have a close working relationship, although her style, much like Brown’s own, is to “empower my executives so they have carriage and responsibility for their areas of expertise”.

“In Phil’s case, I have the utmost confidence and respect for him and what he brings to the role,” she says. “I’m very happy to let him run things.”

Brown says the fund’s investment strategy has been “fundamentally altered” since 2011 and its current exposure to infrastructure and property is about 26 per cent.

“Some of the advisers are the same but the portfolio construction has been fundamentally enhanced and rewritten,” he explains. “A whole new series of parameters around vintage, diversification, position, sizing and other things has been implemented. Liquidity management has been fundamentally overhauled. A whole range of things mean what we do and how we do it today and what we’ve done in the past really can’t be compared.

“We had a different chief executive, we had a fundamentally different board and they had an approach that doesn’t exist anymore.

Boosted by windfall profits from the sale of the Moto Hospitality service station business in the UK in 2015, MTAA Super has returned to near the top of the performance

Investment team staff: Five Key people: Chair John Brumby; chief executive Leeanne Turner; deputy chief executive Michael Sykes; executive manager, investments, Philip Brown.

ASSET ALLOCATION

My AutoSuper (balanced) option

As at April 4, 2017 International equities

25.58

Australian equities

22.83

Infrastructure

13.94

Cash

12.02

Overseas fixed interest

7.89

Property

6.56

Australian fixed interest

2.98

Private equity

2.16

Alternative credit

1.48

Other

4.55

SOURCE: MTAA Super

HISTORICAL PERFORMANCE

As at February 28, 2017 11.8

9.6

11.5 8.7

9.5

8.1 7.2

7.1

5.2

2.9

1 YEAR

3 YEARS

5 YEARS

7 YEARS 10 YEARS

(% PA)

Median – SR50 MySuper Index NOTE: MTAA Super Benchmark = CPI + 3 per cent SOURCE: MTAA Super, SuperRatings

investmentmagazine.com.au

CIO PROFILE \

charts, a position it regularly occupied before the GFC. MTAA Super’s MySuper option was the second-best performing fund in the three years to the end of February, SuperRatings data shows, with a return of 8.68 per cent a year, narrowly beaten by Hostplus’s 8.83 per cent a year, and ahead of the Cbus MySuper option’s 8.46 per cent a year. It’s a significant improvement on the 2.92 per cent a year return the fund achieved over the last 10 years.

“We have hit our stated investment objective over periods out to the last seven years, which is the recommended minimum investment time horizon for the balanced MySuper option,” Brown says. “The 10-year number is low, as it still includes the impacts of the GFC. The investment strategy today and the portfolio are vastly different, in many ways. The strategy is more refined now than it was 10 years ago.

Brown says many of the issues MTAA faced were “misreported or misstated” at the time. Nevertheless, he says it “wouldn’t have been a very intelligent approach not to have learned something from those things along the way”.

“There have been many things to learn, a lot of enhancements, and we’re on a journey, still, of continuous improvement, as every organisation should be,” he says.

TODAY ’S CHALLENGES

In today’s market conditions, Brown says, investing in infrastructure and property – the assets MTAA manages in-house – is particularly challenging.

“We’re being very selective in that space and not wanting to deploy too much capital at a potential high point in the cycle,” he says.

“We’re able to play in a part of the market, with our size, that is probably less competed over on a global basis.

“We do not need to play in large [global] asset-bidding competitions against huge sovereign wealth funds or very, very large funds that are looking for large stakes in large assets. We can play in a smaller part of the market but do it efficiently.”

Brown says MTAA Super has found what it believes to be better risk-adjusted returns in “midmarket” assets, and in particular in infrastructure debt, rather than infrastructure equity. He cites Alpha Trains, a European

15

rolling stock leasing company, which MTAA Super invested in a couple of years ago and, more recently, Calvin Capital, a UK smart metering company.

“You need to be very careful about how you deploy your capital in that market environment. We’re able to avoid the large, heavily contested auctions for big assets,” he says. “We can deal in different parts of the market and still deploy capital effectively.

That’s important for us, particularly given how much we play in private markets and the unlisted space.”

Perhaps not surprisingly, given MTAA’s ups and downs over the last eight or nine years, Brown says resilience is a characteristic he values highly.

“It means continuing to focus on the goal and the member outcome as the ultimate – persevering, really,” he says. “This organisation and many of my colleagues, and hopefully myself, have been very resilient, in terms of remaining focused, staying the course, striving for continuous improvement, dealing with issues, learning along the way, and just remaining focused on what we do every day.

“It’s a very powerful concept.”

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16

\ COLUMN

THE CURRENT DEBATE over default fund selection has highlighted one of the strong points of difference for profit-to-member funds in the superannuation sector.

The focus of those pushing to change the existing default system is on removing super from the industrial relations process; however, the Australian Institute of Superannuation Trustees is of the firm belief that enshrining super in industrial awards has brought enormous benefits to members.

This includes protecting consumers who have limited financial literacy.

Underlying AIST’s position is the deeply held view that superannuation is much more than a financial product; it is social policy.

As pointed out in the new book Workers’ Capital by Bernard Mees and Cathy Brigden, the move towards superannuation as a workplace entitlement for all represented considerable social change.

forced: a windback in sales commissions and conflicted advice; improved reporting and measurement of super fund returns; leadership in infrastructure investment; and an increasing focus on the environmental, social and governance practices of corporate Australia.

Industrial law-based retirement income systems are not unique to Australia. But as Workers’ Capital concludes, it is hard to point to a comparable retirement savings system in the world where BY trade unions – in the spirit of social EVA SCHEERLINCK equity – have developed, reformed

and managed such a successful system.

Eva Scheerlinck is the chief executive But change did not come easily. of the Australian Institute of Many of the union officials who Superannuation Trustees. led the fight for universal super weren’t seen as heroes of the day or visionaries, rather they were viewed by some as rebel rousers and a threat to business and the wider economy.

The Coalition was particularly hostile to the idea of super for all. In 1979, then-federal treasurer John Howard claimed that national superannuation would be an unreasonable impost on employers and would limit freedom of choice in retirement planning.

Current default system protects workers’ capital As the Productivity Commission considers alternative models to the current default fund selection process, it’s worth remembering WHAT IS AT RISK. Workers’ Capital – a collaboration between AIST and Melbourne’s RMIT University, supported by IFM Investors – is a history that outlines the extent to which collective trade union action was pivotal in the development of a universal retirement savings system.

THE BATTLE FOR A FAIR GO

Prior to the 1980s, super was a privilege granted only to company head-office staff and career public servants. It was unions that recognised the need for a system that could

MAY 2017

provide ordinary Australian workers with security and dignity in retirement.

The battle for a fair and universal retirement savings system led to many important reforms. This included measures such as portability and vesting, the absence of which had previously disadvantaged many members – most notably women and the lower paid.

The phenomenal growth of industry super funds also brought with it social reforms and innovations. A hugely successful campaign

TODAY ’S FIGHT

The industry fund movement and other profit-to-member funds are now caught up in another battle. But rather than fight for change, as our pioneering forebears did, this time the profit-to-member sector wants to ensure that the existing industrial lawbased default model is recognised for the benefits it brings.

While we are open to a review of the way default funds are selected, we object to a process that fails to consider the existing system properly and seeks to replace it without an evidence-based reason.

The existing default model not only has a good track record, it ticks all the boxes that the Productivity Commission itself has highlighted as critical to an efficient default system – an independent body (the Fair Work Commission), a quality filter and an expert panel.

The default fund system is an important piece of social policy. It’s not there simply to make profits for shareholders. The current system provides a high level of consumer protection and serves the interests of all Australian workers. We are determined to preserve and protect it.

investmentmagazine.com.au

2017

TRUSTEE DIRECTOR EDUCATION Professionally develop your way to the top As the super industry evolves, so do the roles within it. Upskilling – or simply refreshing – can lead to new ideas, increased efficiency and, ultimately, better results both for you and your fund.

Designed specifically for trustee directors working in profit-to-member superannuation funds, AIST’s annual calendar of courses and events provide a full suite of learning programs for directors, and boards, looking to build on their expertise.

“From geo-political risk, through to technology and cyber security, AIST ensures profit-to-member boards understand the strategic issues facing the industry as well as providing forums for directors to collaborate and share leading practice.”

Lisa Darmanin, Trustee Director, HESTA

Chairs Forum These exclusive events held in both Melbourne and Sydney for AIST member fund chairs provide a collegiate forum for profit-to-member super fund chairs to discuss and debate the key issues of the day.

Director Briefings

Trustee Director Course

AIST’s 90 minute Director Briefing sessions address current areas of change and challenges in governance and fund leadership.

AIST's flagship educational offering – the Trustee Director Course – recognises the unique role that superannuation executives have in providing a better retirement outcome for working Australians.

These sessions are designed to provide continuing professional development (CPD) opportunities for trustee directors in a collegiate forum.

Topics are set on a rolling basis to ensure the latest and most topical content for profit-to-member super fund directors.

Location: Melbourne and Sydney Date: Various 2017

AIST Super Investment Conference (ASI) AIST’s Super Investment Conference (ASI) delivers three days of in-depth investment content with a range of sessions covering strategic, technical and new frontier topics.

Typically ran as a half-day event with the agenda set by fund Chairs, the discussion varies from a private discussion with the regulator through to macro trends impacting fund boards.

Bringing together international and domestic thought leaders, ASI is a must attend for trustee directors looking to build their knowledge and capability on one of super’s most important areas of focus, investment.

Location: Melbourne and Sydney Date: Various 2017

Location: Gold Coast Date: 6 – 8 September, 2017

The flexible delivery of the Trustee Director Course means participants can complete the full course in 5 days or break it down into individual days across any time period.

Participants can also choose to attend individual days of the Trustee Director Course at any time to address specific professional development needs.

Location: National Date: Various 2017

“This course recognises the unique skills and heavy responsibilities required of today’s trustee directors – it should be on every trustee’s radar.”

John Brumby, GAIST (Adv.), Chair, MTAA Super

For a full calendar of courses, events, dates and locations visit www.aist.asn.au/plan-my-training

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\ ROUNDTABLE

The RISE of the FUTURE makers

How asset owners are balancing their fiduciary duties with pragmatic responses to the demands of activist stakeholders was the topic of a recent roundtable, proudly hosted by INVESTMENT MAGAZINE and sponsored by MERCER. By

Sally Rose

AUSTRALIA’S BIGGEST INSTITUTIONAL investors are fielding more questions than ever about how they are managing environmental, social and governance risks in their portfolios.

Campaigns by external activist groups played out in public and over social media are just part of the story, though. A more powerful force is the rising level of engagement among trustees concerned about how the funds they oversee are meeting their fiduciary obligation to consider all long-term investment risks.

A decade ago, it was considered radical for fiduciaries to consider the financial and business risks associated with climate change. Now it is mainstream. Traditionally conservative investment organisations are increasingly thinking about a wide range of

environmental, social and governance (ESG) risks in their portfolio and looking for innovative ways to manage them.

“A concept we have been working with a number of investors on is the idea of being a future maker,” Mercer senior responsible investment consultant Alexis Cheang said.

“One of the questions we encourage clients to ask is, ‘What kind of future do you want to see that your members will be retiring to or that your endowment would be operating in, and how are you making that future more likely using your influence as an investor and your relationships with your intermediaries and portfolio companies to make that future more likely, and an unsustainable, divided future less likely?’.”

Cheang and her team have worked with some of Australia’s biggest institutional investors to help them understand the risks in their portfolio, define their investment beliefs, and come up with a strategy for evaluating and responding to stakeholder feedback and demands. She stresses the importance of having a clearly defined responsible investment policy and being transparent about what that is and how it is implemented.

UniSuper, the $57.5 billion default superannuation fund for the country’s largest universities, was an early adopter of such an approach.

“I think UniSuper was probably one of the first funds targeted by activist campaigns.

Many of our members are academics, and they are highly educated, engaged, and take a keen interest in ESG issues,” UniSuper manager, governance and sustainable investment, Talieh Williams said.

“We’re not an activist fund but we are an active share owner and we feel very accountable to exercise our ownership rights with prudence.”

Having an integrated ESG policy should not be confused with trying to please

HOW YOU INVEST TODAY IMPACTS TOMORROW MAY 2017

Find out more at: mercer.com.au/low-carbon-economy

investmentmagazine.com.au

ROUNDTABLE \ Right (L-R): Investment Magazine’s SALLY ROSE; First State Super’s DAMIAN GRAHAM; CFS FC’s JODIE TAPSCOTT

PA R T I C I PA N T S Left: Mercer’s ALEXIS CHEANG

everybody all of the time, which would be an impossible folly.

“One issue we get a lot of questions about is whether we are invested in companies that participate in stem cell research…some of our members have strong religious or philosophical views against it, while some of our members are researchers in that field,” Williams said.

Framing ESG integration as a riskmanagement tool means that even if some stakeholders don’t like certain investment decisions, they understand the framework in which they were made.

“I think ESG integration can transcend philosophical views at that level,” Williams said.

Balancing conflicting demands from stakeholders was a challenge faced by University of NSW director of treasury Andrew Fellowes last year when he embarked upon developing a responsible investment policy for the institution’s endowment fund.

This followed campus demonstrations, including a small sit-in in the chancellery backed by many more supporters on social media, protesting the university’s investments in certain fossil fuel producers.

While a handful of vocal protestors were calling for blanket divestment, this would

have been both problematic for the fund’s portfolio requirements and inconsistent with the values of many other stakeholders – like mining engineering students.

This sort of conundrum is one of the reasons why it is so important investors clearly define what their own investment beliefs are.

“Something many of the funds we work with have found really useful is to do an Investment Beliefs Workshop,” Cheang said.

This is a chance to articulate what the organisation believes about ESG and integrate it into their investment policy.

“Then even if you can’t satisfy everyone’s desires or requirements about stem cells or climate change, you can say, ‘Organisationally this is what we believe.

This is the approach we’ve taken. This is how we’ve taken on-board your overarching concern’,” Cheang said.

Mercer advised UNSW on the development of its new Investment Policy Statement, which incorporates the goals of the Paris Agreement on Climate Change.

NSW Treasury Corporation (TCorp), the $72 billion funds management arm of the NSW Government, recently worked with Cheang’s team at Mercer on the development of its inaugural Investment Stewardship Policy.

One driver for this was the rise in queries coming from external stakeholders, such as universities and local councils, reflecting the general public’s growing interest in ESG issues, TCorp senior manager, investment

ALEXIS CHEANG

Mercer | senior responsible investment consultant ANDREW FELLOWES

University of NSW | director of treasury DAMIAN GRAHAM

First State Super | chief investment officer BILL HARTNETT

Local Government Super | head of sustainability DR JOHN HEWSON

Asset Owners Disclosure Project | chair HELEN MURDOCH

Mercer | delegated solutions leader EMMA PRINGLE

BT Financial Group | head of customer governance and sustainability JODIE TAPSCOTT

Colonial First State | senior manager corporate responsibility MICHAEL WALSH

UC A Funds Management | chief executive TALIEH WILLIAMS

UniSuper | manager governance and sustainable investment KYLIE WILLMENT

NSW Treasury Corporation | senior manager, investment advisory and stewardship

PREPARE YOUR PORTFOLIO FOR TR ANSI TION investmentmagazine.com.au

MAY 201 7 Find out more at: mercer.com.au/low-carbon-economy

19

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\ ROUNDTABLE

advisory and stewardship, Kylie Willment said.

“But I’m happy to say that a lot of the catalyst was Treasury itself turning to us and asking what we were doing about things like climate change risks within our investment portfolios.”

Willment said the implementation of the Investment Stewardship Policy would be “a major focus” for TCorp over the “next couple of years”.

“We acknowledge that we are a bit behind where some of the industry is in terms of ESG integration and active ownership but we’re targeting moving ourselves up to best practice very quickly and resourcing and re-structuring ourselves accordingly,” she said.

The move to embed ESG principles into investment policies is also underway inside the nation’s largest banks.

Roughly two years ago, BT Financial Group, the superannuation and wealthmanagement arm of Westpac Bank, first outlined the organisation’s investment beliefs in regards to managing ESG risks.

BT Financial Group head of customer governance and sustainability Emma Pringle said the move had played an important role in pushing considerations about ESG issues into the mainstream at the organisation, rather than just being viewed as a concern of special label funds.

Pringle said BT Financial Group primarily engages with its investee companies “behind closed doors” and was currently spending a lot of time thinking about how to do that better.

“It comes back to what role we play as the custodian…investing that money responsibly at the highest level that’s going to meet total member interest.”

Around two years ago, the Commonwealth Bank’s wealth-management strategy group started formalising its approach to responsible investment with regards to ESG risks.

Jodie Tapscott recently joined the group in the newly created role of Colonial First State senior manager corporate responsibility. Her job is to implement the group’s Wealth Management Responsible Investing Framework.

Tapscott said the importance of good stakeholder engagement should not be underestimated.

Above (L-R): LGS’s BILL HARTNETT; Mercer’s HELEN MURDOCH; AODP’s DR JOHN HEWSON

“I think wealth organisations can really do a lot to better communicate with their members and engage them on the [ESG] issues they are interested in.”

Improving engagement on ESG issues with CFS’s external fund managers is another area of focus for Tapscott to meet the organisation’s commitment to encourage the disclosure of ESG risks and impacts.

Cheang said a useful activity for asset owners trying to figure out how to prioritise their ESG engagements with fund managers and the companies they invest in is to undertake a “whole-of-portfolio modelling” exercise. In addition to providing a clear view of where ESG risks are concentrated, this illuminates holdings that may have a positive offset effect – such as investments in clean energy or healthcare.

For many institutions, the push to analyse and disclose the ESG risks in their portfolios is coming from the growing band of advocacy groups dedicated to lobbying them – such as the Asset Owners Disclosure Project, which pushes institutional investors to measure and report the climate risks in their portfolios and ultimately work toward reducing them.

Asset Owners Disclosure Project chair Dr John Hewson said standards had lifted markedly over the almost decade the initiative has been in place.

“The momentum over this time has been very encouraging for us, although it’s been a pretty painful process. We got a lot of pushback in the early years, but it’s changed a lot.”

Hewson said any lingering debate over whether or not it was appropriate for local investors to consider risks associated with climate change in their portfolio decisions, once considered potentially at odds with the fiduciary duty, had now been put to bed.

In February of this year, Australian Prudential Regulation Authority executive board member Geoff Summerhayes said the directors of financial institutions have a pressing obligation to consider the investment risks associated with climate change, which he warned had “potential system-wide implications”.

Local Government Super, a $10 billion industry fund, has spent the best part of a decade building its reputation as an investor with strong ESG and sustainability credentials.

It was ranked by the Asset Owners Disclosure

HOW YOU INVEST TODAY IMPACTS TOMORROW Find out more at: mercer.com.au/low-carbon-economy

ROUNDTABLE \

Below: UNSW’s ANDREW FELLOWES

Above: BTFG’s EMMA PRINGLE

Project as the number one institution in Australia, and number two globally, for environmentally sustainable investing.

Blacklisting certain categories of investments – such as tobacco, coal, armaments, and nuclear energy – is a central part of the fund’s approach.

But Local Government Super head of sustainability Bill Hartnett acknowledges that exclusions have their limits.

“You can’t keep on divesting of everything.

You’ve got to be invested for the long term and get your long-term goals for your members, for your clients’ savings. So you also have to engage, you have to be involved, and you need to be transparent.”

First State Super chief investment officer Damian Graham characterised the divestment approach of some smaller funds as “a pretty blunt tool” that becomes less effective the more capital an institution has to deploy.

“At First State Super, we have to consider these challenges from a universal ownership perspective, which is that we know we are always going to have to own most of the listed companies in Australia, and so we need to continue building up a framework that allows

us to have a constructive dialogue with those companies,” he said.

“We view ESG risks from a fiduciary perspective, as one type of risk that we need to factor in and consider when we’re contemplating a long-term, risk-adjusted, return.”

First State Super is the $80 billion default fund for NSW public servants.

Graham said that it was important funds do the work to discern what matters to the majority of their stakeholders, rather than simply feeling pressured by the noisiest agitators.

He said research the group conducted with Mercer showed that while many members said they believed a well-defined ESG approach was “very valuable” over the long term, virtually none of them would be prepared to pay any more for it.

Michael Walsh, the chief executive of the Uniting Church of Australia’s $1 billion investment arm, UCA Funds Management, said it was important to listen to niche complaints.

“It is important that the investment sector listens to the voices of smaller non-profit organisations that are starting to bleep about issues that may still sound a little whacky but

have the potential to have significant social consequences and may become reputational risks later on,” he said.

“I think it really is up to the ESG fraternity to identify and examine these issues, rather than wait until they appear on a Four Corners program.”

UCA Funds Management has an integrated ethical investment policy that is aligned to the values articulated by the Church Synod.

Community health problems associated with sugary foods and beverages, the exploitation of slave labour in modern supply chains, and split community values over new industries were just a few of the issues on the ESG radar of the roundtable’s participants.

Mercer delegated solutions leader Helen Murdoch said there were “lots of ways” that asset owners could choose to deal with ESG issues that could all be appropriate in different circumstances. However, all institutional investors need to ensure that their behaviour is consistent with their stated strategy and be open about it.

“The disclosure and transparency around that is becoming increasingly important,” she said.

PREPARE YOUR PORTFOLIO FOR TR ANSI TION Find out more at: mercer.com.au/low-carbon-economy

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SP ONSORED CONTENT

This communication is for Wholesale Clients only, as defined in subsection 761G(7) of the Corporations Act 2001 (Cth) (the ‘Act’) and must not be relied on by anyone else.

MEETING THE RETIREMENT INCOME CHALLENGE

By TAYLEE LEWIS

Australia’s superannuation industry is at a tricky inflection point. Twenty-five years since the introduction of the superannuation guarantee, funds are adept at helping workers accumulate retirement savings. Now the challenge is to become expert at converting those savings into a durable income stream for members as they retire.

W

hile the retirement income problem has been widely acknowledged across the industry, few funds have developed a robust solution. It is a difficult thing to do against a backdrop of regulatory uncertainty and extremely challenging global investment markets.

Global growth rates are below trend, interest rates are hovering near record lows, and volatility is tipped to rise. All this at a time when valuations across major asset classes are inflated from a decade of monetary stimulus post the global financial crisis, and traditional diversification strategies have lost their resilience as bond and equity markets start to move in concert.

MAY 2017

Catering to the needs of retirees in such an environment “creates an interesting problem” and multi-asset and fixed income portfolios have an increasingly important role to play, according to Edinburgh-based Standard Life Investments investment director and multi-asset investment specialist David Bint.

Super funds need to offer retirees a solution that meets a number of sometimes competing goals: capital preservation throughout the retirement phase, a sufficient level of income generation, and flexibility to allow them to sometimes draw a different level of income.

“Retirees need a solution that will provide an income, focus on a low-risk outcome,

as well as help them cope with the specific problems associated with the early years of drawdown,” Bint says. In March 2011, Standard Life Investments launched an Absolute Return Global Bond Strategies (ARGBS) Fund aimed at combating some of these challenges.

Standard Life Investments is a $475.3 billion (£277.9 billion)* global funds management business and a market-leader in the provision of multi-asset, absolute return funds.

The ARGBS Fund aims to achieve returns similar to those investors could expect from a long-term investment in global bond markets, but with lower risk. The flexible mandate and careful portfolio construction also gives the Fund the potential to perform in a wide range of market conditions, helping insulate the portfolio against market shocks.

The ARGBS Fund has been well received by institutional investors here in Australia and has over $2.4 billion*(£1.4bn) in assetsunder-management globally with a strong performance track record behind it.

One of the biggest challenges for funds in looking after the interests of members in the decumulation stage is striking a balance

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SP ONSORED CONTENT

DAVID BINT

between capital growth and income.

As retirees start drawing down on their super savings pot, the impact of market volatility is amplified.

Bint says that by being invested in a broad range of strategies, the ARGBS Fund is designed to produce a positive return regardless of whether bonds are benefiting or not benefiting from the market environment.

“By being unconstrained we can play both sides of the market. Absolute Return Bond Funds are extremely flexible products.

They can be long, short, or market neutral by pairing different positions together.

“ARGBS is an ‘all-weather product’ that operates within a low volatility ratio – of between 2 to 4 per cent. Whatever product you are going to use for retirement savings, the whole solution needs to be very low volatility,” Bint says.

In April 2017, Standard Life Investments partnered with locally listed investment management firm Challenger to launch the Challenger Absolute Return Global Bond Strategies (ARGBS) Fund into the Australian retail market.

The Challenger ARGBS Fund aims to provide a positive return in all market

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conditions. It is targeting an initial distribution of 2.5 per cent per annum, paid quarterly.

Challenger Chief Executive, Distribution, Product and Marketing, Richard Howes, says the new fund plays an important role and is a great addition to Challenger’s range of retirement income products.

The pressure to deliver retirement income solutions is being felt by pension funds all over the world, but is a particularly hot-button issue in Australia ahead of the introduction of a new comprehensive income product for retirement (CIPR) framework.

Details of the Turnbull Government’s planned CIPR framework, currently the subject of industry consultation, are yet to be finalised. However super funds are already hungry for tools that can help them deliver a combination of capital growth and income.

Sunsuper head of product Shane Mather hopes the new CIPR framework will be “principles-based, solution-agnostic and member focused” to give funds the flexibility to develop best products for their members.

“What must be avoided are any changes that create a narrow framework and limit innovation,” Mather says.

Frontier Advisors head of member solutions David Carruthers says that with retirement income clearly under the spotlight, now is an ideal time for super funds to look at their member base and consider what products will be able to meet retiree income needs going forward.

“If super funds start to take an income focus then they will value assets which provide a level of income or a more certain level of income a bit more highly”.

Retirees need a combination of income, flexibility and risk management, he says.

Carruthers notes that a growing proportion of funds have up to 20 per cent of their assets in pension phase, with this ratio set to substantially increase over the next five to 10 years.

“The objective of superannuation is to take a retirement income, therefore it’s hard to argue that funds shouldn’t provide one,” Carruthers says.

Frontier Advisors is currently encouraging some of its superannuation fund clients to “explicitly change the objective” of many of their options from an inflation relative benchmark to an income target.

“At the minute if you look across the industry, most, I’m probably talking

90 per cent of funds have all got these CPI + targets,” Carruthers says.

“Those kinds of objectives might be good for accumulation but once you get into retirement, it makes less sense when you know the objective of the member is to take a retirement income.”

Carruthers is advocating that super funds offer at least one pension phase option targeting income, but argues that “it may be sensible down the track to have a range of options that target different levels of income”.

A 2016 research report produced by Standard Life Investments highlighted that low volatility multi-asset strategies can be particularly valuable for investors who want to avoid the possibility of a bad outcome in retirement. Multi-asset strategies “provide a number of benefits through lower risk and more predictable returns”, the report found.

Bint says that while there is no single product that will “save or solve” all of the issues associated with developing retirement products, income outcomes must be the industry’s focus.

australia.standardlifeinvestments.com/fixedincome *Source: Standard Life Investments as at 31 December 2016, based on an exchange rate of $1.71 Standard Life Investments Limited (ABN 36 142 665 227) is incorporated in Scotland (No.SC123321) and is exempt from the requirement to hold an Australian financial services licence under paragraph 911A(2)(l) of the Corporations Act 2001 (Cth) (the ‘Act’) in respect of the provision of financial services as defined in Schedule A of the relief instrument no.10/0264 dated 9 April 2010 issued to Standard Life Investments Limited by the Australian Securities and Investments Commission. These financial services are provided only to wholesale clients as defined in subsection 761G(7) of the Act. Standard Life Investments Limited is regulated in the United Kingdom by the Financial Conduct Authority under the laws of the United Kingdom, which differ from Australian laws.

The value of an investment in the ARGBS Fund is not guaranteed and can go down as well as up.

An investor may get back less than they invested. © 2017 Standard Life, images reproduced under licence.

MAY 201 7

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\ COLUMN

Purpose, governance and choice: three items still on the reform agenda

The superannuation system deals with large sums of money. It is compulsory, complex, and boasts characteristics that are not typically found in standard markets.

This means it is imperative that the regulatory arrangements for the system are modernised, with strong standards of trustee oversight as the foundation. It is important both for members – the people whose money is at stake – and for our economy more broadly.

Many experts have concluded that high-quality governance is essential to Enshrining the purpose of superannuation in legislation, organisational performance. Yet, as it stands, modernising trustee requirements and extending choice-of-fund the standards for governance of super funds remain lower than for banks, insurers and laws are priorities of the government’s superannuation policy other listed companies. for 2017.

It is accepted wisdom that independent directors are an essential part of modernising the system and keeping it fit for purpose.

OUR SUPERANNUATION Independent directors will enable SYSTEM has changed superannuation funds to broaden the mix of dramatically since its earliest skills at their board tables. They will improve incarnation, in the 1800s, the industry’s capacity for innovative new when employer-based super products and investments, both of which are was a perk for some wellessential as the focus of the system shifts heeled workers in the finance from accumulation to decumulation. and public sectors.

All of that explains why we will Today, it is a more than BY continue to progress legislation that $2 trillion industry that, as one of KELLY O’DWYER requires all superannuation fund three crucial pillars of our retirement

trustee boards to have a minimum income system, has a direct bearing on of one-third independent directors, the lives of millions of Australians. And The Hon Kelly O’Dwyer MP is federal including an independent chair. it works well. Right now, Australia is among member for Higgins and the Minister for the world’s best when it comes to retirement Revenue and Financial Services. savings systems.

EXTENDING CHOICE That does not mean we can be complacent.

The government has been pleased It is now 25 years since the superannuation to see the growth of the self-managed guarantee was legislated. As the nation’s super fund industry, particularly given super pool has grown, so too has the need our belief in the values of individual to make sure the system remains strong and choice and self-determination.

Some stakeholders would like the sustainable, especially for members. That It was why, in 2005, the Howard legislated objective to go further, by is what the Turnbull Government has been government introduced these key including concepts such as adequacy working towards with our reforms. principles into superannuation by or comfort in retirement. requiring that employers provide But as noted recently by David Murray, employees with a choice of super fund who chaired the Financial System Inquiry, A CLEAR OBJECTIVE for compulsory super contributions. to include such subjective words would “open One of those reforms is enshrining into But there is more to be done in this the way to constant political interference”. law an objective for superannuation. important area. Twelve years on from The lack of any consensus about what such The objective, which is “to provide the landmark introduction of choice in concepts might mean, let alone how they might income in retirement to substitute [for] super, there are still about 1 million people be measured, could lead to endless arguments, or supplement the age pension”, makes who are covered by federal enterprise and this would distract from the core task of it clear that superannuation is about bargaining agreements that restrict their ensuring that superannuation policies are providing all Australians higher income right to choose their own super fund. directed at delivering retirement incomes. in retirement than they would have on It is my firm intention to reintroduce the age pension alone. Clearly, it is not legislation this year to make it possible about tax minimisation, estate planning MODERNISE GOVERNANCE for more people to choose where their or unlimited wealth accumulation. It is Another important area of reform compulsory superannuation is directed. to promote income in retirement. is governance arrangements.

MAY 2017

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COLUMN \

IT’S SHAPING UP to be another busy year for the superannuation industry in 2017.

More proposed legislation is set to come and there are inquiries underway in Parliament, the Productivity Commission and the industry itself.

Late last year, reforms were made to superannuation laws. Labor was broadly supportive of these changes, having led the debate on the need to update super tax breaks, particularly for high-income earners.

We also argued to ensure that low-income earners would not be disadvantaged when putting money into super.

Labor proposed a package that went further than the government’s legislation in two ways: by further reducing the annual non-concessional contributions cap to $75,000 (from $100,000) and by lowering the high-income superannuation contribution threshold to $200,000, not the $250,000 the government proposed.

In addition, Labor opposed several of the measures in the government’s package, which included new expenditure, including reforms that allowed catch-up concessional contributions and tax deductibility for personal superannuation contributions.

BY KATY GALLAGHER

ACT Senator Katy Gallagher is shadow minister for small business and financial services.

Labor’s sense of purpose in super: let’s talk it over Labor is seeking to block the government’s plans to introduce a simple legislative definition for the objective of superannuation, arguing that the CONCERNS OF MANY KEY STAKEHOLDERS in the industry require further consideration.

DEFINING SUPER’S PURPOSE

Now that the reforms have passed, however, the focus will shift to a range of other important issues in the sector, including defining the objective of superannuation.

Labor supports this, as recommended by the 2014 Financial System Inquiry, but believes it is crucial that we get it right, as it will set the framework for making decisions around

investmentmagazine.com.au

superannuation policy into the future.

Labor referred the government’s Superannuation (Objective) Bill 2016 to a Senate committee late last year for further examination. This established that important concerns remain, including those of major industry bodies the Australian Institute of Superannuation Trustees, Industry Super Australia, the Financial Services Council,

and the Association of Superannuation Funds of Australia, who all called for a rethink of the wording of the objective.

Labor has called on the government to consult further with the superannuation sector before proceeding with this legislation.

Labor will participate constructively in this process and I am already having discussions with stakeholders about their views and how we may reach agreement on such an important measure.

Many other issues remain high up on the political agenda for Labor, including: unpaid super; compliance; fees and charges; performance of funds; and insurance. There are several inquiries underway in these areas. I acknowledge that the industry itself has prioritised many of these issues and is leading work designed to improve services to members and help them maximise their superannuation savings.

There is also the Turnbull Government’s pursuit of superannuation governance changes and the Productivity Commission’s inquiry into competitiveness, efficiency and default arrangements – all to deal with this year.

INDUSTRY OUTREACH

Labor’s focus for all of these reports, inquiries and debates will always be on the need for Australia’s superannuation system to put members’ interests first and to ensure that any policy or legislative changes serve their best interests.

I would like to take this opportunity to thank all of the organisations and individuals who have taken the time to talk with me in my first six months in the portfolio of financial services. I have learnt that it is certainly a dynamic and complex portfolio undergoing huge amounts of change. The advice I have received during my first few months in the role has been invaluable in assisting me with my job.

I look forward to strengthening these relationships in 2017.

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\ INDUSTRY BENCHMARKING

the scales

By Z i lla Ef r at

An industry-wide study has concluded that nearly one-quarter of all superannuation funds are failing the Australian Prudential Regulation Authority’s scale test, leading the author of the report to call for the regulator to do more to SHUT DOWN THESE FUNDS.

THE SUPERRATINGS’ BENCHMARK Report 2017 shows that roughly 23 per cent of superfunds studied, or 32 out of 140, should be considering winding-up or finding a merger partner.

SuperRatings granted Investment Magazine exclusive access to the annual super fund benchmarking study it produces for clients.

No individual funds are identified in the report but it shows some striking trends in how average performance varies between small, medium and large funds.

One of the most critical issues highlighted in the 2017 study is the disturbing number of funds that are struggling to pass, or even failing, the regulator’s scale test.

The Australian Prudential Regulation Authority’s scale test requires that super funds can show they are financially sustainable and positioned to deliver in their members’ best interests both now and into the future.

The application of the scale test is stricter for MySuper funds – those entitled to be nominated by employers as a default option for workers who do not wish to choose their own fund.

SuperRatings measured and compared funds across five areas that it considers key to assessing whether providers are meeting the scale test: membership growth/loss, net inflow/ outflow ratio, net benefit to member outcome, fees, and net operating expense ratios.

About 23 per cent of funds surveyed were found failing on most of those measures.

The bulk of funds, 68 per cent, were ahead on most metrics but behind on some. Only 9 per cent of the funds surveyed were found to be ahead in each of the five areas.

APRA deputy chair Helen Rowell has stated publicly, on numerous occasions, that the name scale test should not be misinterpreted

MAY 2017

as meaning that the regulator thinks bigger is necessarily better. However, she has also repeatedly voiced concerns about the “long tail of sub-scale funds” that continue to exist without any viable strategy to improve the value they can offer members.

The SuperRatings research shows that while bigger isn’t always better, it is certainly true that smaller funds are more likely to be struggling to pass the scale test.

SuperRatings chief executive Adam Gee tells Investment Magazine many of the products that lagged on all five key metrics of the scale assessment were small funds (defined as those with less than $2 billion in assets under management).

“The majority are industry-specific funds, many of which are still named in awards.

Most are smaller not-for-profits, but there are also some reasonably sized funds”, he says.

One of the entities that lagged on all the metrics is a larger fund with about $15 billion in funds under management.

Gee warned that MySuper funds struggling to meet the scale test were in an even more precarious position than struggling Choice funds. This is because the loss of default status could “spell the death knell” for them. This is poignant amid the ongoing governmentordered Productivity Commission review into alternative default fund selection models.

Gee also noted, however, that some diseconomies of scale do exist in funds with larger membership bases, particularly in terms of the ability to tailor an insurance design, provide financial advice and offer personalised servicing.

HIGHER COSTS

The SuperRatings’ Benchmark Report 2017 highlights some of the strongest headwinds

to hit the industry in the financial year ended June 30, 2016.

Average fund member growth was down 1.3 per cent in 2016. Overall, the industry has endured an average decline in membership of 0.9 per cent, per year, for each of the past five years.

“Negative membership growth has become the new normal for superannuation funds as account rationalisation continues,” Gee says.

Over the same period, total contributions to the median fund fell 0.9 per cent.

Employer contributions grew just 3.8 per cent in 2016, compared with 6.1 per cent a year earlier. Gee says this was due to the stagnant superannuation guarantee rate and benign wages growth. In addition, member contributions fell by nearly 10 per cent over the year, on the back of market and regulatory uncertainty.

“In particular, we noted a drop off in contributions post the 2016 budget, as concerns about the sustained generosity of super tax concessions were heightened,” Gee says.

“Transfer contribution growth is also becoming harder to come by, with the median fund recording a 1.7 per cent fall, driven by its non-recurring nature.”

This is because fewer members are consolidating their super into one fund, thanks to the success at getting so many of them to do this in the past.

Meanwhile, Australia’s ageing demographics contributed to a growth in benefit payments of 4.7 per cent, which easily outpaced inflow growth and resulted in a median net outflow ratio of 72.9 per cent. That means that, on average, the industry paid out 72.9 cents in benefit payments for every dollar of inflow funds received in 2016. Outflow ratios tended to be much higher at smaller funds, while many of the larger funds still attracting new members reported net inflows.

Another challenge for the industry last financial year was the 5.9 per cent growth in the median fund’s operating expenses – following a rise of 3.3 per cent the previous year.

In the recent past, rising operating expenses were masked by strong investment returns, but this was no longer the case in 2016, as the post-global financial crisis run of double-digit average returns came to an end.

“As we now live in a low-growth environment, where net asset growth is more uncertain, one must question how funds will

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INDUSTRY BENCHMARKING \

continue to fund similar levels of increases in operating expenses going forward,” Gee says.

He explains that larger funds with access to economies of scale were typically spending more on their brands, advertising, analytics, member segmentation, compliance, risk management and new product development.

These initiatives all help them better attract and service members – but at a cost.

“Whether a for-profit or not-for-profit, the undeniable fact remains that superannuation funds operate like any other business, such that revenues must at least be sufficient to offset expenses, and where this does not occur, one has to question a fund’s sustainability.”

CONSOLIDATION INEVITABLE

Gee says that, given the pressures facing so many funds, and the slow pace of industry consolidation, the regulator should take a more interventionist approach.

“Consolidation over the next few years is inevitable,” Gee says, “And rather than giving a bit of a push, APRA will need to come in with a bigger stick to force some funds to move down this path.”

He blames the “self-interest” of many directors for blocked mergers.

“We’ve worked on a couple of mergers over the past six to 12 months and they’ve come to nothing because boards don’t necessarily want to give up seats and executives don’t want to lose positions.”

APRA’s Rowell made a similar observation at the Conference of Major Superannuation Funds in March. “We continue to observe considerable reluctance by boards to acknowledge that it is in the best interests of their members to pursue a merger or wind up their fund,” Rowell said.

Amid the calls for more industry consolidation, a number of small funds have been vocal in defending their right to exist,

S U RV I VA L O F T H E F I T T E S T METRIC FUND GROWTH METRICS Market share (%) Growth in market share FUM growth Member growth Average account balance Active members FUND FLOW METRICS Employer contribution growth Member contribution growth Transfer contribution growth Total contribution growth Benefits paid growth Net outflow (benefits/contributions) Net cash flow ($ millions) Net cash flow (% of assets) Net rollovers (% of assets) OPERATING COST METRICS Operating expense growth Op exp/net assets Cost per member Cost per active member

SMALL FUNDS (<$2b)

MEDIUM FUNDS ($2b-$10b)

LARGE FUNDS (>$10b)

INDUSTRY MEDIAN

0.0% 0.4% 4.0% -1.8% $47.7K 64.8%

0.3% 1.0% 4.6% -1.5% $71.7K 66.8%

1.1% 2.9% 6.6% -0.9% $70.5K 68.2%

0.2% 1.0% 4.6% -1.3% $66.2K 67.5%

1.4% -2.5% -20.6% -2.3% 3.8% 85.8% $14.4 2.5% -4.9%

3.9% -13.3% 3.3% -1.0% 4.1% 75.0% $124.9 2.5% -4.6%

5.2% -10.6% 0.9% 1.6% 5.3% 68.5% $888.0 4.9% -3.2%

3.8% -9.9% -1.7% -0.9% 4.7% 72.9% $72.5 2.8% -4.4%

4.3% 0.71% $289 $494

6.7% 0.41% $264 $345

6.3% 0.34% $165 $258

5.9% 0.48% $255 $368

SOURCE: SuperRatings Benchmark Report 2017

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and have cautioned that mergers do not always lead to better outcomes for members.

“Mergers are expensive to implement, do not always provide benefits to members and can be detrimental to the interests of existing members,” NESS Super chief executive Angie Mastrippolito says.

She says NESS – a micro industry fund that manages just $626 million – accesses benefits of scale through its outsourced providers and provides a valuable niche service.

“We can have more direct contact with members and thus provide a more personalised service delivery,” she says.

Gee agrees that scale can be imported by using third-party providers; however, the ability to differentiate a fund’s service offering is becoming more difficult, with funds spending significant amounts on data analytics and member segmentation in order to deliver a more tailored experience for members.

Others warn that without scale it will ultimately be too hard for tiny funds to stay afloat, putting their members’ retirement security at risk.

“The competitive advantage of knowing members better may be getting eroded through the strong investment by other funds in technology to create efficiencies and increase service capabilities,” REST Industry Super chief executive Damian Hill says.

REST is a $39 billion industry fund that, while not under pressure to merge, could accelerate its growth by convincing smaller funds to transfer their members into it.

Hill says if the government wants to encourage mergers, it should scrap plans to end the temporary capital gains tax relief on fund transfers from July 1, 2017.

The Productivity Commission’s recently released Draft Report Superannuation: Alternative Default Models suggests that the over-arching criteria for assessment and inclusion as a default fund should be net returns.

SuperRatings analysis shows which providers would be most likely to sit within the “List of 10” default funds if this approach were adopted. In alphabetical order, they are: AustralianSuper, BUSSQ, CareSuper, Catholic Super, Cbus Super, Hostplus, QSuper, Rest Industry Super, Telstra Super and UniSuper.

All are medium to large funds.

SURVIVING THE APR A SCALE TEST Three pathways to achieving fund sustainability. investmentmagazine.com.au

MAY Read the white paper at: mercer.com.au/scaletest

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GROUP INSURANCE

By Simon Hoyle

AMID INCREASED SCRUTINY of the group insurance sector, many superannuation funds are exploring how to improve their life insurance offerings. One of the most radical examples of this is QSuperâ&#x20AC;&#x2122;s move to establish its own insurance arm.

But few funds have the capacity or appetite to become their own underwriters, meaning the rest of the industry is focused on making improvements by working with providers.

One trend to watch in the coming years will be how funds are harnessing technology and big data, coupled with the use of plain English in their member communications, to engage group insurance members in a more personalised way.

Change is underfoot across the group insurance sector as it comes under intense regulatory examination. The Parliamentary Joint Committee on Corporations and Financial Servicesâ&#x20AC;&#x2122; inquiry into Life Insurance has highlighted group insurance as a focus, while both the Australian Securities and Investments Commission and Australian Prudential Regulation Authority are conducting their own reviews.

Meanwhile, a three-stage Productivity Commission review into the default super sector is also underway. In the spotlight is the cost to members of (often duplicated) insurance cover, and how well protected individual members are.

As the $8 billion-a-year group insurance sector tries to stave off a regulatory revolution, superannuation funds and their insurance providers are LOOKING FOR WAYS TO EVOLVE.

GROUP therapy

GROUP INSURANCE \

Actuarial consulting firm Rice Warner estimates that 71 per cent of all death cover, 88 per cent of total and permanent disability cover and 59 per cent of income protection cover in Australia is provided through superannuation.

Super funds are under pressure to deliver better default life insurance coverage, while simultaneously being urged to reduce fees to preserve members’ retirement benefits.

A recent discussion paper from the Insurance in Superannuation Working Group, Account Balance Erosion Due to Insurance Premiums, found that: “Despite this coverage, insurance at an individual level may be insufficient to meet the needs of members or their beneficiaries.”

TAL chief executive Brett Clark says that while the group life system is “unique on a global scale and it enables insurance to be provided to millions of Australians who otherwise might not get access to it”, there are still valid reasons to question whether it’s working as well as it could for individual fund members.

TOWARDS A ‘SEGMENT OF ONE’

In the midst of all this scrutiny, super funds and their insurers are looking for ways to differentiate their offerings.

QSuper chief officer, of member support and advice, Matthew Halpin, says one of the main reasons the Queensland public sector fund established its own life insurance business, QInsure, in 2016, was that it was “virtually impossible” to align the interests of external providers.

Looking to the industry more broadly, Halpin predicts the use of big data and the smart application of technology could bring into the group life market what is already happening in the investment world.

“We think, from an investment standpoint, about a segment of one. And the way

we think about financial wellbeing for members, which is our number one strategic objective, [is] individual financial wellbeing,” he says. “I don’t think we can fight greater tailoring of individual insurance offerings within a group life structure…What will occur over time is a ‘segment of one.’ ” The Productivity Commission, in a research paper titled How to Assess the Competitiveness and Efficiency of the Superannuation System, states that it is unrealistic for default insurance to meet all members’ needs, so it has “set a lower hurdle” in defining two assessment criteria: Do funds offer value-for-money insurance products to members? And are the costs of insurance being minimised for the level and quality of cover?

But focusing on cost to the exclusion of other dimensions of insurance runs the risk of producing a suboptimal result for members and exacerbating the wellrecognised problem of underinsurance.

Adam Gee, the chief executive of research house SuperRatings, argues the quality of the life insurance offering should remain a critical component of assessing a default fund, and warns the Productivity Commission’s assessment criteria are limited.

“The exclusion of insurance from the assessment is fraught with danger, given the important role it continues to play within superannuation and the community more broadly,” Gee says.

INFORM MEMBERS

As the discussion bubbles along as to whether what is included in default group insurance coverage needs to be overhauled, some in the industry have cited the potential benefits of doing a better job of communicating with members about the value of their existing policies.

We know life insurance is complex, but when we use words and language that are foreign, it makes it hard to connect with people

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Many members are clueless as to the amount of the group insurance premiums automatically deducted from their default super fund each year or what coverage they have.

MLC Life Insurance chief customer officer, group insurance, Suzanne Smith, says consumer expectations are changing and fund members are expecting more tailored, personalised service.

Smith says MLC Life, which is in the midst of a major push to win more industry fund mandates, is doing research using big data to better understand and respond to customer needs and expectations.

“It’s giving us some great insights; people don’t want to hear about the morbid side of life insurance, they really do want to hear about what life insurers are doing to focus on wellness, and to help people. [And they really want to] understand what cover they’ve got,” she says.

Smith says the life insurance industry is cloaked in language and terminology that make it impenetrable to the average person, which only fosters disengagement and cynicism about the industry and its products and concerns about value for money.

“It starts with acronyms…and when you start to think of it like that, it really can be quite confusing,” she says. “We know life insurance is complex, but when we use words and language that are foreign, it makes it hard to connect with people.”

Smith says 18 months into her role at MLC she caught herself getting sucked into that language and speaking it as well.

“The real call to action for me was realising that not everyone understands the way we speak here and if we want to connect and help ordinary people understand life insurance, we need to speak in terms that people understand,” she says.

A director, advisory, with EY, Elizabeth Baker, says the group life sector has “a really good product” but not enough fund members know what it is, and often do not even realise they have it through their super fund.

She says one tip the group life sector could pick up from other insurance sectors would be reducing the length of its communications.

Clark, Halpin, Smith and Baker made the comments attributed to them in this article during a panel session at the Financial Services Council Life Insurance Conference in Sydney on March 30, 2017.

MAY 201 7

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EVERY YEAR, IN May, the leading experts in ESG investing gather for the Australian Council of Superannuation Investors’ annual conference, and each year the audience coming to hear from them grows bigger.

It’s been said before, and sometimes prematurely, but the philosophy of aligning investment strategies with environmental, social and governance principles really is in the mainstream now.

The industry has come a long way since ACSI was founded in 2001 and we held our first annual conference in 2002. But there is still so much more to do, both in our traditional areas of focus and on emerging issues of concern.

BY LOUISE DAVIDSON

Louise Davidson is chief executive of the Australian Council of Superannuation Investors.

‘MODERN SLAVERY IS REAL’

It’s hard to believe that, in the second decade of the 21st century, Britain would have to enact a law addressing modern slavery, and that the Australian Parliament would start an inquiry to see if we need to do the same here.

Yet, according to the UN’s International Labour Organization, there are 21 million people around the world estimated to be victims of forced labour, and their labour in the private economy generates US$150 billion ($200 billion) in illegal profits every year.

THE CHALLENGES TO COME

ESG hits the mainstream MAJOR INVESTMENT INSTITUTIONS are increasingly integrating ESG principles into their strategies. Stamping out modern slavery, addressing income inequality, and tackling climate change are just THREE BIG AREAS where these players are wielding their influence.

Modern slavery is real and it exists in domestic and global supply chains of companies operating in Australia. This is something ACSI has been working on for years, and we’re certainly making a submission to the inquiry urging the introduction of a tighter legal framework.

In human terms, slavery and forced labour are clearly abhorrent and should have been relegated to the history books long ago.

MAY 2017

retirement savings are at stake here – are on board, too. The issues we deal with every day at ACSI aren’t just good for profit, they’re good for people.

One perennial hot topic on the ESG agenda is chief executive pay. In the United States, the average S&P500 chief executive earns about 350 times the amount an average worker does. Under rules meant to go into effect this year as part of the Dodd-Frank reforms, US companies will have to disclose the ratio of the median pay of their employees to the pay of the chief executive.

Simply disclosing the ratios won’t necessarily bring those salaries more in line with community expectations, but it will certainly give investors an idea as to which companies are putting their profits back into shareholder hands, and we hope also give the remuneration committees of listed companies pause for thought.

In business terms, a company with slavery in its supply chains faces huge reputational risks that have the potential for major impact on its share price.

CHIEF EXECUTIVE PAY

Long-term investors know the measurable impact ESG issues have on the sustainability and profitability of listed companies. And Australians more broadly – those whose

Modern slavery and outsized chief executive pay are miles apart on the spectrum of issues ACSI advocates on but have two things in common.

First, the average person would consider both to be unfair and unreasonable. Second, in investment terms, both can be linked to short-term profit taking at the expense of long-term sustainability, and both carry reputational risk, which may put the company’s social licence to operate in jeopardy.

The World Economic Forum’s Global Risks Report 2017 found “rising income and wealth disparity” and “increasing polarisation of societies” ranked first and third, respectively, among the underlying trends that will determine global developments in the next 10 years. In second place: climate change.

All of these issues have the potential to cause massive disruption around the world.

Rising inequality certainly influenced the political upheavals in the UK and US in 2016.

Governments around the world have committed to a zero-carbon future under the Paris Agreement, and to reducing poverty to zero under the UN’s Sustainable Development Goals.

The Principles for Responsible Investment, which is the global hub for responsible investment, is focusing on these two themes as it helps investors come to grips with the enormous challenges ahead.

It is in everybody’s best interests to rise to those challenges.

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