SUPER A NNUATION P OLICY IN V E S TMENT S INSUR A NCE A DMINIS TR ATION
AUSTR ALIA’S LE ADING SUPER ANNUATION M AGA ZINE
Default funds
Well-performing default superannuation funds have little to fear
Superannuation guarantee
A deferral of the rise in the SG might be warranted but should be subjected to a review
SMSF auditing
The COVID-19 pandemic has brought new challenges when auditing SMSFs
Retirement planning
Longevity risk and generating sufficient income are the biggest challenges for advisers
VOLUME 34 - ISSUE 4, SEPTEMBER 2020
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CONTENTS
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SEPTEMBER 2020 WWW.SUPERREVIEW.COM.AU F IN D U S O N TWITTER @SUPERREVIEW LINKEDIN SUPER-REVIEW FACEBOOK SUPERREVIEW
TOP STORIES & FEATURES
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5 | APRA canvasses COVID-19 super fund exits
The firm’s acquisition of MLC Wealth will boost it to be the second largest super entity with $173 billion in funds under administration.
The coronavirus pandemic might accelerate viability and sustainability issues faced by some superannuation funds, particularly those that are already dealing with challenges.
Superannuation members who switched to cash may need to keep working an extra two to eight years longer before being able to retire.
8 | Deferral of the next SG rise warranted by economic reality
10 | Is superannuation too big to let politicians play with it?
11 | W hy compulsion is vital to superannuation
The Government may use the recession as an opportunity not to increase the SG or will move it up to 10% and park it there for five years.
An independent authority such as the Reserve Bank should oversee superannuation rather than be subjected to political gameplaying.
IOOF acquires super scale but not without problems
6 | Switching to cash bigger negative impact than early release
Government back-benchers that believe the super guarantee should be made voluntary for young people are in the same boat as the Flat Earth Society.
2 | Super Review
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EDITORIAL
Good default funds have nothing to fear from Govt’s new choice regime
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Default superannuation funds with good returns and high levels of service to their members have little to fear from the Government’s new choice of superannuation fund regime. Despite the victory lap done by the Assistant Minister for been heard to echo some of that rhetoric, giving a particularly Superannuation, Financial Services and Financial Technology, Senator partisan tone to what should be a reasonably agnostic Jane Hume, and the Financial Services Council (FSC), around the exercise in modernising the superannuation regime. passage of the Government’s choice of superannuation legislation, As the Government moves further towards releasing the report industry default funds have little to fear from the changes. developed by its Retirement Income Review panel it is certain that Indeed, most industry fund executives would have understood the level of political rhetoric around superannuation will increase for many years that the clock was ticking on superannuation and that the divide between the major parties on what should arrangements tightly linked to industrial agreements and awards sensibly be treated as a bipartisan policy area will become wider. with many of them such as AustralianSuper having long since adopted The simple facts of the matter with respect to award-based marketing and communications strategies aimed at membership default funds is that they had their origins in the very beginning well beyond award-based employees. of the processes which led to the creation The celebratory tone adopted by the FSC of the superannuation guarantee (SG) and is hardly surprising in circumstances where reflected the Australian workforce as it existed “The raw data says the organisation had been campaigning for in the late 1990s rather than in the 2020s. well-performing the change for well over a decade on the basis In the intervening 20 years, union membership default funds have that many workers were being forced into the has declined by close to 40%, from nearly 50% little to fear and award-based default fund arrangements to the of the workforce in the mid-1980s to about probably much to gain exclusion of the FSC’s retail fund constituents. 15% in 2019 and this has coincided with radical from the Government’s And, in truth, such arrangements were not changes to the make-up of the workforce choice regime.” universally admired and accepted by all industry including high levels of casualisation and the superannuation funds, with many of those which emergence of the so-called ‘gig’ economy. did not have award default fund status arguing that So, the bottom line for industry funds with they were being placed at a distinct disadvantage to those which did. award default status is that they were dealing with an ever-decreasing In short, in the age of social media and the emergence of funds base from which to draw their SG inflows and an imperative to directly targeting tech-savvy rather than industrial relationsrecruit and retain members by other means. What is more, most of savvy millennials, the awards-based default superannuation them would be fully aware of the fact that, notwithstanding the new regime had begun to look like a serious anachronism. legislation, the activities of trade union delegates and recruiters The problem, of course, is that what should have been a will ensure any drift of industrial membership is minimal. fairly straightforward promulgation of long-standing policy on The pragmatic bottom line is that by almost any measure, the the part of the Morrison Federal Government became more investment performance of industry superannuation funds has been political than it should have been because of the persistent better than that of retail funds over most of the past 15 years. On that niggling and rhetoric of a section of the Liberal/National basis, the raw data says well-performing default funds have little to Party backbench about the future of superannuation. fear and probably much to gain from the Government’s choice regime. And, unfortunately, the Assistant Minister herself has
Mike Taylor, Managing Editor
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3 | Super Review
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NEWS
Super tax change painful for retirees BY OKSANA PATRON
IOOF acquires super scale but not without problems BY MIKE TAYLOR
IOOF is predicting that as a result of its acquisition of MLC Wealth it will rise to be the second largest superannuation entity in Australia with funds under administration (FUA) of $173 billion. According to an investor presentation allied to the MLC Wealth acquisition, MLC will rank just behind the combined QSuper and Sunsuper which boast a total of $188 billion in FUA, and just ahead of AustralianSuper with $172 billion in FUA. It will represent a substantial leap in the rankings for IOOF which up till now has boasted just $70 billion in FUA. What is more, the transaction brings leading superannuation fund asset consultant, JANA under the broad IOOF banner giving it investment servicing reach across both retail and industry superannuation funds. However, the transition of the superannuation businesses are not without challenge, with the briefing document noting “indemnities provided for specific pre-completion matters including tax, breaches of anti-money laundering, regulator fines and penalties, an 80% share of provision of a provision overrun for a remediation program for workplace super and three pieces of litigation (relating to an ASIC [Australian Securities and Investments Commission] action in relation to plan services fees, a class action in relation to grandfathered commissions and a separate class action in relation to the transition of certain accrued default members to MySuper) and certain ongoing regulatory investigations and certain existing investigations in respect of MLC Group including investigations relating to the implementation of planned service fees, late lodgement of significant breach reports and deduction of adviser fees from super accounts of deceased members”.
Investment inside super may be a political “soft target” as it will not be felt directly in voters’ pockets, but will have unfavourable longer-term impact in retirement outcomes, according to Parametric. Parametric said the possibility for government to increase superannuation taxes in response to the ballooning budget deficit caused by COVID-19 could severely hurt member balances at retirement Raewyn Williams, head of research (Australia) and analyst Josh McKenzie, in a paper titled ‘Will retirees pay the price for superannuation tax rises?’ indicated the two most likely tax options which would be increasing the headline tax rate of 15% or reducing the capital gains tax concession from one-third, while the third option assuming limiting the claiming of franking credits for Australian share dividend was scrapped as being “too political risky”. According to the report’s authors, the smallest tax increase (15% to 17.5%) would cause a member to forgo (in today’s dollars) $40,509 in retirement savings but if the tax rate was increased to 25%, then the member could lose $150,448 in retirement savings, ending up with 22% less than expected outcomes under the current tax regime. “The ‘tit for tat’ retirement impact of a super investment tax rise is clear, even if not immediately felt by the super fund member,” they said. “A very small reduction (3%) in the CGT [Capital Gains Tax] discount concession to 30% would shave a negligible $1,545 of the member’s retirement balance of $682,146. Even using our most aggressive assumption (the CGT discount more than halving to 15%), the expected loss to retirement savings is a modest $8,446. “Other more muted changes to the super CGT rules are also possible, such as extending the current one-year holding period rule (for CGT discount eligibility) to three years, capping carry-forward capital losses or limiting the types of assets eligible for CGT discounting.” Parametric stressed that just the possibility of tax increases should send a clear message to the industry – for funds to better manage the tax impacts of their investment decisions. “Our research on the Productivity Commission’s report showed that a genuine after-tax focus could be more valuable to retirees than reigning in fees. So, what if a super fund responded to a higher-tax environment by adopting a genuine after-tax investment management focus to defend retirement outcomes?” Williams and McKenzie asked. “After all, good retirement outcomes are the raison d’etre of super; a way to avoid the enormous fiscal drain from public funding of age pensions in future.”
4 | Super Review
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NEWS
APRA canvasses COVID-19 super fund exits
Assets under custody drop 7.7% BY JASSMYN GOH
BY MIKE TAYLOR
The extended period of the COVID-19 pandemic may hasten the exit of some superannuation funds, according to the Australian Prudential Regulation Authority (APRA). In an analysis within its latest corporate plan, APRA pointed to the challenges facing superannuation funds as a result of the COVID-19 pandemic and the associated hardship early release superannuation arrangements and noted that the longer the situation continued the greater challenges would be. It then said that the “pandemic and associated impacts will also continue to accelerate viability and sustainability issues facing some superannuation funds, particularly those who were already showing indications of challenges in continuing to be able to sustainably deliver quality outcomes for members”. Elsewhere in its analysis, APRA also noted that beyond the pressures being exerted by the early release scheme, “rising unemployment will continue to impact the cashflow of superannuation funds as contributions are likely to slow and outflows are expected to remain elevated”. “Service continuity within both funds and service providers such as administrators has generally been maintained despite increased member activity, including high call volumes and the need to manage early release applications expeditiously. However, sustaining service levels through an extended period of substantially remote working will require careful management,” the analysis said.
Assets under custody in Australia has declined 7.7% to $3.75 trillion over the six months to 30 June, 2020, according to Australian Custodial Services Association (ACSA) data. ACSA said the fall in assets was largely a result of market valuation impacts and the spike in transactions reflected the level of activity by underlying institutions adjusting their portfolios in response to the COVID-19 pandemic. State Street had the largest decline in assets, down 20.8% to $405.2 billion, followed by a 10.2% decline for HSBC Bank to $179.8 billion, and a 9.3% decline for BNP Paribas to $463.3 billion. Only Netwealth ($31.5 billion) and BNY Mellon ($27.1 billion) increased their assets at 10.5% and 10.2% respectively. J.P. Morgan had the largest amount of assets at $820.2 billion. ACSA chief executive, Robert J Brown, said: “According to a recent ACSA member survey, 82% of asset servicing professionals are working from home. At the same time we have witnessed record volumes of transactions in the market. Despite the obvious challenges, there has been minimal disruption to service provision. “Although our industry is highly automated, there are exceptions. Asset servicing providers have needed to adapt to the social distancing and movement restrictions under public health orders, and this has created challenges for handling physical documents. Mail room and vault access, support for transactions that require wet ink signatures and physical cheques all triggered changes to process for custodians, registries and other key players in the service chain.”
Repeat early release members took out average $16k The average superannuation member fund that used the early access to super scheme twice has taken out $15,854, according Australian Prudential Regulation Authority (APRA) data. APRA data found the average initial application amount was $7,402 and the average repeat application was $8,452. APRA data has showed that applications for the hardship scheme has tapered off with 59,000 applications over the week to 23 August, a drop from 70,000 the previous week. Over the week, 35,000 were initial applications and 24,000 were repeat applications. This has brought the total number of initial applications to 3.1 million and repeat applications to 1.2 million since the start of the scheme. The total amount paid is now at a total of $32.2 billion with 10 funds accounting for $21.2 billion. The top 10 funds that had paid out the most were AustralianSuper ($4.48 billion), Sunsuper (3.26 billion), REST (2.96 billion), Hostplus ($2.8 billion), Cbus ($2.06 billion), HESTA ($1.6 billion), Retirement Wrap ($1.5 billion), MLC Super Fund ($1.91 billion), and Retirement Portfolio Services ($983.6 million). 5 | Super Review
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NEWS
Link declines to provide guidance in face of COVID-19
Switching to cash bigger negative impact than early release of super scheme BY JASSMYN GOH
BY MIKE TAYLOR
Major publicly-listed superannuation administration company, Link Group has reflected the challenging circumstances facing the superannuation financial services sectors reporting a 16% decline in net profit after tax of $144 million. The company reported a statutory net loss after tax of $114 million which it said was largely driven by a $108 million impairment of its corporate markets business. The board declared a final dividend of 3.5 cents per share 50% franked. Within its retirement and superannuation solutions division, the company reported a 6% decline in revenue to $519 million when compared to the prior corresponding period but said that when adjusted for prior year client losses and the impact of regulatory reforms strong underlying member growth helped the division deliver underlying revenue growth of 5%. However, it said that operating EBITDA of $78 million and operating EBIT of $65 million were down 36% and 40% respectively on the prior corresponding period largely reflecting the flow on impact of lower revenue and the high level of operating leverage in the division. The group’s soon-to-retire managing director, John McMurtrie, said Link Group had demonstrated overall resilience in a period of change and multi-faceted challenges. However the company stopped short of giving any guidance, with McMurtrie saying that the future trajectory of the COVID-19 pandemic and its potential economic impacts remained unclear and that “we believe additional financial guidance is not appropriate at this time”.
Superannuation fund members who have switched to cash as a response to the COVID-19 pandemic will experience the greatest adverse impact, and members may need to keep working anywhere between two and eight years longer before retiring, according to Willis Towers Watson. Willis Towers Watson’s latest research on the impact of the virus on retirement adequacy found that while the proportion of members that switched to cash was still reasonably small across the industry, it could be very damaging and was particularly acute for older members. This, the firm’s head of retirement solutions Nick Callil said, reflected the impact of investment returns in what it called the “retirement risk zone” in the years immediately preceding and after retirement date. The impact of the early release of super was higher for younger members with the exception of those with a low earnings base and account balance, where withdrawals were significantly less than the full $20,000. The research noted that younger members were most impacted by periods of unemployment, with lost income in the early years equating to the largest differences at retirement through the powerful force of compound interest. “Some members, particularly higher earners, may choose to retire with a slightly lower retirement income if they are able to maintain their desired lifestyle with the funds available to them. For others, the most obvious action may be to contribute more by way of voluntary member contributions,” Callil said. “However, at a time where unemployment is projected to reach its highest since the great depression, many members will not have the ability or inclination to use available income to support additional contributions even where the need is recognised. “Those who are unable or unwilling to make additional contributions may be forced to work past their preferred retirement age – if such an option is available to them. Clearly, for those approaching retirement, this approach may not be feasible with an additional working life of up to eight years required to achieve pre-COVID-19 adequacy levels.” He noted that funds needed to understand their membership, what their projected retirement adequacy looked like, and how it had changed through this time.
Super gender gap exacerbated with early release
The gender gap in superannuation doubles for women under 34 if they have used the early release of superannuation scheme to combat financial hardship brought by the COVID-19 pandemic, according to data. Data released by the Australian Institute of Superannuation Trustees (AIST) and Women in Super (WIS) found that women who accessed their super through the scheme were even further “behind of the eight ball when it comes to retirement savings”. AIST head of advocacy, Melissa Birks, said: “In normal times, the gender super gap starts to become more evident when many women take a career break to care for their first child in their 30s. Some of these women will now be saving for their retirement pretty much from scratch when they return to work”. The joint analysis found that female applicants aged 25 to 34 had on average a starting balance before the pandemic of $19,906 – 21% less than the average male balance of $25,200. After withdrawing their super, this gap widened to 46%. Women aged 25 to 34 withdrew on average 35% of their balance, compared to 29% for men in the same age bracket. In all age brackets, women withdrew a greater proportion of their account balance when compared to men. AIST and WIS noted that it was estimated that 15% of all applicants had had their super fully wiped out. The two groups called on the Government to commit to a return to pre-COVID-19 super preservation rules from 1 January, 2021, and recommended: • Maintaining the legislated timetable for the superannuation guarantee (SG) to increase to 12%; • Payment of SG on Government paid parental leave; and • Removal of the $450 monthly threshold before SG was payable. 6 | Super Review
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NEWS
MySuper assets down 3.3%
SG increase needs to go ahead: ASFA
BY JASSMYN GOH
Superannuation benefit payments for the year to June 2020 increased 31.2% from the previous year due to the early release of super scheme, leading to a decline of 0.6% of total super assets and 3.3% for MySuper products, according to data. Australian Prudential Regulation Authority (APRA) data found total super assets in June 2020 stood at $2.86 trillion, compared to $2.88 trillion in June 2019. APRA-regulated assets dropped 0.2% to $1.92 trillion, of which MySuper products dropped 3.3% to $731.3 billion. “Quarterly benefit payments were $37.4 billion, significantly higher than the March 2020 quarter ($21.1 billion) and the June 2019 quarter ($20.5 billion) due to payments made under the Early Release Scheme which came into effect on 20 April 2020,” APRA said. “Amounts transferred to the Australian Tax Office as inactive low balance accounts are also counted in the June 2020 benefit payments figure. Benefit payments for the year to June 2020 were 31.2% higher than to June 2019.” APRA said key statistics for entities with more than four members for the year ended 30 June 2020: June 2019
June 2020
Change
Total contributions
$114.7 billion
$120.6 billion
+5.2%
Total benefit payments
$76.5 billion
$100.4 billion
+31.2%
Net contribution flows
$38.0 billion
$23.5 billion
-38.2%
The increase in the superannuation guarantee (SG) should continue as legislated as the COVID-19 related reductions in employment had disproportionately impacted the young and those on lower incomes, according to the Association of Superannuation Funds of Australia (ASFA). In its Budget submission, ASFA recommended the SG be gradually increased to 12% as the majority of applications of the early release of super scheme were under-35 and while they had a substantial period of years before retirement, they would miss out on the benefits of the compounding of investment returns over many years. ASFA also recommended the Government amend the current legislative framework to include dependent contractors within the scope of the SG. It said as the rise of the gig economy lead to shifts in the structure of the labour markets, a larger proportion of people had some form of independent work arrangements, such as independent contracting, where workers were generally not covered by the SG. The super body also recommended that unpaid SG entitlements be included in the definition of unpaid employment entitlements for the purposes of Fair Entitlements Guarantee (FEG). ASFA said while JobKeeper payments were helping keep businesses solvent, once the program ceased there would likely be a substantial increase in the number of insolvencies. “…it is likely that there will be
continuing cases where there are unpaid contributions when businesses become insolvent. Greater visibility to unpaid employer contributions will be of only limited assistance where the employers do not have any financial capacity to pay given COVID-19 impacts on their businesses,” the submission said. “In ASFA’s view, there is merit in reviewing the treatment of unpaid SG entitlements in insolvency/bankruptcy, with the objective of considering how to achieve the maximum possible recovery on behalf of affected employees. “ASFA estimates that on a regular ongoing basis it would cost around $150 million per year to include unpaid SG in the FEG, with around 55,000 employees a year benefitting. In 2021/22 as a result of COVID-19 related insolvencies the figures might be more like $600 million and 220,000 employees.” The super body also reiterated that the $450 super threshold be removed and proposed measures to improve the productivity of super administration. The measures proposed were: • Change the default communication medium from paper to electronic; • Make advice more accessible and affordable for members; • Centralise data reporting by funds rather than having reporting to multiple agencies and departments; • Address issues inhibiting superannuation fund mergers; • Make it easier for members to make a contribution and to claim a tax deduction; and • Ensure greater stability in policy settings.
7 | Super Review
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2/09/2020 2:39:25 PM
ROUNDTABLE
Deferral of the next SG rise warranted by economic reality A focus group of senior superannuation industry executives has agreed that a deferral of the next rise in the superannuation guarantee might be warranted in the economic circumstances but that it should be subject to independent review.
ATTENDING: Mike Taylor (MT) – Managing editor, Money Management and Super Review Paul Cahill (PC) – Chief executive, NESS Super Russell Mason (RM) – Superannuation partner, Deloitte Andrew Howard (AH) – Chief commercial officer, TAL
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MT: Can we sensibly expect them to proceed with the rise which comes into effect next year when we already know the likelihood that we’re going to have a lot of unemployment and a recession? PC: Look, I think you use the appropriate word there, Mike. It’s a loaded question. You should sensibly, so that automatically makes it a loaded question. But you know we’ve been stuck at 9.5% for god knows how long. I appreciate we’re in times that no one has ever experienced before in their life and probably hopefully never will but the whole increase in the superannuation guarantee (SG) has been kicked around like a political football. My view is the Government will use the opportunity not to increase it or they’ll move it up to 10% and park it there for five years. Put it to sleep. But I can’t see the legislative timetable going through simply because any opportunity to cut something out to help the economy will absolutely be utilised. So, the best case for us is that we get it to 10% and it stays there for a few years while the economy regains its feet. But it wouldn’t surprise me if we were left at 9.5% for a not insignificant amount of time. RM: I think Paul is right, which is a real shame and the question becomes, if the economy is going into recession how quickly will it recover because it would be a shame to delay increases when the economy actually recovers quicker than expected. And there’s already
8 | Super Review
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ROUNDTABLE
been talk of a quicker turnaround than initially expected and I expect that once a vaccine is released things will change very quickly. Also it’s a shame because most people have acknowledged that 9.5% isn’t adequate and that we need to get it to a higher level and, in my view, 12% is the minimum. Technically we should have got there at 1 July last year if we had stuck with the original Labor timetable and now it’s been pushed back. I still believe we need to get to 12% and if the Government does defer next year’s increase I’m hoping that deferral is only for 12 months and not for an extended period of time. MT: Well, you don’t think as someone might have suggested in an editorial recently that the deferral should be subject to review depending on how quickly the economy recovers? RM: If there is a deferral, I think that makes a lot of sense because the bottom line is that we’re in unknown territory and we really don’t know what things will look like in 12 months and, as I say, you know it may recover a lot quicker than expected so that if there is a deferral it would be good to have an independent review of that this time next year to see how appropriate that deferral is. AH: I don’t have much more to add to what Russell and Paul have said except that I think it’s important, and it’s certainly important to the fund partners that we work with, that it’s not lost in the debate that the superannuation system has achieved an enormous amount for Australia. It’s a leading system for saving and you only have to consider where we were before it was put in place. From the point of view of life insurance, it’s a fact that the system itself creates access for more people than otherwise would be the case and it also provides better value for money on life insurance. Those are important points that I think need to be preserved as the debate on the matter is considered.
The poor design that is making early release a problem The Government’s rushed design of its hardship early release regime has caused a cascade or problems for funds and their members. MT: So let’s assume there will be no rise in the SG and we move onto the early drawdown of superannuation which for some people is obviously a necessity and for others possibly not so much the case and there is an argument that says that in the absence of increases in the SG people are going to find it very, very hard to restore their balances. I guess, from your point of view Andrew,
it also raises the question of whether they can restore their balances such that they can continue to have insurance inside superannuation. So Russell, let’s start with you on that issue. RM: Yes, Mike, I think irrespective of whether the increase is delayed or not, it’s going to be difficult for many people to get back to pre-COVID-19 levels and the majority of people will not make additional voluntary contributions so I’m concerned about those that have been disadvantaged in the long-term by drawing down money. I don’t want to criticise them for doing that when they are in dire financial straits. For those people who are in that situation it’s what all of us would do in those circumstances. But
RUSSELL MASON
it’s hard to see those people clawing back that money, especially with the compounding effect over the ensuing years. Increases in the SG will at least help towards part of that clawback, but I think what we need to do when we come out of this is to embark on a strong education program to encourage people to make additional voluntary contributions, make people aware of the impact the drawdowns had, and perhaps there can be some concessions short or medium term for those people who have drawn down and who may want to try to pay the money back into super through additional tax concessions. MT: Andrew, give us your view. I know that TAL and other insurers have actually been quite generous in some instances in trying to help people maintain their insurance cover. How does the early drawdown look from an insurance company perspective? AH: Well a lot of funds that we work with have been active in discussing with us their concerns about individuals potentially losing insurance cover as a result of the early drawdown of super. So far it’s been reasonably
modest, but that’s high on the funds’ minds. Trustees and management teams, from an accumulation point of view and from an insurance point of view, want to know what the funds can do for those members who are going through hardship so one of the things that we’ve been talking to the funds about is implementing access to career services and mental health services because all of this really does wrap into what is a health crisis which is turning into an economic crisis. If you follow the bouncing ball, it could end up giving rise to a social set of problems for us to deal with. The funds feel they have a role to play in that if they can take care of some of the things that relay to how much contributions individuals have but as members, or even non-members, what they can do for them. PC: We’ve had to go to enormous effort to make sure that members who have literally taken their account to zero – and we’ve had plenty of those – don’t lose their insurance. Because of the way the whole early release scheme was designed we’ve had many a member pull out an account balance that was sub-$10,000 and they’ve hit the zero figure and a week later we’ve had a contribution for them, so we had to make sure that the mechanisms are in place so that a member didn’t lose all their insurance. So, it’s little things like that that people don’t consider. You know, this is probably one of the worstdesigned pieces of legislation I’ve seen for the law of unintended consequences. So you know, many of the funds had a member go from an account balance of whatever you like to zeroed-out and closed out. Insurances have gone and if the fund wasn’t really dialled in a lot of insurances which the fund has a fiduciary duty to protect, can be lost, so there’s all sorts of consequences. And what is most perturbing to us is the fact that if, one day, someone does the analysis they’ll find that a lot of these claims aren’t real or fair dinkum. A lot of people are getting money out because the opportunity simply presents itself – and coming back to Russell’s point – when you’re 55 years old taking out $10,000, it isn’t really going to affect your end balance too much in the larger scheme of things. But a 25-year-old taking out $10,000 and doubling down on $20,000 – that’s going to drive a trucksized hole in their retirement income. When you’re 24 years old you think it will be alright and that something will sort itself out later on, but the reality is that the compounding effect of $40,000 over 40 years of work is not insignificant and you know what, it’s not going to be today’s Government’s problem. Continued on page 10
9 | Super Review
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ROUNDTABLE
T Is superannuation too big to let politicians play with it?
A
Superannuation should be placed under an independent authority such as the Reserve Bank rather have it subjected to political game-playing, according to a roundtable of senior industry executives.
As the Australian superannuation industry moves to assets of over $3 trillion it is time to extract politics from the equation and place the sector in the hands of an independent entity such as the Reserve Bank of Australia (RBA). That was one of the issues canvassed in a superannuation focus group conducted by Super Review with NESS Super chief executive, Paul Cahill, actively arguing for the fate of superannuation to be removed from the hands of politicians and into those of a less volatile authority. “I think it is time that the whole superannuation debate is moved to a different level and what I’d love to see is the Reserve Bank get carriage of superannuation,” he said. “Because of its political nature now, and the size of it – $3 trillion going to $8 trillion – it’s too dangerous to leave it to fly by night politicians with an agenda and I include Labor and Liberal in that description,” Cahill said. “You can see the damage that it can do when
it is treated in an incorrect manner,” he said. “It [superannuation] needs to be treated like interest rates or currency and needs to handled by an independent authority such as the Reserve Bank. The Government may put people on the board of the RBA but it is highly independent. “Due to the critical place that superannuation intersects with the economy now, I think it’s time it gets moved off to something like the RBA for carriage of the various legislative requirements,” Cahill said. Deloitte superannuation partner, Russell Mason, said the concept being canvassed by Cahill was not one he had previously contemplated but that he agreed that “as we approach $3 trillion in assets, superannuation is something that is just too large and too important to get wrong”. “So whether it’s the RBA or consolidated with a specialist superannuation regulator which brings the best of the Australian
Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) together we need to make sure this money is well-regulated.” He said that Deloitte had estimated that by the end of the 2030s, superannuation funds would own over 60% of the assets listed on the Australian Securities Exchange (ASX) which represented a huge amount of money with the capacity to change the shape of corporate Australia. “All that means superannuation will need to be well managed and well-regulated and, as Paul Cahill said, from an independent point of view,” Mason said. TAL chief commercial officer, Andrew Crawford said he believed it was about confidence and the need for fund members to hear different voices talking about confidence in the superannuation system and confidence in the role insurance plays in superannuation.
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ROUNDTABLE
Why compulsion is vital to superannuation
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While some Government backbenchers might argue for the removal of compulsion for young and low-income earners, plenty of evidence exists to prove that compulsion is a necessary component of a successful retirement incomes regime.
MT: There is a suggestion being canvassed by some Government backbenchers that the superannuation guarantee should be made voluntary for young people and low income earners. What does the panel think of that? What’s your view Paul? PC: It’s up there with the Flat Earth Society to be honest with you. If you want people to save for their retirement then, unfortunately, compulsion has historically been proven the best way to do it. If you go to a 25 year old and say you can cash out your super of 9.5% so you can enjoy your life, then I guess that is what they’re going to do. Nine-out-of-10 are going to say ‘thanks very much’. Now there are a lot of smart, welleducated kids that will do the right thing and their parents will probably drive them to do that, but there’s also a great many out there that will take the opportunity to enjoy that money in their youth and, as I get older, I can hardly blame them sometimes. But you know that that will create a generational issue in years to come. You’ll have a sub-class of people who won’t have the same retirement incomes as others. Is that what we’re trying to do in Australian society? I wouldn’t think so. MT: So Andrew, from an insurance point of view, compulsion is one of the things that’s helped drive insurance cover. If people have life insurance cover today, the majority have probably got it as a result of superannuation. Is compulsion the key to that? AH: Well there have been unintended consequences. There have been progressive pieces of legislation back to back that have actually taken some members out of the systems for good reasons. Good consumer reasons. The Protecting Your Super legislation and PMIF legislation were designed for a certain purpose. On the other hand, what we’re seeking as well is the engagement with members because of this legislation and because of the events that are going on in and around the industry and there are high levels of voluntary cover being taken
out within funds that we work with. And, Paul spoke about it, some of things that happen with early release. One of the things that we think might be happening is that people are actually having conversations about their super about; about whether it’s the right thing to take money out of their super, about whether it’s the right thing to keep their super in place because of all the benefits that come with it. And that is probably a positive. We expect that we’ll see more voluntary cover taken out in super going forward than ever before largely because of this heightened awareness and don’t forget that in the middle of all these legislative interventions there’s been a pandemic which also heightens people’s sense of risk about their own health and their ability to earn income. So, it’s complicated. The scenarios that have played out. But there are some positives that have come out of it. There is higher engagement. RM: I strongly believe in our compulsory system. When I entered this industry in the early 1980s about 25% of the workforce were covered by super. They were primarily those lucky enough to work in the public sector for one of the big banks or some global multinationals and they had cover. But for 75% of the workforce, they didn’t and I suspect a minority, a very
small minority, had private superannuation taken out themselves and while our grandparents and great-grandparents got by on the Age Pension I think today if you were to ask people whether they were happy to live on the Age Pension in retirement the answer would be ‘no’. So we’ve come a long way and according to the Mercer Global Pension Index we’re in the top three or four countries in the world. We can’t afford to take a step back. This system has helped a lot of people and in the area of insurance I sit on the claims committees of two or three funds and, like Paul and Andrew, I’ve seen the benefits for people who have made disability claims and been able to make ends meet, to be able to keep their house, to be able to do the basic things that as Australians we all have a right to do. And that is because the superannuation fund has provided a good level of death and disability cover. I think it would be such a retrograde step to take that away or to wind that back when I think since the early 1980s we’ve achieved so much.
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SMSFs
SMSF audit checklist in the age of COVID-19 BY NICHOLAS ALI
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The COVID-19 pandemic has brought unique challenges to self-managed superannuation funds and this checklist is an opportunity to assess the overall health of fund.
An audit may seem a necessary evil, however, it’s an opportunity for an overview of the status of self-managed superannuation funds (SMSFs) – an assessment of the fund’s compliance as well as its overall health. Look at the annual audit as a medical check-up of your fund, which is worthwhile given the unique challenges COVID-19 brings. Below is 14-point checklist to start an audit of an SMSF:
will also be subject to the disregarded small fund assets rule. Thankfully this requirement will not apply from 1 July, 2021, as a change was mooted in the 2019 Federal Budget (it has yet to be passed into legislation, however). Assuming it does become law, from 2021 onwards, a fund will not require an actuarial certificate if it is 100% in pension mode.
1. Check the trust deed
4. Make sure the assets are registered in the correct name
Check the trust deed to ensure it is properly executed, and to make sure the trusteeship and membership align. When a company is trustee, all members must be directors (the principle exception being singlemember funds). With individual trustees, all must be members of the fund (again, single-member funds being the main exception). As a rule – if there has been a change of member or trustee circumstances throughout the year, this is impetus to review the fund’s trust deed.
2. Review the fund’s investment strategy
We are often asked: “What about a term deposit commencing when the fund had individual trustees? Now we’ve changed to a corporate trustee, the financial institution says the ownership of the term deposit will change if the investment is registered in the name of the new company, and accrued interest will be lost. What will the auditor think about this?” In these situations, a declaration of trust may need to be signed by the trustee to satisfy the auditor, stating the term deposit is not registered in the name of the trustee.
5. Are assets recorded at market value?
Check if the fund’s investment strategy is fit for purpose, given recent (and probably continuing) market volatility. Don’t just look at the fund’s strategic asset allocation (its long-term benchmark risk/return nexus). Consider the fund’s ability to take short-term positions away from the benchmark.
It is very important assets are recorded at market value and it is up to the trustees to provide the valuation. Market valuations are important for several reasons, including:
3. Check actuarial certificates and determine if your fund is subject to the disregarded small fund assets rule
• Determining pension payments for the year; • Determining the level of in-house assets; • Payment of lump sums (member accounts need to be valued before a lump sum can be paid); and • Other scenarios, such as estate planning and retirement decisions.
The rules for this changed in the 2017/18 financial year. In short, the SMSF will not require an Actuarial Certificate if:
The Australian Taxation Office (ATO) has also published some very helpful guidelines on valuation of assets.
1) It has been 100% in pension mode for the entire financial year 2) The fund is not subject to the disregarded small fund assets rule.
Disregarded small fund assets is where: • Any member of the SMSF has retirement-phase assets of at least $1.6 million; • The asset does not need to be in the SMSF; and • Measured as at 30 June the previous financial year.
So, if $1 million is in pension mode in your SMSF and you also have, say, $600,000 in an industry fund also paying you a pension as at 30 June, 2019, the SMSF will be subject to the disregarded small fund assets rule in the 2020 financial year. It will require an actuarial certificate, even though the certificate will say the fund was 100% in pension mode (and thus not subject to tax on earnings). In a similar vein, if you started your SMSF pension with $1.5 million and it has now grown to $1.6 million, the fund
6. Limited recourse borrowing arrangements An SMSF can borrow to invest in assets under strict conditions (usually for property). These arrangements are complex but suffice to say if you have a limited recourse borrowing arrangements (LRBA) in place, the property must be held in the name of the holding trust trustee, not the SMSF trustee. • For those SMSFs with LRBAs, the impacts of COVID-19 on rental incomes, contributions by members or other fund income may impact the SMSF’s ability to make loan repayments. • If a commercial lender has provided loan deferral, it is important this is documented to ensure the auditor understands why loan repayments are not being made. Where the lender is a related party, if loan deferrals are to be provided to the fund, such arrangements
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must mirror commercial practices and be undertaken on an arm’s length basis. • It is also important to ensure this information and the actual amendment to loan terms is documented and the documentation retained for audit and other purposes.
7. Make sure related party transactions are at arm’s length terms.
10. Fund expenses cannot be of a personal nature Expenses can only be paid by the fund where they relate to the running of the SMSF and the tax invoice is in the name of the SMSF. No expenses of a personal nature can be paid by the fund.
11. Assemble your benefit payments documentation
Acquisition prices of assets, such as transfers of property, must be at market value, otherwise non-arm’s length income (NALI) provisions may apply. These provisions ensure assets not acquired at market value will be subject to tax on income (and any future realised capital gains) at the top marginal tax rate, irrespective of whether the fund is in pension mode. The ATO is also targeting non-arm’s length expenses; whereby a related party provides a service to their SMSF and does not charge the fund a commercial rate regarding the expense.
Make sure documentation relating to a benefit payment (lump sum or pension) is in place. Pensions must be paid in cash. Lump sums can, however, be paid in-specie. At this stage, if you have paid more than your reduced COVID-19 minimum, you cannot refund the excess back to your fund.
12. COVID-19 documentation requirements: Pension reduction
8. In-house assets to be no more than 5% of overall assets An in-house asset, in general terms, is: • A loan to, or an investment in, a related party of the fund; • An investment in a related trust of the fund; or • An asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund.
In-house assets cannot be more than 5% of the fund’s total assets and are measured on 30 June each year. Ordinarily, the trustees would need to put in place a rectification plan to bring the in-house asset back to within the 5% limit by 30 June, 2021. COVID-19 may mean funds with in-house assets breach the limit, so the ATO has stated they may not take any compliance action if the rectification plan is not executed by 30 June, 2021. The plan would still need to be in place, however, and this is something the auditor is going to want to see.
9. Check the contribution restrictions The types of contributions an SMSF can accept are restricted by several factors: • The age and employment status of the member; • The amount of contributions, known as the contributions cap; and • The member’s total superannuation balance on 30 June of the previous financial year (affecting the member’s eligibility to non-concessional contributions, spouse contributions and government co-contributions).
Trustees need to document a member’s decision to take the reduced pension minimum. The auditor will require this to see why the ordinary minimum was not drawn from the fund in the 2020 financial year.
13. COVID-19 documentation requirements: Rent relief The ATO and the auditor will not take compliance action where an SMSF landlord gives a related party tenant rent reduction in 2020 and 2021 financial years. However, the rent relief must be due to the impact of COVID-19 and must be on arm’s length terms.
14. COVID-19 documentation requirements: Early access to super This is the $10,000 tax-free lump sum payable to fund members who have been adversely impacted by COVID19. It is a self-assessed lump sum, but make sure you are eligible for the payment, as the ATO will vigorously police this scheme and severe penalties apply to those who abuse it. Documentation that shows a loss of employment, or a reduction in earnings, will be important for the auditor to verify accessibility to the scheme. Nicholas Ali is executive manager – SMSF technical support at SuperConcepts.
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SMSFs
Planning for your clients in retirement BY AIDAN GEYSEN
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It is important for advisers to understand and educate their clients on how they can best put their self-managed super fund to good use in retirement.
Fact: retiree clients play a substantial role in self-managed superannuation fund (SMSF) planners’ practice, typically comprising over half of their total SMSF client base, according to the annual Vanguard/ Investment Trends 2020 SMSF report. Also another fact – retirees are one of the most impacted groups in today’s low yield and high volatility investing environment. With those two facts in mind, this report offers some interesting insights into this challenging task faced by today’s advisers, taking a deep dive into how SMSF planners are working with retirees with self-managed funds and the most popular strategies employed to assist investors in this sector. One of the key findings of the report was that SMSF planners are seeing longevity risk and generating sufficient income as their primary challenges when servicing their retiree clients – correlating with the challenging investment environment they are operating in. A vast majority (73%) of these advisers, felt there is a lack of suitable products in the Australian marketplace to assist with these issues. So how are advisers preparing their SMSF retirees for their drawdown years?
Insights on drawdown One of the critical tasks for an adviser with retiree clients, is advising on their draw down strategy, helping to ensure the money doesn’t run out too soon. The average age of retirees in this research was 69, with average accumulated assets of $1.8 million, and an average pre-tax drawdown amount of $70,000 per annum. It was no surprise the research reported
that when determining a draw down strategy for their SMSF retiree clients, a planner’s primary consideration typically starts with their client’s lifestyle, with 70% of advisers reporting they review what their client needs to maintain their lifestyle. Also taken into account widely is the minimum compulsory rate the client has to draw out due to SMSF rules – with 57% of planners factoring this in. There were two drawdown methods which the majority of advisers employ. The most popular, employed by just over half of advisers surveyed, was the bucket approach. This was described as splitting assets into long term and short-term buckets. Some 53% of advisers used this method with retired clients. The ‘income from investments’ approach was advised by 39% of advisers with retiree SMSF clients, described as using income from their investments to cover withdrawals. This strategy suggests that, by only spending the income that has been paid out, the underlying assets are not touched, which means that the strategy should last forever, or at the very least, outlast your retirement. However an income strategy, in particular in the current low yield investment environment, can lead to an alteration of the risk profile of the investor’s portfolio, due to the equity heavy exposure needed to yield enough income to suit investor lifestyles. In fact, Vanguard research suggests while back in 2013 an investor following the 4% spending rule could have used a diversified portfolio of 50% equities and 50% bonds to get that 4% yield. Today that investor would have had to shift their allocation to 100% equities to get the same yield and so the risk has almost doubled.
An alternative method – the total return approach coupled with a dynamic spending strategy So how can advisers implement a retirement income strategy that will support a client’s lifestyle but not create an overreliance on income such as dividends? This is where the total-return approach – a strategy that looks at all sources of return from your portfolio, both income and capital – comes in handy. This approach first assesses an individual or household’s goals and risk tolerance, and sets the asset allocation at a level that can sustainably support the spending required to meet those goals. Unlike an income-oriented strategy which generally utilises returns as income and preserves capital, the totalreturn approach encourages the use of capital returns when necessary. So, during periods where the income yield of a portfolio falls below an investor’s spending needs, the capital value of the portfolio can be spent to make up the shortfall. As long as the total return drawn from the portfolio doesn’t exceed the sustainable spending rate over the long term, this approach can smooth out spending during the volatile periods for markets which inevitably occur. This approach can also require the discipline to reinvest a portion of the income yield during periods where the income generated by the portfolio is higher than the sustainable spending rate – something that can require the valuable guidance provided by an adviser. And while capital returns – best
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represented by the price movement of shares – can be a volatile component of this strategy, taking a long-term view is paramount. A total return approach separates the spending strategy from the portfolio strategy and can allow for better diversification of risk across countries, sectors and securities. The other strategy that planners can employ alongside the total return approach for their clients, is addressing a client’s expenditure through the use of a strategy termed the ‘dynamic spending strategy’. Vanguard combined the two most commonly used approaches to spending – the “dollar plus inflation” rule and the “percentage of portfolio” rule – to find a middle ground. The dynamic spending strategy resolves the portfolio viability risk aspect of the former and addresses the latter’s requirement to regularly adjust one’s rate of expenditure. This strategy sets a maximum and a minimum percentage withdrawal limit for annual expenditure based on the performance of the markets and an investor’s unique goals. As a result, it allows for annual spending to adjust according to market performance while concurrently moderating fluctuations from year-to-year. This means that those who are willing to be flexible in their spending – reducing expenditure in negative return years and spending more in positive return years – materially increases their chances of the portfolio lasting the period of their retirement in comparison to the dollar plus
“SMSF planners are seeing longevity risk and generating sufficient income as their primary challenges when servicing their retiree clients – correlating with the challenging investment environment.”
inflation rule, and also lessen the large fluctuations in expenditure that would result from the percentage of portfolio rule. Vanguard investigated the results that would come from capping spending increases at 5% of the prior year’s income each year – even if a portfolio grows faster than that, and setting the floor at 2.5% irrespective of the extent of a market correction. The calculations are as follows: Take for instance an investor who determined that a sustainable spending rate of 4% was appropriate and spent $40,000 from a $1 million portfolio in year one. If in the following year, market returns were positive and the balance is now $1.1 million, a maximum of $42,000 would be spent (an increase of 5% on the prior year’s $40,000 withdrawal). Without the 5% ceiling, $44,000 would have been drawn (4% of $1.1 million). In a poor year, they should cut spending to the floor of $39,000 ($40,000 less 2.5%) but no more. Applying the ‘cap and floor’ approach to calculate each year’s of a client’s spending can reduce the variability in retirement income while balancing the likelihood that an investment portfolio can last the distance required.
Moving a client’s investment strategy to a total-return approach allows for the separation of an investment strategy from their spending strategy and enables a planner to help a retiree client better tailor their spending strategy to their retirement goals. This, alongside staying the course and taking the longer-term view instead of focusing on the current market volatility, can help ride out this health pandemic with more confidence.
Most retirees on track Finally, the Vanguard/Investment Trends SMSF report showed that 70% of planners are confident their SMSF retiree clients will not require the Age Pension in the future, particularly those who are under 65 years old. Of their clients still in accumulation phase, advisers felt that some 79% were on track to achieving their retirement goals. Some 84% of advisers reported their retiree clients were drawing down in a sustainable manner. Of the remaining 16% the most popular advice provided to these clients in order to correct this was to review their budget, expenses and spending habits, downside their home and explore the Age Pension entitlements, to return to paid employment and to use higher income generating investments. Aidan Geysen is head of investment strategy at Vanguard Australia.
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ROLLOVER THE OTHER SIDE OF SUPERANNUATION
Fighting without fighting to see off tiresome Tim Nobody has kept industry funds executives and their helpers busier than the chair of the House of Representatives Standing Committee on Economics, Tim Wilson. That would be the same Tim Wilson with connections to the Institute of Public Affairs (IPA) and the same Tim Wilson who championed the Coalition’s campaign against the Federal Opposition’s franking credits policy, including controversially utilising a Parliamentary Committee of Inquiry, something which some have suggested helped Tim’s relative, Wilson Asset Management boss, Geoff Wilson. So, anyone who visits the website of Wilson’s committee will note that he has been prodigious in using its Review of the Four Major Banks and Financial Institutions to place questions on notice interrogating industry superannuation funds about almost every facet of the operations, including any cross-overs which may have occurred. So far as Rollover can tell, Wilson’s efforts have uncovered some interesting detail but nothing particularly juicy about the industry funds, but what has particularly taken Rollover’s eye is the manner in which IFM Investors has seen him off by adopting the old Bruce Lee kung fu tactic of “fighting without fighting”. Apart from telling Wilson that many of his questions are outside the committee review’s terms of reference, it has answered most of his inquiries without telling him anything he probably did not already know.
JUMPING THE GUN ON ANNOUNCING AN ENGAGEMENT Rollover believes that its just common knowledge that politics and ego are part and parcel of any merger process between superannuation funds. And so whenever Rollover hears about a merger between funds he expects that messaging will reflect at least some ego and a good deal of politics. And such proved to be the case with respect to the putative merger between NGS Super and Catholic Super with Catholic Super’s chief executive, Greg Cantor, appearing to have surprised his friends at NGS Super by the alacrity with which he
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decided to announce the merger to the always hungry media. Rollover gathers that while the guys at NGS Super were a bit miffed, they were happy to go along with the early-than-anticipated announcement on the basis that such events are all part and parcel of superannuation fund marriages. From where Rollover sits, the merger looks like one of the more sensible to be announced in recent times given that NGS Super covers those working in non-Government schools, while Catholic Super covers those working in the Catholic non-government schools system. What can possibly go wrong?
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ASFA, Annastasia, borders and vaccines Rollover is offering a big shout out to Association of Superannuation Funds of Australia chief executive, Dr Martin Fahy, for his continued optimism with respect to his organisation’s national conference. Anyone making inquiries about the conference will find that it is still scheduled to held from 3-5 February in Brisbane – something which is probably already giving rise to some raised eyebrows amongst those who might or might not attend the event. The last time Rollover looked Queensland Premier, Annastasia Palaszczuk was still holding firm on keeping the border closed to almost anyone living south of the Tweed River and, so far as anyone can tell, there is not likely to be a COVID-19 vaccine available in Australia until perhaps the second half of 2021, if then. So as Rollover has asked before, what do the people at ASFA know that others don’t know and why do they remain optimistic? Rollover’s advice to ASFA is that they should do what everyone else has so far done, accept the inevitable and hold a virtual conference.
F IND U S O N
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