VOLUME 34 - ISSUE 5, NOVEMBER 2020

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

Industry challenges

The industry would do well to put aside its differences and present a united voice to the policy makers in Canberra

Superannuation administration

Super funds had just weeks to build a process to pay out thousands of dollars for the early release of super scheme

Super Fund of the Year Awards 2020

One fund has taken home Super Review’s coveted Super Fund of the Year award for 2020

Member returns

The Government’s proposed super performance test could drive an oligopoly structure

VOLUME 34 - ISSUE 5, NOVEMBER 2020

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CONTENTS

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NOVEMBER 2020

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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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ASIC investigates super fund trustee and 5 | APRA’s heatmaps executive COVID-19 have not discouraged investment switching innovative investment

decisions: Rowell

Executives from UniSuper, NGS Super, Cbus, CareSuper, and Rest had executives who switched investments.

The authority’s performance heatmaps have not driven a material shift in investment strategies or has led to benchmark hugging.

10 | Administrating through a pandemic

12 | Super Fund of the Year Awards 2020

The early release of super scheme tested funds’ administration services as they grappled with designing a release process, security, and the ability to address member issues quickly.

The overall winner for this year’s awards was praised for its strong and consistent long-term investment performance with competitive fees.

6 | Significant superannuation lessons from McVeigh v Rest lawsuit The settlement by Rest has ensured the active management of climate change risks by superannuation funds.

14 | Super changes will undermine innovation, nation building and member returns While the proposed super performance test is well-meaning, it appears to be interventionist and flawed.

2 | Super Review

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12/11/2020 2:19:34 PM

EDITORIAL

Time for the superannuation industry to unite 2020 has been challenging for the Australian superannuation industry and with 2021 promising even more challenges it is time for the industry to present a much more united front.

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Australia’s superannuation industry has rarely been subjected to the Government, remains focused on encouraging the exit of more pressure than occurred during 2020 and superannuation what it regards as underperforming funds along with further fund executives should expect more of the same in 2021. fostering the merger activity which is currently underway.

Just because the Government’s superannuation hardship When this is taken together with the Government’s changes early release scheme will end on 30 December does not mean to default superannuation fund arrangements and the that the Government will not be pursuing further changes continuing arguments of Government backbenchers around to the superannuation regime, many of which will represent policy issues such as the continuing compulsory nature of the an existential threat to the future of some, smaller funds.

SG and the use of superannuation to fund first home deposits, As well, lurking in the background, is what may prove to be there is much for the industry to be concerned about. the catalyst for further superannuation policy It is in these circumstances that the change – the long-delayed release of the industry would do well to put aside its Government’s Retirement Income Review (RIR). differences and present a united voice to “The internecine The RIR report has been in the hands of the policymakers in Canberra. In short, the politics of the old the Treasurer, Josh Frydenberg since early Association of Superannuation Funds of industry fund versus this year but for whatever reasons Frydenberg Australia (ASFA) and the Australian Institute retail master trust has chosen not to release it to the industry, of Superannuation Trustees (AIST) should divide need to be perhaps realising that the impact of the ensure they are singing from the same abandoned because it superannuation early release scheme and the hymn book in defending the industry. is that very division ongoing impact of the Government’s earlier The internecine politics of the old which has assisted the policy changes around Protecting Your Super industry fund versus retail master trust (PYS) and Putting Members’ Interest First divide need to be abandoned because it critics of the industry.”

(PMIF) needed to be taken fully into account. is that very division which has assisted Also at play is whether the Government will, the critics of the industry to successfully as legislated, proceed with lifting the superannuation guarantee undermine public perceptions of the success of the industry.

(SG) beyond the current 9.5% or whether it will choose to use 2020 has been a challenging year for superannuation. next year’s May Budget to further delay the increase as part of a 2021 will be equally challenging and the industry broad sweep of measures aimed at restoring economic activity as must be prepared to meet those challenges.

Australia emerges from the 12 months of the COVID-19 pandemic.

This is the last print edition of Super Review for 2020. It But what should already be obvious to the executives will be returning in March 2021. The entire team wishes our of smaller superannuation funds is that the Australian readers a Merry Christmas and a safe and prosperous 2021.

Prudential Regulation Authority (APRA), with the backing of

Mike Taylor, Managing Editor

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3 | Super Review

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11/11/2020 3:49:15 PM

NEWS

Only 10 balanced funds make a return

BY JASSMYN GOH

Only 10 funds have made a return so far this year as most have not managed to recover losses from the global sell-off induced by the COVID-19 pandemic, according to data.

According to FE Analytics, the balanced superannuation fund sector average was a loss of 1.75% and only 10 funds out of 191 have made a return since the beginning of the year to 31 October, 2020.

Australian Catholic Super’s Australian MySuper Balanced Option fund was the top-performer with a return of 6.44%, 3% higher than the second-best returning fund.

Suncorp Brighter Super Personal Suncorp Multi-Manager Balanced fund came second at at 3.45%, followed by AMP SIGS MySuper Macquarie Balanced Growth at 3.24%, Australian Catholic Super Socially Responsible Option at 2.94%, and Amp SignatureSuper Macquarie Balanced Growth at 2.9%.

According to Australian Catholic Super’s latest investment update, the fund said due to the COVID-19 pandemic it had reduced exposure to growth assets such as overpriced stocks prior to the virus.

The fund also said it increased investments in growth assets when these assets were sufficiently discounted following the fall in investment markets in March 2020, and decreased investments in growth assets following the market recovery as uncertainties posed by COVID-19 continued to be a risk.

Over the longer term, it was Australian Super Balanced Option which topped the charts at a return of 48.31% over the five years to 31 October, 2020.

AMP SIGS MySuper Macquarie Balanced Growth came in at second at 40.9%, followed

by CareSuper Sustainable Balanced at 40.21%, CareSuper Balanced at 39.76%, and Suncorp Corporate Investment Super Balanced at 39.44%.

The average sector return for this time period was 21.7%.

However, none of the top-performing funds had managed to recover losses from the sell-off in March 2020.

ASIC investigates super fund trustee and executive COVID-19 investment switching

BY MIKE TAYLOR

The Australian Securities and Investments Commission (ASIC) has confirmed it is considering whether to take action against superannuation fund trustees and executives who switched their investments at the height of the COVID-19 market downturn earlier this year.

Examples of superannuation funds whose members had switched investments in that period were provided to ASIC by the chair of the House of Representatives standing committee on economics, Tim Wilson, and ASIC confirmed those were the types of matters it would investigate.

Among the superannuation cited by Wilson were UniSuper, NGS Super, Cbus and CareSuper.

ASIC’s formal response to Wilson stated: “It is not ASIC’s practice to comment on whether it has formally commenced an investigation or make public comment about the progress of investigations. But we confirm that we are considering the material supplied and what further action might be appropriate for ASIC to take in accordance with our usual practices upon the receipt of intelligence”.

“We also note that investigations of matters such as breach of directors duties and market misconduct can take some time,” the ASIC response said.

In asking his question of ASIC during a committee hearing, Wilson cited CareSuper and then pointed to other funds.

“For instance, I believe UniSuper have admitted that one member, who is also an executive of the fund, had one or more switch requests processed during the high load periods of their fund to a total value of $445,368,” he said. “We then have other funds where we see other issues similarly occurring.

“AustralianSuper had one person who did a transaction during that time. I’ll table that one.

We have Cbus, who refuses to provide any information to us, which is interesting. We then have NGS Super. They have outlined that they have trustees who did major transactions—three of them, in fact—during that time.”

“Then we have Rest. Rest has a person who transacted $465,949 in funds,” Wilson said.

“You can see the pattern of behaviour. We have people who are trustees or managers of funds transacting huge sums of money within a defined period, where it’s known that the stock market may not have reached bottom—we have to concede that—but had dropped considerably while they hadn’t revalued their unlisted assets and therefore may have been able to secure a benefit. Is that the sort of thing that ASIC would investigate?”

4 | Super Review

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12/11/2020 2:19:52 PM

NEWS

LGIAsuper reduces allocation towards property, bonds and global equity

BY JASSMYN GOH

LGIAsuper has reduced its exposure to property, traditional bonds and international shares while increasing its allocation to infrastructure, cash, and Australian shares in a bid to increase risk-adjusted returns.

The superannuation fund said the changes took effect on 1 November and had introduced new asset class private capital to target higher-returning investments, as well as altering the mix of its alternative investments.

LGIAsuper chief investment officer, Troy Rieck, said the new allocations would provide greater transparency to members on their investments, provide more flexibility to invest, and better position members’ savings in the new investment environment.

“We are focusing on assets where we expect higher risk-adjusted returns to support our members in building their retirement balances and generating the income they need in retirement,” he said.

“Placing more emphasis on generating sustainable income from our diversified portfolios makes sense in a world when capital gains will be harder to generate.

“We are also working the assets harder, increasing the flexibility of the investment program and cutting investment fees, as every dollar we save in fees flows straight to members.”

Rieck said the reduction of property and international shares reflected market conditions and aimed to protect members from continued volatility.

He noted that the fund expected better returns from infrastructure in the coming years compared to property and would add to its portfolio over time.

“Current valuations also suggested rebalancing our share market portfolio in favour of domestic assets at the expense of our global portfolio, after a long period of being overweight in global shares,” he said.

“We keep the interests of our members at the heart of everything we do, and our focus on solid, long-term growth in a diversified portfolio enables us to respond to opportunities to ensure that our members can plan for their future in times of both prosperity and volatility.”

APRA’s heatmaps have not discouraged innovative investment decisions: Rowell The Australian Prudential Regulation Authority’s (APRA’s) superannuation performance heatmaps will not and has not discouraged trustees to make innovative investment decisions, the authority believes.

Speaking at the Financial Services Council’s (FSC’s) investment conference, APRA deputy chair, Helen Rowell said the heatmaps had not driven a material shift in investment strategies nor had it led to a shift to wholesale indices.

“We don’t see it as having driven material shift in investment strategies so far. We haven’t seen the shift to wholesale index hugging that people said that would happen as a result and nor do we think that should happen,” Rowell said.

“At the end of the day the measures are risk based, they are meant to assess the performance against the strategy that the trustee has selected for their members and so trustees still have that flexibility to make those decisions about the risk return outcomes for the appropriate members and shape their strategy accordingly and make those key decision on how they implement that in terms of liquid and illiquid, or passive versus active strategies.

“If those strategies aren’t delivering value and outcomes relative to the cost and risks taken then it suggests there’s a need to revisit and a change to the strategies are needed.”

Rowell said while APRA was surprised at the “noise” that was created when the authority announced its heatmaps, it had “seen good things” so far.

“The industry has responded really well and most of the industry has turned its minds to actually improving outcomes in investment space, reducing fees etc.

When we did the update in June 2020 we were able to show that more than 40% had received a fee reduction in their MySuper product and that proportion has continued increased and you’ll see more change when we continue to release the update in December,” she said.

“We’ve also seen shifts in investment governance and implementation with a view to improving outcomes. For example, funds moving out of higher cost investment strategies and options where those weren’t adding value. We felt that the heatmaps were a game changer in terms of industry transparency and getting a better sharper focus on lifting member outcomes and that has been realised in our view.”

Commenting on concerns regarding benchmark hugging as a result of the Government’s Your Future, Your Super investment performance test, Rowell said she did not see a tension or trade-off between balancing obligations for members and having investment strategies that had good outcomes however it was measure and irrespective of its benchmark.

“The question fundamentally is what is the right investment strategy for your members? And whether it’s APRA’s heatmap or the government’s measures the trustees continue to have flexibility to set the strategy they think is right in terms of risk return outcomes for their members,” she said.

“Then they need to implement that in a way and monitor the delivery of that to make sure they’re delivering the value and outcomes they expect. If they’re not meeting those benchmarks or not delivering value for the strategy that you’ve implemented then you have to ask the question on whether this is the right strategy and if not, change it.”

5 | Super Review

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11/11/2020 11:22:31 AM

NEWS

Geared Aussie equity super funds best over five years

Significant superannuation lessons from McVeigh v Rest lawsuit

BY JASSMYN GOH

BY MIKE TAYLOR

SUPERANNUATION funds focused on geared Australian equities have performed the best over the last five years to 30 September, 2020, with an average return of 55.66%, according to data.

There are significant implications for superannuation fund trustees, their executives and the relationships between superannuation funds and their investment fund managers flowing from the recent settlement reached between Rest and its member and ecologist, Mark McVeigh.

That is the assessment of legal firm, Mills Oakley which argues that because the case was settled it has not succeeded in establishing a legal precedent it has nonetheless established a standard against which other superannuation funds will be measured.

Mills Oakley partner, Mark Bland, has written that while the lack of a court determination is an issue, the settlement appears to have ensured the active of management of climate change risks by superannuation funds.

This case promised the first judicial consideration of the disclosure and conduct of obligations of superannuation trustees as they relate to managing climate change risk.

A judgement would have provided certainty for trustees who are operating in a highly uncertain environment.

The requirement for action on climate change risk by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) is at variance with the views expressed by members of Government. Also, the strongest voices for addressing climate change risk at each of ASIC and APRA will have departed by the end this year.

“While settlement is, in one sense, a lost opportunity for certainty, it has the direct impact of setting the $60 billion in Rest on a course where climate change risks are actively managed. It also sets a standard against which other funds can expect to be measured by their members,” he wrote.

“The claim was also based on conduct prior to July 2018, so any judgement may have been highly fact specific and related to expectations at that time, which have shifted considerably.

While the commitments made by Rest do not appear to be directly enforceable, the mechanism of a press release amounts to a representation that, if Rest were to depart from privately, would result in misleading or deceptive conduct.”

Bland wrote that funds that are lagging in the management of environmental, social, and governance (ESG) related risks will be carefully considering what steps they will need to take to avoid being the next target of such an action and to ensure they don’t see members exit the fund in favour of funds that are actively managing climate change risk.

“Funds should be careful, however, in rushing to make commitments in response to member pressure. Not only could the failure to keep to promises cause significant reputational damage, it would also likely amount to misleading or deceptive conduct,” he said.

According to FE Analytics, when it came to super funds focused on a specific equity class, geared Australian equities was followed by small/mid cap Australian equities (52.01%), Asia Pacific ex Japan (50.16%), global equities (45.21%), and global hedged equities (45.05%).

On the other end of the scale, it was global property that performed the worst at 7.36% followed by Australian property at 23.59%, and infrastructure equities at 27.7%.

While the Australian geared equity sector had performed the best over the five years to 30 September, 2020, it still had not recovered losses induced by the COVID-19 pandemic.

At its peak, the sector returned 125.9% since 30 September, 2015, to 20 February, 2020. However, the sector was currently still down 31.1% since the February peak.

The top five performing geared Australian equity funds in the sector were all CFS funds.

The top performers were Commonwealth Select Personal Supa - Colonial First State Wholesale Geared Share at 119.27%, CFS FC PSup Colonial First State Wholesale Geared Share at 99.41%, CFS Colonial First State Geared Share Select at 97.27%, CFS Geared Share ROSCO at 90.55%, and CFS FC Psup Colonial First State Geared Share at 89.52%.

The top five holdings for the Colonial First State Wholesale Geared Share were CSL, BHP Group, Commonwealth Bank of Australia, Woolworths Group, and National Australia Bank.

None of the top-performing funds had recovered losses from the sell-off earlier this year induced by the coronavirus pandemic.

The Commonwealth Select Personal Supa Colonial First State Wholesale Geared Share is still down 24.53% from its peak on 20 February, 2020 at 190.54%.

On the other end, it was two Perpetual funds that were the bottom performers.

Perpetual WF Super Perpetual Geared Australian returned 9.32%, followed by Perpetual Select Super Geared Australian Share Investment Option (18.56%), CFS FC Psup FirstChoice Geared Australian Share (33.29%), AMP FLS and CS Future Directions Geared Australian Share (34.15%) and AMP Flexible Super Super Future Directions Geared Australian Share (37.36%).

6 | Super Review

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11/11/2020 11:21:34 AM

NEWS

Asia Pacific ex Japan super funds best at navigating COVID-19

BY JASSMYN GOH

Superannuation funds focused on Asia Pacific ex Japan equities were the clear winners in navigating through the COVID-19 pandemic as the sector average return was 9.49%.

According to FE Analytics, when it came to super funds focused on a specific equity class, the Asia Pacific ex Japan sector was the only sector to make a return since the start of the year to 30 September, 2020.

The second-best performing sector was the Australia small/mid cap equity sector at a loss of 0.37%, followed by global equities (-1.82%), global hedged equities (-3.76%), and alternative (-4.83%).

At the other end of the scale it was the Australian equity geared sector at a loss of 22.26%, followed by global property (-17.18%), infrastructure equity (-11.26%), Australian equity (-8.99%), and emerging market equity (-7.48%).

The top-performing Asia Pacific ex Japan super fund was MLC MK Super Fundamentals Platinum Asia at 15.25%.

This was followed by ANZ ASA BT wholesale Asian Share Manager at 15.07%, ANZ Smart Choice Super Platinum Asia at 14.83%, OnePath OA Frontier Personal Super Platinum Asia at 14.82%, and CFS FC W PersonalSuper Platinum Wholesale Asia at 14.52%.

Only two funds did not make a return – AMP SignatureSuper Future Direction Asian share (-1.02%) and AMP Flex LifetimeSuper and CustomSuper Future Directions Asian Share (-1.57%).

According to the Platinum Asia fund’s latest factsheet, the fund’s largest geographic weighting was to China at 44.9%, followed by Korea at 10.2%, India at 9.2%, Hong Kong at 8.2%, and Taiwan at 7.3%.

Consumer discretionary was the fund’s largest industry exposure at 26.3%, followed by information technology at 22.6%, financials at 11.1%, communication services at 10.1%, and real estate 5.5%.

For the month of September, Platinum said the key drivers of the fund’s performance was due to large holdings in Taiwan Semiconductor Manufacturing and Samsung.

“We expect Chinese-US tensions to persist, and that there will be winners from this ongoing tension and industrial displacement,” it said.

“In our view Samsung is a potential beneficiary, given the US-led effort to block Huawei’s sales of 5G network equipment.”

Industry superannuation funds canvass three-way financial advice fee split

BY MIKE TAYLOR

Industry superannuation funds are asking whether it is possible to split advice fees into three components, one of which is intrafund advice.

In a discussion paper forming part of Industry Funds Service (IFS) submission to the Australian Securities and Investments Commission’s (ASIC’s) current advice within superannuation project, the industry funds body has openly canvassed whether it is possible to split statement of advice (SOA) fees into three components.

It listed those three components as “(part intra-fund, part fee deduction from account, and part payable directly by the member)?”

In asking the question, the IFS document has argued that “a full retirement plan may involve advice on investment choice (covered by intra-fund), contributions and pension recommendations, including Centrelink, that we charge the member via a deduction from their account, and a non-super investment recommendation which the member needs to pay from their own funds, for example”.

“What is the expectation of a fund to accurately cost their advice in order to set their advice fees?” It asked. “Further, for advice that goes beyond intra-fund, how is it to be determined what the costs of those elements are in achieving cost recovery?”

The IFS document has pointed to areas where the organisation there needs to be more regulatory guidance and clarification and specifically asks whether retirement advice can be provided as intra-fund advice.

“This is where we see the biggest contention from the broader advice industry, and the widest variance of interpretation amongst super fund,” it said. “Some funds provide near full retirement planning advice under its ‘intra-fund offering’ and remain silent on advice relating to other products or a spouse. Other funds do not provide retirement advice in any form on the basis that it isn’t simple and cannot include strategies for a non-member spouse.”

The IFS paper also asked whether the charging rules have such a significant impact on how advisers are licensed, and hence which members needs are addressed and stated that: “More fundamental is whether the use of limited licensing to align to intrafund charging rules is creating challenges for advice models and advisers i.e. the scope of needs rarely falls neatly into one charging bucket. The limited adviser needs to assess whether the member sufficiently understands the impact of only receiving limited advice and then determine if it’s appropriate to proceed with giving it.

“This is a growing conflict for limited licensed advisers who often need to operate at the limits of what they are allowed to do, yet are qualified and capable of solving for more.

“Further the member’s expectations are for them to address their superannuation and retirement needs. Limited super licensing is not something that a consumer should be expected to understand. Instead advisers should be licensed to solve for super and retirement and scope up and down as required.”

7 | Super Review

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11/11/2020 3:14:00 PM

NEWS

Superannuation investment performance test a ‘blunt single-issue measure’ Wage boost promises were not kept in 2014 when SG froze

BY JASSMYN GOH

The wage boost promise, when the superannuation guarantee (SG) was frozen in 2014, never materialised and workers were not compensated for their lost super, according to an enterprise bargaining agreement (EBA) analysis.

The analysis of 8,370 EBAs conducted

by Industry Super Australia (ISA), found that while thousands of agreements were in place when the SG freeze was announced, most employers saw little need to renegotiate them to pass on the lost super as higher wages.

ISA noted that politicians were again claiming that cutting next year’s legislated 0.5% SG rise would lead to higher wages.

“The economic downturn makes wage rises far less likely now and most economists now concede that Australian workers are not going to receive any real wage growth over the coming years – making the super rate increase the only pay rise on offer for most workers,” ISA said.

“A worker on the cusp of retirement has already lost about $100,000 from previous super guarantee delays, further pauses will compound the losses.

“It is unfair that some politicians – who receive more than 15% super contributions – are once again cruelly asking workers to sacrifice their chance for security and dignity in retirement for nothing in return.”

The rate was scheduled to rise to 10% in 2015, and 0.5% each year after until it reached 12% in 2019. ISA said the delay could cost the average full-time worker in their 30s, $45,000 at retirement.

“The pay cut persisted for years, once those agreements expired the new deals did not include catch up wage increases to compensate for the lost super,” ISA said.

“In agreements certified after the super rate was cut, wage growth fell from 3.33% before the cut to 3.27%. This shows employers pocketed the lost super and workers’ total remuneration also went backwards.

“This paper confirms what Australians already knew, that most employers do not voluntarily return the loss of mandatory super payments as wages and the 2014 super freeze left workers worse off.”

Superannuation funds that fail the Government’s proposed investment performance test will be unable to turn their eight-year performance around in one year and will be “very messy for all concerned”, according to Rice Warner.

In an analysis, the research house said underperforming funds would have to set up different structures to accommodate new members and this would be “very messy”. It said this suggested that the Government appeared to hope that these funds would exit the industry.

It noted that there were many ways funds would deviate from the new benchmark or encounter issues such as: • Most market indices are cap-weighted whereas funds should seek industries which will grow in future rather than those that grew in the past. Similarly if a fund wishes to avoid areas of the market which it considers to be over-valued, then it needs to be able to stay the course if they miss out temporarily from these shares becoming even more over-valued; • Funds can use derivatives to change their exposure – and this will alter their returns; • Funds can seek franking credits to maximise after-tax returns. They will participate in off-market buy-backs as these provide strong after-tax returns; • Funds investing in infrastructure will be measured against a benchmark which could be quite different from their holdings; • Lifestage products have multiple asset allocations. Each will be measured separately – and theoretically a fund could find itself underperforming in one area. Sorry, you can’t join our default for people under age 30 this year, but why not join the 30 to 45 group instead!

• Some funds will revert to bland indexed investments thus avoiding the chance of underperformance – but forgoing the opportunities for higher performance from unlisted investments; • While we know that past performance is no guide to the future, funds cannot change the first six years on the forthcoming eight-year test. Even if a fund totally revamps its strategic asset allocation, moves some classes to passive and brings some funds in-house to cut costs, it will still have this past performance within its measured returns; and • Some funds have had poor returns (after fees) and they will have no option but to wind up. They will not be able to recover in two years when 75% of their return will still be poor. This applies even though new members will not receive the past performance. They could start again but are more likely to merge with a high-performing fund (even a very small one) and SFT into that option to preserve the good performance.

The analysis also said that while strategic asset allocation was one of the largest contributors to investment performance, it was not being measured. It was possible, Rice Warner said, for a fund investing in volatile assets to provide a sound return and deliver on member targets but fail the benchmark test in some period.

“Conversely, a fund could invest entirely in cash and not be at risk of measured underperformance. Yet, it would deliver a poor retirement outcome. This is an extreme example of some unintended consequences, and the reality is that few members would choose this option, but it shows how the new process could distort behaviour,” it said.

Some funds could also fail on investment performance yet do well in other areas such as retirement or life insurance. This meant that the test was a “blunt single-issue measure and there does not appear to be any leeway for tolerance”.

“The over-arching effect of the proposed measures would likely be to pressure funds to forgo opportunities for long-term outperformance to mitigate the risks of underperformance against a nominated benchmark,” it said.

Rice Warner said it was likely many funds would become passive on Australian shares and, in time, prices would be set by the trading activities of foreign investments, the retail investors and self-managed super funds.

“The new system will lead to changed behaviour. We hope funds stay the course and continue to seek alpha in unlisted asset classes. However, they will have to watch the benchmarks carefully and might use derivatives to protect against any major deviation from the fund’s own assets,” it said.

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11/11/2020 3:48:04 PM

NEWS

Contributions and asset allocation need personalisation: Russell Investments

BY JASSMYN GOH

Link’s McMurtrie rebuts takeover consortium’s claims

BY MIKE TAYLOR

Link Administration outgoing managing director, John McMurtrie, has defended the company against suggestions that it has lost ground in the superannuation administration market through the loss of mandates.

Addressing the company’s annual general meeting, McMurtrie pointed to suggestions contained in a private equity-led takeover bid that the loss of mandates had weighed on the company.

He noted that the issues raised by the consortium included $800,000 of lost contract accounts including TWU Super, Care Super, Austsafe and Kinetic Super and reduced client accounts resulting from Protecting Your Super (PYS) and early release super (ERS).

As well, he pointed to the Government’s recently announced Budget initiative Your Future, Your Super which would see the stapling of existing super accounts to an individual member to prevent account duplication.

“While we recognise that these have had an impact on the financial results, I would add the following additional context,” McMurtrie said. “In the past 18 months we have resigned 15 clients on long-term contracts including AustralianSuper, Rest, and HESTA.” “Together these clients represents approximately 6.3 million members and over 70% total annual contracted revenue earned in Australia.”

McMurtrie said the financial impacts of PYS and ERS had been highlighted in all the company’s results presentations and were well understood.

“By the time we enter the next financial year, we expect the majority of this immediate financial impact to be behind us. Conversely, we anticipate that the recent volume of regulatory change and increased regulatory oversight will create further opportunities for us, as we are able to offer superannuation funds a high-quality outcome underpinned by our leading technology, scale and breadth of service,” he said.

Optimising contributions and asset allocation can help close the retirement gap in Australia, according to Russell Investments.

During a virtual roundtable, Russell Investments managing director, Jodie Hampshire, said personalising contributions and asset allocation would improve superannuation members’ chances of reaching retirement goals as currently most super funds were using a one size fits all approach which was not ideal.

The investment firm said accurately optimising voluntary contributions depended on the personal circumstances of each investor and the retirement income they were trying to achieve.

Its ‘Making Super Personal’ whitepaper said engagement from members was needed to obtain information to personalise contributions.

“By focusing individuals on the retirement lifestyle they would like to achieve (rather than complex investment decisions), the

entry into superannuation can be significantly simplified and much more engaging,” it said.

On optimising asset allocation, Hampshire said that most Australians were defaulted into super options that significantly compromised their returns.

The whitepaper said the one size fits all approach ignored other personal information that could improve asset allocation, such as the super account balance, contributions, and the individual’s retirement income goal.

“Shifting from ‘one size fits many’ to ‘mass personalisation’ of investment strategy is a real ‘free lunch’. It provides a benefit without an associated trade off. It does that by removing the compromises in the current one-to-many approaches,” the paper said.

“By optimising asset allocation (removing the compromises of one size fits many approaches), our analysis shows more than two-thirds of those analysed would have higher projected retirement incomes, with some incomes increasing by over 30%.”

ASIC explains no action position on super advice The Australian Securities and Investments Commission (ASIC) has revealed it did not take action against superannuation funds which it identified as having delivered defective advice but, instead, contacted them and asked them to fix the problem and then confirm they had done so.

Answers provided by ASIC to a key Parliamentary Committee have revealed the regulator has not and does not intend taking action with respect to the advice.

Answering questions on notice from NSW backbencher, Jason Falinski, ASIC stated: “ASIC has not taken enforcement action against any specific funds as a result of the advice review findings and it does not plan to do so.

“For the files where there was an indication that the member was at risk of suffering financial or non-financial detriment, we contacted the advice licensee of the advice provider requesting them to review the advice and where required, remediate those affected members. We asked advice licensees to confirm that they had undertaken the appropriate steps and to provide us with an update on the outcome.”

ASIC referenced its financial advice by superannuation funds project which it said included a review of personal advice provided to 233 members of 21 industry, retail, corporate and public sector superannuation funds.

“In the review we assessed 32 files recording advice that was provided under an intrafund arrangement, 68 files recording advice that was scaled/limited in scope but not provided under an intra-fund arrangement and 133 files recording advice that was comprehensive in scope,” it said.

“The findings from the advice review identified the need for improvement in the advice provided to members of superannuation funds. For most files, that did not demonstrate full compliance with the best interests and related obligations, this was due to procedural, disclosure or record keeping deficiencies.

“However, the file did not indicate that the member was at risk of suffering detriment as a result of the advice. For a smaller number of files (36) that did not demonstrate compliance with the best interest duty and related obligations, there was an indication that the member was at risk of suffering detriment as a result of the advice.”

It said it was with respect to those instances of advice that it had “not taken enforcement action against any specific funds as a result of the advice review findings and it does not plan to do so”.

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ADMINISTRATION

Administrating through a pandemic

BY JASSMYN GOH

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With just weeks given to superannuation funds to build processes for the early release of super scheme, much of their success in paying $34.8 billion to over four million applications has come from administration whether the function is insourced or outsourced.

There is no doubt that one of the biggest responses to the COVID-19 pandemic in Australia was the Government’s early access to superannuation scheme.

Once the scheme was announced to the public, super funds had just weeks to come up with a process that expected the funds to release a maximum of $10,000 to any member suffering from financial hardship as a result from the virus’ impact for the first tranche.

Despite worries about liquidity, Australian super funds were successful in collaborating with their administrators and the Australian Taxation Office (ATO) to roll out the program.

Link Group’s chief executive for retirement and super solutions, Dee McGrath, told Super Review, that they had just 19 days to work with the ATO and the broader industry to build, design, and implement the scheme.

“The industry did a really good job in coming together in a collaborative way to implement a solution. Overall, there have been 3.3 million claims across the industry so far. We have processed over two million of those and about $17.5 billion to date. The industry has done a really good job, our clients have been incredibly proactive and supportive through that period,” she said.

Apart from building the system that would process the applications, McGrath said Link needed to think through the security and what the ATO were doing. The administrator added features such as SMS updates once it received a claim to validate the member had requested the claim as a form of second line of defence.

As the Government stipulated that 95% of claims needed to be paid within five business days, McGrath said Link needed to make sure they could process those payments that were in the thousands of dollars.

McGrath said the biggest challenges were to do with processing, having to quickly address member questions, and trying to fast-track claims within 24 hours for those people who were in dire circumstances.

“One of the things that you don’t necessarily design for – we had people that through no fault of their own might have put a wrong digit in so we had incorrect bank details. We were seeing rejections on a daily basis in the files being sent to the banks so we had to contact those people and get things reprocessed and so it was a really large program of work,” McGrath said.

“There were people in some quite dire circumstances so we were making sure we were able to deliver. So far we’ve delivered around 97.5% of the claims in the five days and also being able to make personal contact with people where we needed to clarify something.”

Mercer commercial operations leader, Pacific, Chris Stevens, said Mercer had identified that it needed to work quickly with its superannuation fund clients to ensure everyone was on the same page.

“We had to set up project teams quickly, to make sure the tech and the interface with the ATO was in place, and we could support the scale and volume of requests coming in.

That was a really successful program that led to deferrals of some other activity but it was really critical and we prioritised that for members. By in large it was very successful and while there is still some activity to early release, it certainly had its peak in April, July, and August,” Stevens said.

He noted that prior to the second tranche of the scheme, the ATO recognised that security of member information was critical which meant administrators

had to introduce additional identification requirements which led to some minor delays in issuing some payments.

“But it was a prudent change the ATO introduced in the third quarter. Generally, we were in good shape in being able to support that outcome.”

Insourcing vs outsourcing admin Given Aware Super, formerly First State Super, both insources and outsources administration chief operating officer, Jo Brennan, said the fund needed to process the early release claims under three different systems.

The super fund inherited the three different systems as a result of the mergers with StatePlus and VicSuper.

While both StatePlus and VicSuper insourced all of their administration, First State Super used a hybrid system with some services inhoused and some outsourced.

“When it came to the early release scheme we needed to make changes and processes three times to each platform. This increased the cost and risk when making the changes three times,” she said.

“We have the WA Super merger coming up next month and we are fundamentally simplifying our business and bringing all our administration inhouse so that we have full control and accountability for that service delivery. It’s a really complex program of work and so we’ll do that progressively.”

Brennan noted that the fund looked to amalgamate the three systems within the next 18 to 24 months.

She said insourcing allowed her fund to have full accountability and control on the member experience. The ability to streamline and drive its strong digital first model would allow the fund to have its hands on the levers

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ADMINISTRATION

that would make the most difference for members, she said.

“By insourcing we can focus on the digital side allowing members to access us anytime and we’ll be able to drive a strong continuous improvement around that,” Brennan said.

“We’ll also be able to drive the member first culture focus across the entire team through one single model and view by having a single view of our members. By having one system we’ll have that control and accountability and it will create a cost efficiency by using our scale.”

However, McGrath said super funds were more likely to outsource rather than insource their administration.

With the Government and regulators putting focus on members’ best interest, McGrath said super funds were looking at what they could do themselves versus what an administration partner could provide for their fund.

“Going forward, less and less funds are going to look at the end-to-end themselves. I think they will look at having a large component of administration outsourced from a provider to provide scale and the continued investment into technology,” she said.

The insourcing and outsourcing topic, Stevens said, was something the wealth management industry was continually considering for their super administration whether it be part of their offering as a core part of their business or to looking to partner with an administrator.

When thinking about the investments Mercer had made into their administration business on an annual basis, Stevens said there were very few examples where he could see where funds could insource their administration as it was a significant investment commitment.

“Insourcing potentially adds risk to the

business and funds need to be mindful of those things. By in large we still see the majority of our industry being administered by very large institutional providers,” he said.

What funds want from their administrator Even prior to the pandemic compelling businesses to pivot towards digital offerings, super funds were already looking at administrators to help support their value proposition through digital and data services.

Stevens said more super funds were asking Mercer to provide broader access to member data to gain a better understanding of their membership to allow them to give better support.

Brennan said Aware was looking to drive a digital-first experience for members to allow requests to be processed quickly, and to provide a facility for members to track their requests – much like tracking parcel deliveries.

This would allow members to understand the timeline and where things were in the process, and empower members to have the most efficient and seamless service by being able to access their fund anywhere, anytime.

App support was another part of the digital first experience Brennan said was an important part of their administration.

“Members will be able to go to the app safely and securely and simply be able to access the information they need and complete the things they need to do online simply and consistently,” she said.

“If they need help and support we have a team that’s empowered to be able to help them with what they need quickly and as simply as possible. Super is complex and being agile makes it less complex.”

She noted that the early release scheme highlighted how important security was for members and that her administration team were conducting ongoing assessments and reviews of its security system and model.

McGrath agreed and said there was a big focus on digital transformation and that COVID-19 had fast tracked that focus. This included designing experiences that made it easy for members to engage with their fund whether it was through mobile apps, websites, click-to-chat functions, and phone services.

Personalisation and the ability to respond to member needs was another part of the digital transformation as Link was working on building tools and solutions to help people plan for retirement.

She said super members needed to have the tools to provide them with a living salary in retirement.

“So, we’ve got some digital capabilities we will be launching in 2021 that helps them to be able to put certain funds into a pot that gives them an income. They might want to put some in a rainy day, or into a holiday fund, or whatever they choose to which allows them to manage their funds in retirement more effectively,” she said.

“The other thing is administration is very much enabled by technology so I think funds are thinking about how they look at their service strategy and us as an administrator the investments we continue to make.

“We made $250 million of investments in the last year and we continue to build on the capability that we have. It’s about taking the friction out of the experience and making sure it’s a good experience and providing the tech and tools to further clients and having that human element in our people that are servicing them every day.”

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SFOTY

SUPER

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FUND OF THE YEAR AWARDS

2020

In partnership with 12 | Super Review

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11/11/2020 2:54:18 PM

SFOTY

AustralianSuper wins Super Fund of the Year 2020

BY JASSMYN GOH

AustralianSuper has been named Super Fund of the Year 2020 at Super Review's Super Fund of the Year Awards, with its research partner, The Heron Partnership.

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The coveted win was based on a holistic assessment of the finalists in each award category and AustralianSuper was deemed to be the most outstanding fund this year.

Heron’s chief executive, Chris Butler, said the fund had strong and consistent long-term investment performance with very competitive fees, and ongoing and evolving

plans to pass on benefits of scale to members.

It was also praised for its ability to react and empathise with members in difficult times such as free death cover during COVID-19, its full offering from accumulation to retirement phase, comprehensive member servicing, and its experienced trustee board and executive team.

CATEGORY

WINNER

Best Corporate Solution Product

Sunsuper for Life Corporate

Best Industry Fund

AustralianSuper

Best Public Sector Fund

Aware Super

Best Pension Product

AustralianSuper Choice Income

Best Insurer

MetLife

Best MySuper

Unisuper

Best Commercial Product – Personal

BT Panorama Super

Best Member Engagement Innovation

Russell iQ Super

Super Fund of the Year 2020

AustralianSuper

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SUPER PERFORMANCE TEST

Super changes will undermine innovation, nation building and member returns

BY MATTHEW GRIFFITH

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The Government’s proposed superannuation performance test could drive the market towards an oligopoly structure which could create diseconomies of scale and concentration risk.

Australia’s superannuation system has been reshaped over the past two decades by market forces and regulatory reform, creating an industry that has significantly consolidated and is widely acknowledged globally as a strong system.

We all want to strive for better member outcomes and while the Government’s superannuation budget initiatives are generally in the right direction, one proposal, whilst well-meaning, appears interventionist and flawed.

Subjecting super funds to an annual performance test – creating a ‘league table’ index and blocking underperformers from taking new members – is overly simplistic and will have potentially significant, negative impacts on investment outcomes for members.

I fear that the drive to be within 0.5% of a simplistic portfolio benchmark test as proposed by the Government, with harsh consequences for failure,

will incentivise a focus on simply being average, rather than being great.

This flies counter to my 20 years’ experience in the industry which has witnessed diverse approaches to objective attainment, including funds “bucking the trend” by early adoption of investments in unlisted infrastructure and property, internalisation, backing start-up managers and entrepreneurs through investing in private equity.

We take many of these innovations as industry norms today, but at the time when these were adopted, they were innovative and required courage to take a carefully calculated risk. Many of these approaches have been enormously beneficial to members.

Instead, the Government’s proposed benchmark test has potential for less innovation, amongst other consequences detrimental to super fund members.

Firstly, trustees may become significantly more index aware, resulting in asset

allocation and investment approaches based significantly on an index and peers, rather than investment opportunities that are considered in the best interests of members.

Secondly, trustees may become more fee conscious, resulting in approaches that limit access to high potential return but higher cost investment opportunities that would be expected to improve returns and/or reduce risk (e.g. including nation building infrastructure, property, and support for entrepreneurs through private equity and small public companies).

Thirdly, we could see trustees being less prepared to adopt longer term investment approaches better suited to the long-term nature of superannuation for fear of failure of not meeting the performance test.

Fourthly, market behaviour might actually continue to focus on shorter term measures, resulting in net cash outflows from some very high quality, strong long-term performing funds that have

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SUPER PERFORMANCE TEST

weaker shorter-term performance.

Fifth, the new benchmark regime assesses funds on only one criteria. In reality, the best fund for any member is a combination of risk alignment, performance objectives, investment approach, appropriate insurance, and service levels including advice.

Finally, this proposed change may drive the market towards an oligopoly structure. There seems to be a view amongst some policy makers that only eight to 10 mega funds (or less) is optimal.

Even with a hypothetical industry of only four mega funds, there will be one upper quartile and one in the lower quartile. There are limits to killing the bottom quartile, and you may create a system that achieves ‘mega scale’.

However, this comes with diseconomies of scale and concentration of risk with massive funds under management under the purview of a shrinking and smaller group of fiduciaries.

To highlight what this might look

“Trustees may become significantly more index aware resulting in asset allocation and investment approaches based significantly on an index and peers rather than investment opportunities that are in the best interest of members.” like for super, consider the outcomes from the Banking Royal Commission.

This highlighted the issues with a large, conglomerate sector with only subtle differentiation between participants, where the structure of that large industry has created other issues, including agency risk.

The Government’s approach ignores that natural market forces and regulatory changes over the last 20 years that have resulted in heightened competition, consolidation and pressure to maintain

strong member outcomes – particularly since Stronger Super was introduced in 2013.

The annual performance test also undermines the evolution of recently developed regulatory initiatives which take a more holistic view of performance.

The Australian Prudential Regulation Authority’s (APRA’s) member outcomes and heatmap evaluations have the capacity to highlight underperformance, across a broader range of measures.

The ink has barely dried on recent regulatory innovations such as member outcomes. The industry at large should be focusing on further development of existing regulatory approaches aimed at developing a wider range of aspirational targets and benchmarks for members retirement outcomes.

We, as an industry, can do better than what the Government has proposed.

Matthew Griffith is principal consultant at JANA.

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ROLLOVER THE OTHER SIDE OF SUPERANNUATION

Digging, digging, always digging for dirt Rollover recognised that there would be those inside TWUSuper who would like to hope that the events of the Trade Union Royal Commission are now in the past and gathering dust.

But not if Victorian Liberal backbencher and chair of the House of Representatives Standing Committee on Economics, Tim Wilson, has his way.

You see it might be over half a decade since the Royal Commission into Trade Union Governance and Corruption was finished, but Wilson reckons there’s still political mileage to be gained in the relationship between the Transport Workers Union and TWUSuper.

Which is why Wilson dredged up the evidence that TWU ‘Superannuation Liaison Officers’ were paid $150,000 a year to encourage members to sign up to TWUSuper.

But Wilson went further in asking the Australian Securities and Investments Commission (ASIC) whether those same Superannuation Liaison Officers might have also been providing unlicensed financial advice.

The answer from ASIC was that there was not enough evidence to suggest any advice was actually provided but it will probably satisfy Wilson that the regulator said it would consider whether it should make further enquiries.

It would seem that there is many a fine tune played on an old fiddle.

WILL THOSE IN TIGER LAND BE ASKED TO ENTER THE LION’S DEN? It is November and so Rollover has noted the manner in which football fields have miraculously been turned into cricket grounds and so suspects that those who attended the first-ever AFL Grand Final to be held in Brisbane are now safely back in Melbourne.

What is more, Rollover notes that those who were lucky enough to travel to Queensland, quarantine in affable resort digs on the Gold Coast and then join the AFL bubble ahead of the Grand Final have now returned to a Melbourne which

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has been freed from lockdown and unshackled from its travelinhibiting ‘ring of steel’.

Rollover therefore wonders whether those superannuation fund executives who travelled to Queensland to check on their members’ sponsorship investments will be travelling to Canberra to discuss the matter with the House of Representatives Standing Committee on Economics.

It might prove to be a case of leaving ‘Tiger Land’ to enter a political lion’s den.

16 | Super Review

Smooth as Silk, the $1 million question On the subject of Tim Wilson and tough questions for superannuation funds, Rollover also notes that his questions on notice have confirmed that the moustachioed chief executive of AustralianSuper trousered $1,111,234 last year.

And it seems that the objective of Wilson’s questioning was to determine how that compared to the “annual remuneration of the average worker who contributes to your fund”.

Sadly for Wilson, AustralianSuper said it was unaware of the remuneration of members but then detailed the annual superannuation contribution of members of its fund, which in the last financial year was $5,338.

To help Wilson, Rollover has conducted a quick calculation premised on $5,388 being 9.5% of a member’s total annual salary. That works out to just over $50,000 a year albeit that other sources suggest the average member account balance is $77,000 a year so, yes, Silk is taking home slightly more than 20 times that of the average member.

On the other hand, they are not overseeing a financial services organisation with over two million members and $172.4 billion in funds under management.

F IND U S O N

11/11/2020 5:55:30 PM