FS Super Volume 13 Issue 04 by financial.standard

Volume 13 Issue 04

Opinion Whitepaper

Cryptic with crypto

Make super docs readable

TAKING ACTION Heather Dawson & Chantal Walker, Active Super Published by

Contents

www.fssuper.com.au Volume 13 Issue 04 | 2021

COVER STORY

TAKING ACTION Heather Dawson & Chantal Walker, Active Super

16 NEWS HIGHLIGHTS

FEATURES

FAILING ASGARD SUPER OPTION CLOSED DOWN

After failing the inaugural performance test, the option was shuttered in October.

SUPER EXECUTIVES SWITCHING IN CONFLICT

A review by ASIC identified possible conflicts of interest in the investment switching of super executives during pandemic-induced volatility.

DEFAULT MYSUPER FEES DROP TO 1%

Average fees paid by members in MySuper options now sit at about 1%, research shows.

MERGER LEGISLATION PASSES

The legislation to allow the merger of Sunsuper and QSuper was passed in October.

$450 SUPER THRESHOLD BILL ABANDONED

The Future Fund and its cost ratio blow-out Alex Dunnin

Make super documents more readable Chas Savage

The bill to remove the $450 threshold for superannuation guarantee contributions was introduced in October but ultimately abandoned by early December.

SUNSUPER MOVES $20BN PASSIVE MANDATE

For news updates like this follow us on social media

The super fund found another fund manager for its passive investments following Vanguard's decision to hand back super fund mandates.

FS Super

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Contents

www.fssuper.com.au Volume 13 Issue 04 | 2021

News

ASIC SUES DIVERSA TRUSTEES AUSSIES CONFIDENT ABOUT RETIREMENT

Published by a Rainmaker Information company.

A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Editor Jamie Williamson jamie.williamson@financialstandard.com.au Design & Production Shauna Milani shauna.milani@financialstandard.com.au Technical Services Roger Marshman roger.marshman@rainmaker.com.au Ian Newbert ian.newbert@rainmaker.com.au Fiona Brillantes fiona.brillantes@rainmaker.com.au Advertising Stephanie Antonis stephanie.antonis@financialstandard.com.au Director of Media & Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Director of Research & Compliance Alex Dunnin alex.dunnin@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au

FS Super

The Journal of Superannuation Management ISSN 1833-9573

08 10

News

ONEPATH TOPS FAT CAT FUNDS LIST UNLISTED ASSET PROCESSES INADEQUATE

News

NO PROOF OF MEMBER BENEFIT REST FIRMS UP NET ZERO STRATEGY

News

APRA TO WEED OUT CHOICE UNDERPERFORMERS COLONIAL FIRST STATE, BLACKROCK PARTNER

News

SUPER FUND DOCUMENTS UNREADABLE AMG SUPER LAUNCHES NEW PLATFORM

News

MILLENNIALS EMBRACE SMSFS WHAT FUNDS SHOULD KNOW ABOUT GEN Z

All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Super are not necessarily those of Financial Standard or Rainmaker Information. Financial Standard is a Rainmaker Information company. ABN 57 604 552 874

Subscriptions hotline:

1300 884 434 THE JOURNAL OF SUPERANNUATION MANAGEMENT•

For more news and updates, visit www.fssuper.com.au

FS Super

Whitepapers

www.fssuper.com.au Volume 13 Issue 04 | 2021

WHITEPAPERS

Compliance

THE SUPER FUND PERFORMANCE TEST HAS LANDED By Rainmaker Information

This paper seeks to answer whether the performance test's inaugural mission was a success.

Investment

INVESTING IN THE GLOBAL ENERGY TRANSITION By Tim Humphreys, Ausbil Investment Management

This paper discusses the opportunities in the global transition to renewables and an alternative way to gain exposure.

Investment

DOWNSIZER CONTRIBUTIONS REVISITED By Minh Ly, Challenger

The author discusses recent developments as to eligibility and some of the nuances individuals should be aware of.

SMSFs

CRYPTIC WITH CRYPTOCURRENCY By Graeme Colley, SuperConcepts

Here are 10 things to know about cryptocurrency and self-managed super funds.

Ethics & Governance

TACKLING MODERN SLAVERY THROUGH FINANCE By Suzy Yoon, JANA Investment Advisers

This paper looks at the impact of modern slavery risks in investment management, what the industry can do to combat it.

Administration

AN EVOLVING ADMINISTRATION ENVIRONMENT By Steve Freeborn, Deloitte

The author looks at the evolving requirements of administration operations, functions being brought in-house and how providers are enhancing their offerings.

Ethics & Governance

FINANCIAL ACCOUNTABILITY REGIME (FAR) DRAFT LEGISLATION

By Gabriela Pirana, QMV Legal his paper outlines the key items in the FAR legislation that require consideration by T superannuation trustees.

Communications & Marketing

CORPORATE 'GREENWASHING' By Andrew Korbel, Corrs Chambers Westgarth

Looking at the latest target for climate litigation.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Welcome note

Alex Dunnin executive director, research & compliance Rainmaker Information

The Future Fund and its cost ratio blow-out olitical pressure coming to bear on Australia’s super P funds to behave differently, raise their governance standards, invest more wisely and much more efficiently puts the Future Fund in an ideal position to show the market how it should be done. Alas, that has not come to pass. As impressive as the Future Fund is as an investment house, it has repeatedly beaten its investment objectives, it has remained in the shadows. Where it has really surprised, and disappointed, is in the cost structures it reports. For one of Australia’s largest funds management groups with immense scale and massive potential efficiencies on its side, the cost ratios it declares in its annual reports are amazingly high. It seemed to be addressing this, however, when in 2019/20 its total cost ratio that combined its direct costs with its “look-through costs” fell to 1.1%, down from 1.6% the previous year. But its 2020/21 annual report shell-shocked observers. Its total combined cost ratio exploded to 2.5% thanks to its direct costs ratio climbing almost one-third in two years, and its look-through cost ratio reaching a mesmerising 2.22%. Hopefully this blow-out was due to the quirks of public sector accounting which may distort how a fund manager – the Future Fund is after all in essence simply a public sector multi-manager – may report. But this does not appear to be the case. To quote from its own report, the look-through costs are just the belowline fees it pays for the almost 130 investment management mandates it has, akin to a super fund’s indirect cost ratio which are counted in super fund fees. “In addition to direct costs, investment management and performance fee costs incurred indirectly through investment vehicles, or where the fund is part of a comingled group of funds, are reported as look-through costs,” it says.

FS Super

Moreover, the cost of the contracts it has with investment managers actually went down 20% in 2020/21, despite its FUM increasing 20% and the Fund incurring $40 million in performance fees in 2020/21. Indeed, at face value it’s arguable the Future Fund became 40% more efficient last financial year. This leads to the view that the culprit for the cost increase is the 23% rise in its own operating costs. Part of this could be the 85 of its 200 staff that are paid more than $200,000 in annual salaries. At least there are only three getting paid more than $1 million. It also doesn’t appear to be the various other nation building funds operated by the Future Fund Management Agency adding to its costs as their direct costs are reported separately. In fact, their direct cost ratios are lower than the Future Fund’s. The Future Fund’s high-cost structure doubling in a year is a political problem because it comes so soon after government leaders were lambasting super funds for high fees and critics repeatedly telling them they should mimic the Future Fund. For these agitators who have tried to embarrass, humiliate and jaw-bone super funds, that it must be acknowledged are already working hard to cut their fees from their 1% average down to far below, the Future Fund’s latest revelations are, to say the least, awkward. At least with the Future Fund’s cost ratios being so high puts paid to the idea it should launch a MySuper product. fs

The quote

For one of Australia’s largest funds management groups with immense scale and massive potential efficiencies on its side, the cost ratios it declares in its annual reports are amazingly high.

Alex Dunnin executive director, research & compliance Rainmaker Information

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

News

www.fssuper.com.au Volume 13 Issue 04 | 2021

ASIC sues Diversa The regulator is taking Diversa Trustees to court over failing to maintain oversight of a now banned financial adviser. Diversa is the trustee for $1 billion Future Super, Mason Stevens Super, ING Super and MAP Master Super - later known as OneSuper - among other funds. ASIC has commenced civil proceedings against Diversa, alleging that between March 2019 and December 2020 it was aware that ASIC was investigating a business run by financial adviser Nizi Bhandari for contraventions of the law but did not take adequate action and continued to allow him to put clients into Diversa’s superannuation product. This allegedly saw Diversa continuing to allow the payment of fees from the super fund to Bhandari. Diversa outsourced day-to-day operations to OneVue during the period in question, according to ASIC’s filing, therefore the regulator wants OneVue held accountable for not providing proper oversight of Bhandari. It is alleged he put clients in a Diversa product just to earn fees, when doing so was not in the client’s best interests. ASIC alleges that the OneVue company group acted on behalf of Diversa and facilitated Bhandari putting clients into Diversa products via his company, The Australian Dealer Group. The regulator also alleges that Diversa did not act efficiently, honestly, and fairly because it failed to provide proper oversight of the activities of OneVue nor take appropriate action regarding the activities of The Australian Dealer Group and Bhandari involving its superannuation fund. fs

Failing Asgard super option closed down Jamie Williamson

The numbers

7.9%

The average return for Asgard Employee Super members over the last seven years.

fter failing the inaugural Your Future, Your Super performance test, Asgard Employee Super has been closed, with many members transferred to BT’s Retirement Wrap. Under the changes, members who were invested in the MySuper Lifestage option are set to be transferred to an equivalent MySuper Lifestage option within BT Super. Meanwhile, those who are currently invested in the fund’s Choice options – Asgard SMA Funds or Managed Profiles – will be transferred to the Asgard Superannuation Account (ASA). However, for those who currently hold insurance being transferred to the ASA, they will also require a BT Super account in order to maintain the insurance cover they hold, documents state. In effect, these members will go from paying for one account to paying for two. “If we open a BT Super account for your insurance, BT Super fees and costs (including insurance fees)

will also apply to your new BT Super account,” the document states. According to Rainmaker analysis, both Asgard and BT currently offer the same level of standard cover at $285,000 for a 40-year-old white collar member. While Asgard members in this cohort are currently paying $32.85 per month for this cover, they will pay slightly less ($32.20) as a BT member. While comparison for a blue-collar worker isn’t quite as simple due to varied occupation types, comparing members in the high-risk option suggests the same standard level of cover will cost an Asgard member significantly more once they join BT, rising from $52.55 per month to $78.25. Commenting, Rainmaker executive director of research Alex Dunnin said that while the transition of members in the MySuper Lifestage option is straightforward, the fact that few super funds can accommodate model portfolios at this time makes the transfer of members to ASA “is arguably one of the most complex seen”. fs

Aussies confident about retirement spending: Study Karren Vergara

Amid the uncertainties of COVID-19, Australians are far more confident about their retirement than global counterparts, a new study shows. Most retired Australians said that they would have retired at the same age even if they had known about the events of 2020 (81%), a stark difference with the global findings of 62%, the Schroders Global Investor Study 2021 reveals. While those from different parts of the world were cautious about spending their retirement savings (58%), Australians are not as worried (47%). Australians are also saving more towards their retirement than the mandated 10% that goes toward their superannuation; many are saving 15% of their income on average. Overall, the global pandemic has spurred Aussies (68%) to focus on their finances. They prioritise

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

paying off debts and their mortgage followed by purchasing a property. As with previous years, Aussie’s investment expectations remain unrealistically high. Australian investors are expecting total investment returns of 10.6% over the next five years, an increase from 8.9% last year but slightly lower than the global average of 11.3%. Schroders Australia chief executive Sam Hallinan said: “For many, the pandemic has presented an opportunity to recalibrate their personal finances and focus on financial wellbeing and, due to decreased spending on non-essentials, investors around the world have been able to save according to plan or indeed exceed their targets for savings.” In terms of post-pandemic priorities globally, property is the front runner, followed by luxury and leisure purchases. fs

FS Super

News

www.fssuper.com.au Volume 13 Issue 04 | 2021

OnePath tops Fat Cat super fund list

Super executives switching options in conflict: ASIC

Karren Vergara

OnePath has toppled AMP to become the worst-performing superannuation fund based on Stockspot’s annual ranking. In analysing some 600 multiasset investment options offered by 100 super funds, OnePath took the gold prize as the overall worst performer after taking into account fees and peer comparisons over a five-year period. AMP came in second place with the silver medal, followed by MLC, Zurich and EISS Super, which came equal third with the bronze medal. Among its worst performers, OnePath’s OptiMix Balanced, Managed Growth and Active Growth filled the top three worstperforming aggressive growth funds category. In the balanced fund category, Zurich’s Capital Stable, and OnePath’s OptiMix Conservative and Conservative performed poorly for members, returning between 2.5% and 2.7% per annum. As for the overall best performers, UniSuper and Qantas took out the gold medal. “We found that simple indexed options outperform over 90% of all super funds. Many superannuation funds hire so-called “expert” investment consultants to pick a range of active fund managers to invest their members’ retirement savings,” Stockspot said. “Unfortunately, these investment consultants and active fund managers take a nice big juicy fee from your super but rarely outperform a basic index that tracks the market. In fact, over the last five years approximately one in 10 super funds were able to beat the index fund with similar risk (after fees and taxes).” fs

FS Super

Elizabeth McArthur

The quote

What we found [instead] was often a clear failure to identify investment switching as a source of potential conflict...

SIC has released the results of surveillance into investment switching by super fund executives during market volatility at the start of the pandemic, finding possible conflicts of interest. ASIC looked at a sample of 23 trustees (including trustees of industry and retail funds) and focused on conduct during the time of increased market volatility arising from the COVID-19 pandemic. “We expected superannuation trustees to have robust conflict of interest policies that dealt adequately with investment switching, including by their directors and executives. What we found instead was often a clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter this risk,” ASIC commissioner Danielle Press said. “This is very concerning given the level of sophistication and governance required of trustees when managing millions of dollars in assets on behalf of fund members.”

The regulator found that most trustees surveilled failed to identify investment switching as a risk, resulting in a lack of controls or guidance around investment option switching. There was significant disparity among trustees in the level of engagement by their boards on the issue of conflicted investment switching by directors and executives, ASIC said. The surveillance found almost half of the trustees (10 of the 23) did not have preventative controls such as trade pre-approvals or switching blackout periods to limit executives’ ability to switch investment options. And many trustees did not have mechanisms in place at all to regularly review switching activity by their directors and executives. There was also a lack of oversight of investment switching among related parties (like a spouse or family member) within funds. ASIC acknowledged that some trustees that did not have oversight of this issue in place at the time of the surveillance had already committed to putting oversight in place going forward. fs

Unlisted asset valuation processes largely inadequate: Regulator Jamie Williamson

In reviewing decisions made by super funds in relation to unlisted assets in early 2020, APRA said it found that, “while RSE licensees generally reacted promptly to the crisis, few had robust, pre-existing frameworks for implementing, monitoring and reverting to regular valuation approaches following out-of-cycle revaluation adjustments”. In communicating its findings, APRA noted that only six RSE licensees it looked at had dedicated valuation committees in place prior to the market volatility seen early last year. These funds demonstrated stronger overall governance and oversight capabilities, the regulator said. However, instances of valuation committees headed by a fund’s chief investment officer were also identified

and where the committee had the ability to determine or influence decisions, introducing a clear potential for conflicts of interest. The regulator said funds typically demonstrated a lack of triggers for the consideration and imposition of valuation changes. There was also no monitoring processes for adjustments and no framework when it came to the alteration of valuation adjustments. Inconsistent levels of RSE licensee consideration and action for different classes of unlisted assets were also identified. It also found that often a fund’s board and management teams dedicated time to devising processes, rather than considering and challenging valuations, and that in many instances it wasn’t clear that there were adequate board-approved valuation policies to guide any actions taken by a fund. fs

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

News

www.fssuper.com.au Volume 13 Issue 04 | 2021

Rest firms up net zero pathway

Default MySuper fees drop to 1%: Rainmaker

Elizabeth McArthur

Industry fund Rest has released its roadmap to net zero and scenario analysis on the impact of climate change on investment returns. Rest said scenario analysis and stress testing of its investment portfolio has estimated members will be better off if the global community acts to keep temperature rises to well below two degrees Celsius by 2100. “Climate change poses a material financial risk to our members’ retirement savings and it’s critical that the global community takes collective action to meet the goals of the Paris Agreement,” Rest chief investment officer Andrew Lill said. The fund has set six measures to achieve a net zero carbon footprint by 2050. By the end of this year, it plans to divest from all listed companies that derive more than 10% of revenue from thermal coal, with the caveat “unless the company has a credible net zero by 2050 plan or science-based targets”. “We will advocate for an economy-wide reduction of emissions of 45% by 2030, based on 2005 levels, particularly in order to continue reducing the Weighted Average Carbon Intensity of the equities portfolio year on year,” the fund said. Rest also aims to increase investment in renewable energy and low-carbon assets to $2 billion by 2025 and aims to have directly owned property assets achieve net zero carbon emissions in operation by 2030. By 2026, the fund wants to allocate 1% of the portfolio to impact investments. fs

Jamie Williamson

The numbers

$2200

The average amount paid in fees by a super fund member in 2021.

ew analysis from Rainmaker Information shows about 60% of all MySuper products reduced their fees last financial year, with the average fees paid by members now sitting at 1%. The 13.5 million Australians with a MySuper account currently pay less than $30 billion a year in fees after a year of reductions across not-for-profit and retail super funds. In the last decade, super fees have fallen by a quarter, with about half of the action taking place in the last three years alone. Six in 10 default MySuper products reduced fees in 2020/21, with fees now averaging 1% overall. The average default MySuper product now charges 1.08%, down from 1.13% the previous year. The total expense ratio for not-forprofit and retail funds is now 1.07% and 1.08%, respectively. There is also

no difference in the total fee ratio for single strategy and lifecycle products. According to the analysis, UniSuper has the cheapest total expense ratio for a public offer product at 0.65%. This is followed by Bendigo SSSE and AMG Corporate, both on 0.70%, and Virgin Super Employer (0.73%) and QSuper Accumulation (0.74%). The top 10 is rounded out by Suncorp ESB (0.77%), AustralianSuper (0.77%), AMIST Super (0.81%), Rest (0.89%) and EISS Super (0.89%). Retail fund admin fees were 3.5 times that of not-for-profit funds in 2010. This ratio has now halved but remains at 2.0 times, he said The average Australian now pays about $2200 in super fees per annum, which is a slight increase in dollar terms. However, the average account balance has also increased, particularly after the record-breaking returns most super funds saw last year. fs

No proof of member benefit: APRA APRA has found instances of expenditure by superannuation funds that does not meet the best financial interests of members, including sponsorship deals and advertising spends with no evidence of member benefit. Releasing its review of RSE licensee marketing expenditure, it found instances of failure to actually measure and assess the benefits of expenditure on marketing activities. This included a lack of clear metrics for doing so, limited evidence of review to demonstrate the intended outcome was achieve, including benefit to members, and an overreliance on aggregate considerations of marketing expenditure impact without demonstrating specific improved outcomes for members. Going into detail, APRA said some licensees were unable to articulate the purpose of the marketing expenditure as part of annual strategic and business planning. Illustrating this, APRA said one licensee that engaged in three different sponsorships over several years could not demonstrate a link between the spend and any acquisition or retention of

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

members. Another licensee spent a significant amount over a three-year period while there was no reference to marketing or advertising in its business plan. APRA also found several instances where super funds renewed marketing and sponsorship campaigns without having reviewed the efficacy of the campaigns. A lack of clear metrics for measuring efficacy of campaigns saw funds rely on measures like changing member numbers and member engagement levels. Finally, APRA said it found instances of super funds being unable to demonstrate how additional benefits associated with sponsorships – benefits provided to super fund staff, directors or executives, such as tickets to sporting events – improved member outcomes. One super fund that sponsored a sporting team received additional benefits for directors, executives and staff members including corporate tickets but could not provide evidence to suggest this in any way benefited members. fs

FS Super

Opinion

www.fssuper.com.au Volume 13 Issue 04 | 2021

Chas Savage chief executive Ethos CRS

Make super documents more readable he 2021 readability scorecard: AusT tralian superannuation funds from Ethos CRS reports on the readability of documents produced by the largest super funds in Australia. The findings are clear and stark. Super funds still have some work to do if they are to produce readable and engaging content for fund members. In producing the scorecard, we were guided by two principles: • Fund members should be able to easily read what their funds put in writing. • Clarity helps members make informed financial decisions. In Australia, superannuation is important. Over 12 million Australians have a super account, and over four million have more than one account. The sector manages $3.3 trillion in assets, yet only 35% of Australians know the value of their super. Retail and industry super funds have a duty to be open and clear about the financial services they provide, the performance of funds they manage and the rights and responsibilities of fund members. Using the online readability application VisibleThread, we measured three attributes of text: the Flesch-Kincaid grade level, active voice, and sentence length. These metrics then generate a readability score. A readability score of 100 reflects writing that is easy to read. The average readability score of 80 documents from 20 funds was only 45.6. On average, content did not meet established benchmarks. CareSuper won the gold medal for

FS Super

producing the most readable suite of documents. Their documents scored an average of 49.4. We awarded silver medals to AustralianSuper and HESTA, which tied for second place. Their suite of documents each generated a readability score of 49.2. To improve the readability and quality of documents, we made two key recommendations. The first was that the sector should adopt the principles of plain language. The second was that funds should set and meet standards for documents and content. According to the Australian Bureau of Statistics, 44% of Australians read at or below a year 10 level. We found that the average score for grade level was 13.5, which suggests members may need tertiary qualifications to accurately interpret content and text. The Association of Superannuation Funds Australia has identified that some members are more vulnerable than others. Some are less able to engage with content. Factors that make members vulnerable include low levels of literacy and/or a non-English speaking background. The Australian Treasury has also emphasised that super funds should communicate clearly. Simple changes can improve engagement, savings and choices. Is it easy to express complex financial ideas clearly? Or to engage with a very diverse group of members? The answer clearly is no. Funds have told us that they are

The readability metrics for this article are: • Ethos CRS readability score: 140.8 • Average words per sentence: 13.8 • Active voice sentences: 98% • Grade level: 11.

The quote

Legal departments are having the final word on documents and text. Which is good … and bad.

adopting a conservative approach when producing mandated documents – product disclosure statements, financial services guides, annual reports, and company policies. Legal departments are having the final word on documents and text. Which is good … and bad. The pressing of legal professionals into a communications role is a potential consequence of interest from regulators. In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, regulators are understandably keen for funds to meet mandated requirements for content. To ensure that content complies, funds face a challenge and create a tension. Documents must comply with the law and yet must still be easily understood by members. And this is where readability comes in. Whatever the audience and whatever the benchmark, readability as a measure enables funds to assess the adequacy of content. That’s an important first step if content is to become clear. fs

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

News

www.fssuper.com.au Volume 13 Issue 04 | 2021

Merger legislation passes

APRA to weed out Choice underperformers Karren Vergara

Jamie Williamson

The legislation that will see the merger of Sunsuper and QSuper through was passed. The Superannuation (State Public Sector) (Scheme Amendment) Bill 2021 was passed by the Queensland Parliament on October 26, enabling the merger. The bill saw a relatively speedy turnaround, having only been introduced on September 1. "Subject to final regulatory and board approvals, this new fund will be a financial powerhouse for Queensland, supporting 2000 local jobs and reinforcing Queensland as a preferred investment destination," Queensland Treasurer Cameron Dick said. “New Queensland jobs are also expected to be created in the areas of investment, information technology and customer engagement as the fund grows in the future.” The passing of the legislation came just seven months after Sunsuper and QSuper announced their intentions. While the most complex super merger Australia has seen to date, the funds said the merger is on track to complete on 28 February 2022. “The merger of these funds will build on the successful legacy of both QSuper and Sunsuper and is a great result for their members and for Queensland,” Dick said. The passage of legislation comes as QSuper reinforces its commitment to climate change. Earlier this year QSuper, along with Sunsuper, was accused of lagging behind its peers when it comes to climate action. QSuper said a rebalancing of its global equities portfolio has seen a substantial reduction in carbon emissions financed by QSuper members. fs

The numbers

40%

How much more admin fees charged by Choice products are than MySuper products.

head of unveiling the inaugural Choice Product Heatmap, the prudential regulator released staggering statistics that will force superannuation trustees to lift their game and expose choice products that are failing members by charging high fees and delivering poor returns. APRA found that choice products charge 40% more in administration fees than MySuper products on a median basis using a member with a $50,000 balance. After examining 568 choice products with 43,000 investment options in total, choice products underperformed a risk-adjusted, peer-derived benchmark by more than 75 basis point compared to MySuper options. Further, performance of choice products with similar allocations to growth assets varied considerably. APRA highlights its findings in its

newly released Information paper: Choice sector performance: improving outcomes for superannuation members. Unlike MySuper products in which members defaulted into the product through employer arrangements, choice members typically either select other investment options available, join a new fund on their own accord or via an adviser. APRA executive board member Margaret Cole said historically, the choice sector’s complexity, variety and sheer volume of options have helped to shield poorer performers from scrutiny. “By shining a light on choice products that are failing to deliver quality, value-for-money outcomes, APRA expects to see the same types of improvements for the 34% of member accounts in the choice sector,” she said. fs

Colonial First State, BlackRock partner Annabelle Dickson

After failing to meet APRA’s inaugural performance test, Colonial First State (CFS) has appointed BlackRock to run strategies across its two MySuper funds. BlackRock won the mandate to provide investment services to CFS’ FirstChoice Employer Super (FCES) and Commonwealth Essential Super (CES) following a formal tender process. CFS will continue to set the investment strategy, oversee investment decisions and manage the implementation of those decisions in consultation with BlackRock. CFS will also retain its internal investment capabilities and both funds will continue as actively managed portfolios. The deal follows CFS’s failure of the Your Future, Your Super performance test in August alongside 12 other MySuper products. “It is important for our members that we act quickly to ensure that our MySuper products not only meet the benchmark test next year but outperform it in the long run,” CFS Superannuation chief executive Kelly Power said.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

“This is our top priority to make sure that both MySuper products feature in the top quartile of MySuper products available in market.” BlackRock’s head of Australasia Andrew Landman said the US$9.5 trillion asset manager is honoured to have been appointed by CFS. “Drawing on our experience in managing whole portfolios globally, BlackRock will offer the full breadth of its platform coupled with its in-depth investment expertise to support CFS’ efforts to deliver enhanced investment outcomes to its MySuper members,” Landman said. “We have a strong heritage in serving Australian superannuation entities and we recognise it is a great responsibility to help manage the retirement savings of many Australians. It speaks to our core purpose of helping more and more Australians experience financial wellbeing, and in the process, helping them retire with dignity and security.” Rainmaker Information executive director of research Alex Dunnin said the big driver for the partnership is efficiency and avoiding underperformance. fs

FS Super

News

www.fssuper.com.au Volume 13 Issue 04 | 2021

Super fund documents unreadable: Study Jamie Williamson

T AMG Super launches platform AMG Super has launched a platform that coincides with unveiling a new superannuation product. AMG Super will migrate existing members and products to the new platform in 2022 as part of a major project that will be rolled out over the next 12 months. The new product, Acclaim Super & Pension, launched on October 27. Head of distribution and partnerships Terry Constable said the Acclaim Super & Pension is a viable alternative to a selfmanaged super fund that delivers the same investment flexibility without the administrative burden. AMG chief executive Alan Hegerty said the new platform has “a unique non-custodial investment model with a choice of broker within a platform environment”. “Our product enables advisers to deliver a truly individualised portfolio without the hassle of administrating and consolidating off-platform assets,” he said. AMG’s MySuper product was one of 13 funds that failed APRA’s inaugural performance test. It joined the likes of ASGARD Employee MySuper, Australian Catholic Superannuation and Retirement Fund's LifeTime One, AvSuper Growth, BOC MySuper, Christian Super's My Ethical Super and Colonial First State's FirstChoice. fs

FS Super

The quote

Retail and industry super funds have a duty to be open and clear about the financial services they provide...

he documents produced by Australia’s largest superannuation funds have performed dismally in an analysis of readability, with an average score of 45.6 out of a possible 100. Ethos CRS analysed 80 different documents published online by the 10 largest industry funds and 10 largest retail funds. The documents looked at were the funds’ product disclosure statements, financial services guide, annual reports, and company policies. The metrics used to derive readability scores were grade level, average sentence length and use of active voice and Ethos CRS set benchmarks for each. Overall, CareSuper had the highest readability score at 49.4 out of 100. AustralianSuper and HESTA placed equal-second on 49.2. The top five were rounded out by Cbus (48.4) and Hostplus (47.7). The fund with the lowest readability score was Netwealth on 40.2. AMP, IOOF, Perpetual Select and Sunsuper were also in the bottom five.

The average score across all 20 funds was just 45.6. For grade level, the benchmark was seven – clear to anyone with a lowersecondary education. The average score across the funds was 13.5, suggesting members would need a near-tertiary level of education to understand what they’re reading. For context, just 1.2% of adult Australians read at a tertiary education level, the researcher said. Turning to sentence length, Ethos CRS considers a sentence with between 15 and 25 words per sentence as ideal. The average sentence length across all documents reviewed was 21.9 words. Finally, on average, just 68% of the sentences in the documents reviewed were written in the active voice. The benchmark is 95%. In all, industry super funds outperformed retail funds on every metric. “Retail and industry super funds have a duty to be open and clear about the financial services they provide, the performance of funds they manage, and the rights and responsibilities of fund members,” Ethos CRS said. fs

$450 super threshold bill abandoned Elizabeth McArthur

On October 27 the bill to remove the $450 per month income threshold for superannuation guarantee contributions was tabled, but is now not expected to be looked at again until after the next federal election. The bill removes the $450 per month income threshold under which employees do not have to be paid the super guarantee by their employer. “This will remove a structural discrimination that has been part of the superannuation system since 1992, improve equity in the superannuation system and increase the economic security of women in retirement,” minister for superannuation Jane Hume said at the time of the bill's introduction. The legislation was part of an omnibus bill that was listed for debate in the first week of December but wasn't reached on the last day of sitting. Women in Super expressed dismay that the bill, which would have addressed historic, legislated

economic inequality, was abandoned by the government. Two out of three of the 300,000 workers in the country earning less than $450 a month are women, the group noted. Women in Super chair Kara Keys said it was extremely disappointing that a bill with bi-partisan support that has been so long in the making would be jettisoned. “The Morrison government needs to explain why it has walked away from this uncontroversial legislation that would improve women’s lives,” Keys said. “The removal of the threshold to ensure people earning below $450 per month receive super payments was part of the first Women’s Economic security statement issued by then Minister Kelly O’Dwyer in 2018." She added that it is disappointing that a measure that has a negligible cost to the government, a potentially big impact on women and was announced over three years ago has been dropped. fs

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

News

www.fssuper.com.au Volume 13 Issue 04 | 2021

Millennials embrace SMSFs Millennials (born 1981 to 1996) represent the fastest growing segment of new SMSF accounts. This is according to new data from AUSIEX, which found during the first quarter of this financial year there was a 9.3% increase in new SMSF accounts opened compared to the previous year. Millennials represent 10% of all new accounts - double the rates seen from 2016 to 2019. Meanwhile, number of SMSF accounts owned by Gen Z investors (born 1997 to 212) has doubled in the past 12 months. AUSIEX chief executive Eric Blewitt theorised that young people are becoming more aware of super due to the regulatory focus on the industry. ”SMSFs have traditionally been the domain of those with higher fund balances and those approaching the decumulation phase," he said. "SMSFs may be appealing to younger people due to the fact they provide greater control over investments." AUSIEX's report on the trading transformation in Australia, released in June, found a 250% increase in self-directed investors under the age of 25 trading during the initial COVID lockdown in Australia through to March 2021. Blewitt suggested young people are more engaged with owning shares and investing, partly due to a number of newer platforms making trading more accessible. "All of this data is painting a picture of much greater interest from younger people in taking control of their financial goals,” he said. SMSFs account for 10% of all AUSIEX accounts, but trading is double the expected amount compared to size. fs

Sunsuper moves $20bn passive mandate Elizabeth McArthur

The numbers

$94 billion

Sunsuper's total funds under management as at October 2021.

unsuper has decided where to move its $20 billion passive investing mandate, replacing Vanguard Australia. State Street Global Advisors (SSGA) has been appointed passive investment manager for the $94 billion fund. It comes after Vanguard announced it would no longer be managing super fund mandates, as it moves to launch its own superannuation offering. SSGA will manage Sunsuper’s passive strategies in Australian Shares, International Shares – Developed Markets, International Shares – Emerging Markets, Australian Listed Property, Global Listed Property, Australian Fixed Income and Global Fixed Income. Sunsuper’s head of public markets Greg Barnes said the appointment taps SSGA’s long history and experience in managing index portfolios. “Following an extensive due diligence

process supported by an independent, external consultant, Sunsuper has appointed SSGA as the most appropriate manager for our passive investment strategies for our 1.4 million members going forward,” Barnes said. “There won’t be any change to Sunsuper’s passively managed investment options, including investment options’ objectives, asset allocations and fees.” He added that Sunsuper already has equities, fixed income, and cash mandates with SSGA. “State Street have also been a longserving transition manager and custodian for Sunsuper,” Barnes said. “SSGA has a comprehensive approach to ESG investing and integration supported by a well-resourced ESG and stewardship team. We believe that SSGA will offer world leading capability, flexibility and alignment that should enhance overall investment outcomes for our members in the future.” fs

What super funds should know about Gen Z New research from industry super fund NGS Super has revealed what Gen Z wants from a super fund and their attitudes to saving and investing. According to the research, 73% of Gen Z participants said the pandemic encouraged them to save more, 31% said it prompted them to explore investment options such as shares or cryptocurrency, and a third are now keen for advice on how to invest. However, they are deeply disengaged from their superannuation. Two in five (41%) said they didn’t care who their super is with – and only 15% want to invest more into their retirement nest egg. NGS said this indicates a disconnect between investment appetite and understanding that super is the largest investment most will have. “The pandemic has made Gen Z hungry for more financial advice and investment options, but they’re looking for short-term satisfaction and we’re increasingly seeing this generation make investment decisions based on limited information via social media,” NGS chief executive Laura Wright said.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

“Gen Z is entering the workforce in droves, and we’re facing a critical moment in time to educate and engage with Gen Zs about their super to help them build a more financially secure and sustainable future. “It might not be surprising that our Gen Z workers are focusing on shorter-term investments rather than their super, but it is concerning how much they are potentially sacrificing for their future. Super can be a very powerful tool in a young person’s investment toolkit, and it’s being disregarded.” Additionally, the research found free financial advice from parents was the most popular source of information for 56%, closely followed by friends at 36%. ‘Finfluencers’ (financial influencers) were the fifth most relied upon source of financial advice, with one in four Gen Zs sourcing their information primarily from YouTube (59.9%) and Instagram (55.6%). Almost 60% of Gen Z aren’t aware at all that they can access free advice from their fund. fs

FS Super

News

www.fssuper.com.au Volume 13 Issue 04 | 2021

Super fund merger official The boards of $7.4 billion LUCRF Super and $230 billion AustralianSuper have approved a Heads of Agreement as they continue to advance discussions towards a merger. This agreement follows the successful completion of due diligence by the two funds and their respective advisers. LUCRF Super and AustralianSuper are now targeting a completed merger before the end of the 2021/2022 financial year. The merger will be completed through a successor fund transfer deed, which will move LUCRF members over to AustralianSuper. “We want to provide our members with a quick and seamless transition to AustralianSuper,” LUCRF chief executive Charlie Donnelly said. “A successfully completed merger with AustralianSuper will provide LUCRF Super members with market leading capabilities that will provide high performing investment products and quality services.” Meanwhile, AustralianSuper chief executive Paul Schroder also welcomed the progress in merger discussions with LUCRF. “AustralianSuper is looking forward to the next stage of the process. As the fund grows with new members joining every day, we remain focused on helping all members achieve their best financial position in retirement,” Schroder said. LUCRF’s MySuper option was among the 13 funds that failed the Your Future, Your Super performance test in August. The fund confirmed it was exploring a merger with AustralianSuper in July, signing a Memorandum of Understanding. LUCRF Super, the Labor Union Cooperative Retirement Fund, was established in 1978 and has 132,000 members. fs

FS Super

Test-induced movement marginal: Data Jamie Williamson

The numbers

The proportion of member accounts in failing funds closed following the performance test results.

nly a handful of Aussies whose super fund failed the inaugural performance test have taken action and closed their accounts, according to APRA. Analysis by the prudential regulator shows that of the one million member accounts in products that failed the test, just 68,000 or 7% were closed in the two months following the results. This equates to just 4.2% of the total assets held in these products. While it’s still early days, APRA is urging workers to reassess their super arrangements as soon as possible. “The trustees of APRA-regulated superannuation funds have a legal duty to act in the best financial interests of their members, and APRA is working hard to ensure they fulfil that obligation,” APRA executive board member Margaret Cole said. “That’s not a reason for members to sit back and avoid taking steps to act in their own best financial inter-

ests by ensuring they are in a high performing super product. Research shows that the difference in outcomes between a top product and an underperforming one can amount to hundreds of thousands of dollars over a working life.” She added that there has never been more information available to members to help them make informed decisions. Since the announcement of the results, BOC Super has merged with Equip, LUCRF Super has committed to merging with AustralianSuper and VISSF is merging with Aware Super. ACSRF was planning a merger with NGS but those discussions broke down following the test results, as did plans for EISS Super to merge with TWUSUPER. Finally, as first reported by Financial Standard, the Asgard Employee Super option has been shuttered and members transferred into BT Super, another underperformer. fs

TelstraSuper unveils new product Karren Vergara

TelstraSuper has launched its version of a retirement income product that has a flexible cash allocation feature. The new Lifestyle investment options aim to generate consistent income and tax efficiencies, grow and preserve capital, and manage retirementspecific risks. The four options are Lifestyle Growth, Lifestyle Balanced, Lifestyle Moderate and Lifestyle Conservative. The options include a cash allocation feature that allows members to automatically put some of their investments to cash each month. Members can then draw a regular, consistent income from the cash option as well as transfer small amounts more frequently. TelstraSuper chief executive Chris Davies said this cash allocation feature will reduce the risk associated with drawdowns in bigger proportions during market downturns and deliver retirees a

stable income that is sustainable over the long term. The federal government recently wrapped up its consultation on the Retirement Income Covenant exposure draft legislation. The new law would see superannuation trustees design a strategy for retirees or near-retirees that maximises their retirement income over their later years. The strategy must account for several risks such as longevity, investment, inflationinflation, and any other risks that threaten the sustainability and stability of the retirement income. KPMG forecasts that over the next five years, some 1.8 million members and $300 billion in superannuation savings will move from the accumulation to decumulation phase. “This provides an opportunity, and a need, for superannuation funds to innovate and develop new products that allow retiree members to take advantage of both strong investment returns while offering downside protection and mitigating longevity risk,” he said. fs

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Event

www.fssuper.com.au Volume 13 Issue 04 | 2021

Financial Standard Retirement Income Forum 2021 his year’s event started by highT lighting how the eighth wonder of the world, namely compound interest, has been diminished and retirees must look elsewhere in their search for yield. Fidelity International cross asset investment specialist Anthony Doyle said investors have previously been able to live off the income of their diversified portfolios. “It is very difficult to simply live off the income from government bonds when they yield close to 1%,” he said. “As you would expect, the riskier asset classes are expected to generate higher total returns, but investors must withstand higher volatility to harness those returns.” Doyle pointed to emerging market debt, Australian equities, high yield corporate bonds and emerging market currency and said these may play an important role in a portfolio of diversified assets. “For me, there will be a portfolio rebalancing effect with investors moving out of cash and defensive assets into riskier asset classes to

generate a positive real yield. “The so-called TINA effect – “there is no alternative”, will dominate the investment landscape for the next decade whilst yields on defensive assets and cash remain at low levels.” Next up, Colchester Global Investors investment officer Martyn Simpson argued why fixed income is still relevant for today’s retirees and what role it plays in portfolio construction. “If you look at some of the traditional strategies you might have used for income like cash in the bank it is giving you quite poor returns. This has forced investors to look at how they can generate more income in different areas,” he said. He went on to explain that the government bond market doesn’t move very much but if investors hedge out the currency risk, they will get a reasonable return for low volatility. “It’s a similar story for investment grade, it’s giving you a higher coupon and if you hedge out the currency, then you’re also getting reasonable return for low volatility,” Simpson said. “Then you’ve got emerging

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

The quote

The controllable side is what you spend and behaviour to some extent and the more uncertain side is what is the investment, return and outcome. Julian Morrison

markets then most people tend to go unhedged in emerging markets, as it boosts your overall return.” However, Simpson believes government bonds still play an important role in a retiree’s portfolio.

Income challenge The industry is often presented with the age-old question of how retirees can maintain access to savings and invest to receive a regular and predictable income that keeps pace with inflation and without eroding capital. Magellan Asset Management head of retirement solutions and data science Paddy McCrudden said finding a solution with the existing instruments in finance is really difficult. McCrudden pointed to the retirement income goals being regular income, access to capital and low risk with existing financial instruments having

FS Super

Event

www.fssuper.com.au Volume 13 Issue 04 | 2021

“If you invest to obtain a predictable income through fixed income securities it often means investing with lower income and limited growth. Of course, if you move towards growth assets which often means accepting less predictable income and increased risk,” he said. “Insurance products like annuities can provide predictable income for an unknown future but with low rates and compromise of limited or no access to capital means they are unpopular.” McCrudden believes these are in acute conflict with the goals of retirees. He said practitioners use bucketing because it works to manage the risk of equity assets in retirement. “There are some very important hurdles that make this difficult. There is a cost to reserving too much, it is the opportunity cost of holding too much cash. The second thing is when you should be using reserves,” McCrudden said.

Avoiding complexity Commencing his session, Allan Gray investment specialist Julian Morrison quoted Albert Einstein, saying: “Everything should be made as simple as possible, but not simpler.” Morrison pointed out that the original quote was much longer and was shortened down to make it simpler, which served to emphasise his point of protecting clients by keeping it simple. “Why would you want an investment to be simple? Well, they are easy to understand easy to explain, which is important in giving advice to clients,” Morrison said. “In retirement we don’t want to struggle, and we don’t want to run out of money. Now, the controllable side is what you spend and behaviour to some extent and the more uncertain side is what is the investment, return and outcome.” Morrison pointed out that retiree investors all want the perfect outcome which is one that meets their needs and despite some investors wanting complex investments, simpler is better.

FS Super

“Generally speaking, more complexity means that there’s a chance for expectations to be perturbed and the outcome to be different to the expectations. Whereas a simple investment option generally has a more transparent look through to its outcome,” he said.

Advisers crucial to fix Generation Life chief executive Grant Hackett said there are about 500,000 Australians set to transition to retirement over the next few years. “That is a great opportunity as a financial adviser. We know going through retirement there are many considerations and so much complexity going into that space,” Hackett said. An important thing to consider, he said, is that we want people confidently spending in the early and active years of retirement and removing the emotional stress and concern that they’re going to run out of money. “The big misunderstanding is that a lot of people think that they would just live off the income that would be deducted from superannuation when in fact people obviously live off not only the income, but the capital,” Hackett said. “The evidence indicates that retirees tend to hold on to their assets and leave significant bequests, even though surveys suggest people do not prioritise leaving a bequest.” These factors, he said, point to the importance of good financial advice in this life stage. Following on from this, a panel discussed whether new products are embraced by clients or if they are relying on tried and tested products. FMD Financial senior financial adviser Nicola Beswick said a lot of clients are using an account-based pension product in retirement simply because it is so commonly used by advisers. “It is commonplace from an adviser perspective and product perspective because it is a way that we can reach someone’s goals by replacing employment income and getting money to live on through those retirement years,” Beswick said.

The quote

Indeed the thing that matters most to people about their finances in retirement is having a regular, constant income that meets essential spending needs. Paddy McCrudden

“The different types of products that are out there very much tie into what someone wants to do from a goals and objectives perspective.” Wollemi Wealth Management financial adviser and aged care specialist Mark Hoy agreed and said he uses account-based pension products with his clients because it is in the superannuation environment and his clients understand it. “People understand drawing down an income which is then tax free if they are over 60 years old. The account-based pension does service that need for clients,” Hoy said. However, he expects these products to evolve into something that provides a guaranteed income, similar to an annuity. Meanwhile, Challenger head of technical services Andrew Lowe said the firm is seeing advisers recommending different types of income streams for different clients. “Some of the drivers of those are particular needs or risks the clients are exposed to. For example, the prospect of a client living for quite a long time in retirement in an uncertain market environment can possibly raise longevity risk,” Lowe said. He explained that for a lot of clients, that risk means they are dependent on the Age Pension alone for their income which can work for some, but others don’t want that. “I think you’ll see specifically products that are designed to address those sorts of risks. I think you’ll see others that are specifically designed to address market risks,” Lowe said. “It is really interesting space, in terms of product development, and not for product development sake, but specifically to address real risks that clients are exposed to today.” fs

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Cover story

www.fssuper.com.au Volume 13 Issue 04 | 2021

TAKING ACTION Heather Dawson & Chantal Walker, Active Super

After more than two decades as Local Government Super, a monumental rebrand has breathed new life into the $14 billion industry fund. Jamie Williamson writes.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

FS Super

Cover story

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Cover story

ocal Super. That was one of the names bandied about in the initial stages of Local Government Super’s mammoth rebrand efforts. To those leading the project, it was a sure-fire winner. Not only did it play on the warm and fuzzy feelings associated with community, but it also removed the word the $14 billion superannuation fund felt was getting in the way of growth; people thought they had to work in a government role to join, while existing members assumed they had to find their retirement savings a new home once they quit public service. The name was perfect, right? “Wrong,” chief digital and marketing officer Chantal Walker laughs. "When researching names with existing members, the obvious one, Local Super, didn’t make the cut as members want their super to be invested globally, not just in New South Wales or in Australia. Local to them, is the corner store.” What Walker’s referring to is the mountains of ethnographic research the fund undertook in the months leading up to its May 2021 rebrand. Ethnographic research is a qualitative method where researchers observe and/or interact with study participants in their day-to-day lives. A branch of anthropology, ethnography seeks to understand how people live their lives and why. Engaging its members, the fund gave participants a task to complete every day for a week, designed to shed light on what they were dealing with at any given point in time and where finances fit into their lives. “At the end of the day, brands don’t exist. They only exist between your ears; it’s all about perception,” Walker says.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

“We had to understand people’s perception and the psychology behind their decision making, because the decision to rebrand is not one that’s made lightly.” Reinforcing this point is the fact that this wasn’t the first time Local Government Super had considered rebranding – but it was the first time all the relevant stakeholders had been a part of the project. “One of the things that made this work so enjoyable is the engagement with all the different stakeholders and audiences, and one of the things that was so fun for our whole organisation was the engagement with the teams, all the people that have worked with the fund and all the members,” chief experience officer Heather Dawson says. “Their excitement for being on the journey and then the excitement when we launched it... I’ll never forget it.”

Two worlds collide Collaborating to bring Active Super to life, Dawson and Walker’s backgrounds couldn’t be more different. A native of the US Midwest, Dawson got her start in financial services in the early 1990s working in business development and 401k. “My background wasn’t boardrooms, it was standing on factory floors and loading docks at 5am before the guys went out for their runs, yelling at them, ‘Hey, do you want to learn about 401k?’,” she laughs. In 2005 she relocated to Sydney when she was appointed managing director of Russell Investments Master Trust. In the three years she held the role, the team introduced lifecycle retirement funds to the Australian superannuation landscape; something Dawson says was a slow burn. But now these products represent almost half of the MySuper market, according to Rainmaker Information. “I remember standing in front of a big crowd of journalists unveiling the first true Australian lifecycle funds, and I remember the journalists and also the financial advice community saying, ‘This will never

FS Super

Cover story

www.fssuper.com.au Volume 13 Issue 04 | 2021

work, 70/30 balanced – that’s how you invest for retirement’,” she recalls. “Unfortunately member take up was low as we didn’t make it the default, but one of the things I’m so proud of is that today so many funds use lifecycle as the default, Active Super included.” Senior roles at the Mercer Super Trust and Morningstar followed before finally, in November 2020, she landed her current role. At the same time, Walker had just been recruited to lead Active Super's marketing efforts and online experience, with a specific focus on driving the rebrand. Hailing from South Africa, Walker has also worked across various geographies, aiding in the evolution of some of the world’s biggest brands. Yet, she’d never worked in superannuation or the retirement space. “The super industry is quite funny because it’s full of really smart people who tend to find their groove and they might whiz around within the industry, but they don’t ever really leave it,” she observes. “Marketers are a little more promiscuous. They find their groove but it’s generally much broader than a single industry.” For Walker, she found hers working with companies that provide a service; Vodafone, Telstra, Foxtel, and Qantas among them. “They all provide intangible experiences but it's about giving people what they want and in a channel that works for them – and that’s what superannuation needs to be about,” she says. “I am constantly telling our team that we need to look at companies who treat you like they know you and give you things you didn’t even know you needed, but once you’ve got it you don’t want to give it up.” Citing Netflix as an example, “it thinks for you” and that’s what the super industry should be looking to emulate, Walker believes. Supporting this, Dawson points out much of the pressure being felt in the industry at present is because competition has never been so rife. “Australia has a compulsory system, so we’ve had Superannuation Guarantee contributions coming in for nearly three decades. But now, we as super funds have to really compete for the first time,” she says. “That means we need to be constantly looking at ways to make it easy for our members to do business with us.” For whatever reason, marketers and experience leads aren’t often credited with improving people’s financial literacy but, charged with getting the word of Active Super out there, that’s exactly what Dawson and Walker are doing. With roles that revolve around engagement and education, they’re powerful influencers – just not the kind the world is now used to. Reflecting on her early days, travelling the US, hosting 401k participant meetings at 22-years-old, Daw-

FS Super

son says: “It was the best job I ever had, and it’s been my north star ever since. You talk about financial literacy or just educating and helping people take small steps, the light in their eyes, the standing a little bit taller when they decide to take a positive step – it’s never left me.” “Money scares a lot of us so we back away... I really believe we’re here to help people build confidence to stay the course.”

What’s in a name? With the name Local Government Super posing so many issues for the fund in terms of growth, finding the right name was at the top of Dawson and Walker’s list of priorities. In addition to Local Super, the team behind the rebrand tested several other possible monikers with members and other stakeholders. Thinking about the values of the fund, Members First Super was considered.

At the end of the day, brands don’t exist. They only exist between your ears; it’s all about perception. Chantal Walker

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Cover story

“We thought that was great,” Walker recalls. “But it’s actually just tickets to the game – it’s not a name.” Eventually, Active Super won out. In addition to the advantage of being at the top of any alphabetical list of super funds, it’s also a name that reflects what the fund and its membership is about, Walker says. The super fund has an active investment style, and its members are actively engaged, certainly more so than many other funds’; last financial year 36% of Active Super’s members made additional contributions to their super, at some point in their membership 33% have made an active investment choice other than MySuper and the open rates on member communications consistently exceed 60%. There is also a strong focus on being actively involved with members, which Dawson says is part of the fund’s heritage and is never going to change. “We will evolve in the digital space but not lose our personal touch. We have With this brand a contact centre team that is so loved by our members," she explains. and the positioning “That’s really important to our heritage of Active Super, and it’s important that our service model it is very much builds off of that heritage of personalised finding that duality service.” of performance But it isn’t just the call centre staff that and doing the hear member feedback. Each week a different executive is tasked with bringing right thing for the the ‘voice of the member’ to the commitgreater good. tee meeting, sharing a story about a memHeather Dawson ber from the previous week. “It helps us to learn the good things that we do and where we’re letting our members down and we need to lift our game... Now it’s spread to our financial planning team who do it in their meetings,” Dawson says. “That just helps us make sure we never forget who we’re here to serve.”

The art of the rebrand It’s fair to say that most super fund branding is boring. And not only is it boring, but it’s generic; a website for Super Fund A could just as well be a website for Super Fund B. But there is no mistaking Active Super’s imagery. Developed by a Sydney-based illustrator within creative agency Principals, variations of the bright and fun concept are plastered across Active Super’s website. The fund has hundreds of different images it uses across the site and its member communications, ranging from basic designs to intricate illustrations. The artwork is uniquely Australian, with luscious green leaves and trees, black cockatoos and king parrots evoking thoughts of the bush, while also reflecting the fund’s strong commitment to ESG investing, with colourful flora and images of serenely happy men and wom-

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

en running through hills, surrounded by wind turbines. And not only does Active Super own the copyright to the imagery, but in doing so, it’s saving members money. “It’s incredibly cost-efficient. Thinking about members’ best financial interest, this is the best way to do it versus having to do a photo shoot every time and pay for hair, makeup, a photographer and royalties and so on,” Walker says. Where you do see shoots of this kind, for instance in the annual report, the people photographed are real Active Super members. “The first photo shoot of members we did was prelockdown [in Sydney] and we put the call out to members, and we were all sitting in the office and response after response started coming through – we got about 200 responses within an hour or two,” Dawson recalls.

Investing for the future At a time when every institutional investor is jumping on the ESG bandwagon, whether authentically or otherwise, Dawson and Walker saw the need to reinforce Active Super’s long-held but perhaps poorly promoted ESG credentials. Back in 2001 the fund became the first Australian super fund to exclude tobacco from its investment portfolio and in 2009 it was among the first investors to recognise the risk climate change poses. It is one of only four super funds to have all its products certified as ethical by the Responsible Investment Association Australasia and was the first super fund with a diversified property portfolio to achieve a ‘6 Star Green Star – Performance’ rating from the Green Building Council of Australia. Further, it became a signatory to the Principles of Responsible Investment in 2007 and has been certified carbon neutral by Climate Active for the past two years, one of only five Australian funds to achieve this. “With this brand and the positioning of Active Super, it is very much finding that duality of performance and doing the right thing for the greater good,” Dawson says. “Our super fund was sort of the best kept secret when it came to ESG... Finding a voice for ESG and leadership was incredibly important in the brand, and you see that coming through in the imagery, the name and the way we talk in very human terms about what it means for members and for the greater good.” Throughout the process, Walker adds: “We’d say, ‘Investment returns, that’s good – but investment returns that don’t harm the environment? That’s greater good’.” “It takes it to that higher order, and it’s about the E and the S and the G. I think too often people can focus just on the E and they forget the S and the G, but the G is super important because it’s the G that often drives the E and the S.” And again, it’s about being active in this space. “The team often says, ‘We’re not activists, we’re active investors’; active in helping companies make change,” Dawson says.

FS Super

Cover story

Measuring success The key metric Active Super looks to in measuring the impact of the rebrand is net member growth. The fund has net member growth “for the first time in years”, Walker says, with people joining from across the country. “We have turned that around. Rather than negative net member growth, we have positive net member growth year on year and that means two things – it’s members coming in but also less members leaving,” she explains. The fund also tracks brand awareness and brand perception, conducting a survey in April ahead of the rebrand and again a few months after. While the results of the second survey aren’t finalised yet, the initial data collection showed Local Government Super had “zero brand awareness”. “I think it was about 2%, and that’s being generous... so I’m really going to be fascinated to see what we’ve shifted the dial on,” Walker says. Over the long-term, another major metric will be seeing how the fund can diversify its membership and increase member engagement and financial literacy, specifically those of different backgrounds. Through software, Active Super can predict with about 85% certainty the ethnic origin of its members, looking at first name, last name and address. With this information, Active Super is able to cater its marketing and communications to specific local government areas. "Our base today is not as broad as it could be and we are working to expand it and increase engagement with Australians from all different backgrounds. We recognise that there’s a huge opportunity for growth in those pockets of diversity in the community,” Walker says. But the Active Super team is diverse, with 16 of the 100 people

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

working at the fund being of a different cultural background and 19 different languages spoken. The team has also had expert cultural training to better understand where a member might be coming from or how to approach any given situation. “We want to make sure as we serve a more diverse membership that we actually bring forth the diversity within our own organisation,” Dawson says. “We’re just at the beginning of this journey but I think it’s a wonderful opportunity for all super funds to learn to serve this multicultural, diverse society that we have in Australia, and to reach out, be human, be respectful, and help people really get active with their super.” As immigrants themselves, Dawson and Walker are both passionate about seeing this strategy succeed but they’re also cognisant of the learning curve they’re on. “It may not work... I keep saying to Phil [Stockwell, Active Super’s chief executive], kind of hedging my bets, ‘I think this will work’. He and the executive team have adopted the whole ‘test and learn’, agile approach... I’m nothing special, but I think if you can try stuff, test it, learn, pivot, adapt and collaborate, that’s the best way to be,” Walker says. Regardless, she’s calling the rebrand a success. “But I’m bullish,” she says. Building on that, Dawson reinforces the competitive environment Active Super is operating in. “We know that for every super fund we have to keep getting better at what we do. Not only in terms of member experience, but performance and fees too,” she says. “We have a comprehensive strategy for growth for the next five years, but the brand is a key part of that... The brand’s success is a wonderful start for us on that.” fs

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Compliance:

The super fund performance test has landed By Rainmaker Information

Compliance

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The inaugural performance test conducted by APRA upon all MySuper products, found 13 products failed to meet set objective benchmarks. This created considerable market controversy over both the test requirements and implications for funds whose products are now ‘on notice’. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

The super fund performance test has landed Was its inaugural mission a success?

Rainmaker Information

he Treasury Laws Amendment (Your Future, Your Super) Act 2021 (YFYS) that came into effect on 1 July 2021 requires the superannuation industry to improve its efficiency, transparency and accountability. Under the YFYS reforms, the Australian Prudential Regulation Authority (APRA) is required to conduct and administer an annual performance test, initially applied only to MySuper products from 1 July 2021, but to be rolled out on all trustee-directed products (TDPs) from 1 July 2022. The assessment under the performance test, in conjunction with the Australian Taxation Office’s YourSuper comparison tool, is intended to hold Registrable Superannuation Entities’ (RSE) licensees to account for underperformance through greater transparency and increased consequences. This serves to highlight that it is erroneous to refer to the performance test as the ‘APRA performance test’. The test was designed by Treasury, not APRA, and published within the federal government’s (government) Budget Papers in 2020, a point APRA chair Wayne Byres reminded the superannuation sector

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

of in testimony to parliament’s House Economics Committee. APRA’s role is simply to administer the test.

Why was the performance test introduced? The Productivity Commission in its Superannuation: Assessing Efficiency and Competitiveness Inquiry Report of December 2018, identified what it considered as a structural flaw in Australia’s superannuation system in the form of entrenched underperforming superannuation products. In its response to the Productivity Commission’s findings and recommendations, the government through its YFYS legislation imposed a requirement upon APRA to conduct an annual performance test for ‘Part 6A products’ as defined in section 60G of the Superannuation Industry (Supervision) Act 1993. These include MySuper products and choice or TDPs where the trustee determines the product’s exposure to specific sectors and the underlying asset allocation but excludes defined benefit and pension products. Interestingly, APRA has been assessing superannuation fund performance for many years and has been publishing information on the performance of MySuper products since 2014. This fact has led to some thinking that the rationale behind the introduction of

FS Super

Compliance

www.fssuper.com.au Volume 13 Issue 04 | 2021

this performance test is to prompt APRA to be more proactive by applying its existing regulatory powers in a more aggressive and openly public manner to promote member awareness of superannuation fund performance. The new performance test is also in addition to an existing requirement for trustees of APRA-regulated superannuation funds to conduct a self-assessed annual outcome assessment for each of their MySuper and choice products.

Performance test methodology The methodology for the performance test is outlined in the Exposure Draft to the Treasury Laws Amendment (Your Future, Your Super – Addressing Underperformance in Superannuation) Regulations 2021. The performance test is a two-part test that involves an assessment of: • investment performance for each asset class relative to a benchmark portfolio created using the product’s strategic asset allocation • administration fees charged in the last financial year relative to the median for the category of product, irrespective of what administration fees were charged through the period. Initially for 2021, investment performance was assessed over a seven-year performance period. This extends to an eight-year period from 2022. If a product underperforms the combined test by more than 0.5% p.a., the product is deemed to have failed the performance test. Trustees of superannuation products that have failed the annual performance test must notify all beneficiaries/members that hold that product of the result within 28 days of receiving notification of the test results from APRA. When a product fails this performance test in two consecutive years, the RSE licensee will be prohibited from accepting new beneficiaries into that product. However, individuals already holding an interest in the product, at the time of this event, can remain invested in the product and make additional contributions if they wish.

Looking in more detail at the elements of the requirements in the preceding list reveals the following: • Actual returns, net of investment and administration fees, are not product returns but rather returns within each asset class. This means APRA reviews each product’s asset allocation while also relying on the strategic, not actual, asset allocation for each product. • Fees used in the comparison are not actual fees charged each year, but instead APRA assumes that the fees that applied in 2020/21 have applied across every year. This assumption provides an artificial and variable boost to the net actual returns recorded for many of the products, as fees have generally been falling across the seven-year timeframe, particularly for some formerly high-fee retail products. • Asset class returns of each product are compared to returns from set benchmarks, as shown in Table 1, that are specified in the legislation. • If a product scores an asset-weighted 0.5% p.a. below the benchmark, it failed the test.

The quote

If a product underperforms the combined test by more than 0.5% p.a., the product is deemed to have failed the performance test.

Inaugural test results APRA assessed 76 MySuper products with at least five years of performance history against the objective benchmark. MySuper products established within the last five years were deemed to have automatically passed the performance test. But note, there is confusion regarding how APRA treated MySuper products that were substantially restructured through the period, for instance, those redesigned from a singlestrategy product to a lifecycle product.

Table 1. YourSuper performance test indices specified in the YFYS regulations

The performance test in practice For the initial performance test conducted in mid-2021, a product passed the test provided its ‘actual return’ minus the ‘benchmark return’ is greater than or equal to 0.5% p.a. on average over a seven-year period. The terms ‘actual return’ and ‘benchmark return’ are defined as follows: • Actual return is the annualised net returns the product actually achieved, where net returns are the net investment return including relevant administration fees and expenses. • Benchmark return involves the construction of an annualised benchmark net return that is tailored for each product with respect to its strategic asset allocation.

FS Super

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Compliance

www.fssuper.com.au Volume 13 Issue 04 | 2021

APRA’s dashboard showing some key facts on the MySuper landscape along with the results from its inaugural performance test are provided in Table 2. Table 2 shows that 13 products failed to meet the objective benchmark and, when combined, these underperforming products held approximately $56 billion in assets owned through more than one million member accounts. A listing of the specific MySuper products that failed the test along with their associated RSE are shown in Table 3 on the following page. Eight retail funds and five industry funds now find themselves in APRA’s sights due to underperforming the MySuper product benchmark. Somewhat surprisingly, of the 13 MySuper products that failed the inaugural performance test, all but ASGARD Employee MySuper and BOC MySuper are offered by AAA-rated superannuation funds.

Table 2. MySuper performance test outcomes

Source: APRA

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

Compliance

www.fssuper.com.au Volume 13 Issue 04 | 2021

Immediate expectations placed on RSE licensees Since releasing the performance test results, APRA has intensified its supervision of trustees offering MySuper products that failed the test by requiring them to: • identify the cause(s) of underperformance and develop and implement a plan to rectify their underperformance • assess the potential implications of failing the test on the fund and the sustainability of business operations • develop a contingency plan if it becomes necessary in the best interests of its members to close the product and transfer members to another fund or product or exit the industry. APRA executive board member Margaret Cole noted that 84% of products passed the performance test, “however APRA remains concerned about those members in products that failed”. She then reinforced its message by stating: Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year's test or start planning to transfer their members to a fund that can deliver better outcomes for them. Rainmaker has commented that a performance test with an 84% pass rate is a very peculiar one. Moreover, the regulator has declined to disclose to superannuation funds with MySuper products that failed the test, where they failed and by how much, claiming that the legislation does not require it to do so. This raises the question as to whether the legislation prohibits it. In Rainmaker’s view, the complexity, controversy of the test and its wide-ranging impacts may make the regulator cautious in this respect.

The quote

Basing a performance test purely on comparative returns throws out most of the information gained in the process of achieving those returns. If the overall returns of the fund happen to incorporate infrequent months of exceptional returns, and thereby passes the performance test, is that good for members?

Do the test results pass the café test? Rainmaker’s analysis of the performance of MySuper products highlighted that a number of the funds that failed the inaugural test have in fact delivered higher seven-year returns than others that passed the performance test. This, in Rainmaker’s view, attracts speculation not so much in relation to which products failed the test, but regarding products that passed the test. Further, some of the MySuper products that failed the test have been assessed by Rainmaker to now be among the top-performing products in the market. This highlights that the performance test, while an important initiative, does have some flaws and inconsistencies. Rainmaker Information’s head of investment research John Dyall exposed a few serious flaws that he considers could lead to unintended consequences for superannuation fund trustees and for their members. First up, because the test compares the returns from a fund’s MySuper option with a series of financial market indices, the best way of not failing the test is to hug the benchmark.

FS Super

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Compliance

Table 3: MySuper products that failed the initial performance test

Source: APRA

However, this might not be in the best interests of members as Dyall explained: Returns are one aspect of performance. The other aspect is risk. Risk is not a well understood concept, even now. In terms of performance, it incorporates such things as volatility, downside volatility, or the risk of losing capital, and other measures that all go towards the shape of the distribution of returns. Basing a performance test purely on comparative returns throws out most of the information gained in the process of achieving those returns. If the overall returns of the fund happen to incorporate infrequent months of exceptional returns, and thereby passes the performance test, is that good for members? Another flaw in the performance test, in Dyall’s view, is the effect benchmarking can have on trustee behaviour: Benchmark hugging also leads to behavioural changes on the part of the trustees of the superannuation funds. The risk is that fear of failure becomes a greater driving force than ambition to act in the best interests of members. Finally, Dyall saw deficiencies in the appropriateness of the selected benchmarks that generate the returns against which the returns of product options are measured. The APRA methodology … requires splits between socalled growth assets and so-called defensive assets. Where there is some uncertainty between whether an asset is growth or defensive, there is a percentage split between the two. At no stage (that I could find) was there an explanation of what “growth” or “defensive” actually meant. In a similar vein, Australian Catholic Superannuation and Retirement Fund (ACSRF) chief executive Greg Cantor stated: You may be a top performing fund by way of investment

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

returns and may still fail the test. It’s all about beating a statutory benchmark. Reinforcing concerns raised by Rainmaker, the ACSRF has also drawn attention to the fact that the performance test does not recognise changes made by trustees to their product options during the last seven years to improve future performance, and yet this should be considered in any proper assessment. CareSuper chief executive Julie Lander, when recently asked about the YFYS regulations, also noted the challenge presented by the new APRA performance test, despite the fact that the fund was well ahead of the benchmark: I want to be clear that we support the introduction and implementation of fair and appropriate performance tests as a way of protecting the best financial interests of all super fund members but that the way it has been introduced will lead to outcomes inappropriately favouring some funds over others, especially the way operational costs have been included. I also wonder whether it will achieve what it sets out to do. The first priority of funds is to deliver riskadjusted returns over the long term and through different investment cycles that produce a real return. That should not be lost. The fact that the test is retrospective and over a period when funds did not know about this test is also interesting, and why it could be considered as harsh. Other market commentary has highlighted the absence of any mention of insurance, including the availability, or not, of certain types of cover within a fund. This would seem to be another flaw in assessing the performance of products from the sole perspective of returns. For some members, losing access to insurance cover that meets their specific needs purely as a result of exiting a product because it failed the APRA performance test would be unlikely to be in their best interests.

What actions may superannuation funds take in response? Superannuation trustees are now being presented with an interesting challenge: While superannuation is a long-term game, returns are being judged on shorterterm performance. This may lead to superannuation trustees to become more risk-averse, and turn away from long term or more-risky investments such as alternative investments or private equity, where returns may only be expected in the long term. In addition, it will be interesting to see the impact on superannuation funds that invest directly in infrastructure or private equity. Trustees may turn to more passive asset management strategies that track the relevant benchmark(s) chosen by APRA. At an individual fund level, the more immediate responses from trustees will be based upon many of the following considerations, and these will differ depending upon their outcome in the initial performance test.

FS Super

Compliance

www.fssuper.com.au Volume 13 Issue 04 | 2021

The quote

Superannuation trustees are now being presented with an interesting challenge: while superannuation is a long-term game, returns are being judged on shorterterm performance. This may lead to superannuation trustees to become more risk-averse.

For funds with products that failed the test:

• prioritise returns to improve performance • determine if it is possible for their product(s) to improve returns so much in one year to boost its eight-year returns by enough to pass • consider if they would be able to stay in business and pass the test in the third year if they failed the test for two years • opt to commence the search for suitable merger partner or, alternatively, close the business. For a small number of funds, presumably in anticipation of a poor test result, pre-emptive action was taken, with Federal Treasurer Josh Frydenberg noting at the release of the test results that eight products had already exited the market since the government announced the performance test. For funds with products that passed the test:

• conclude that the performance test does not reward insightful asset allocation and look to shift to a simpler asset mix that will make it easier to pass the test • direct more money into indexing that would lead to lower fees • become more cautious about investing into unlisted asset classes like infrastructure, property, development capital and hedge funds • realign their asset allocations to match APRA’s performance test benchmarks—this approach has already been announced by Rest Superannuation following the release of the performance test results • shy away from investing into nationally significant projects or from following ESG philosophies

FS Super

unless there is hard financial and demonstrable value-add • place considerable pressure on their investment managers and asset consultants and as a result internal funds management should increase.

Has the inaugural mission been accomplished? Considered opinion would most likely be that the jury is still out. If the goal is to provide a test simple enough for members to understand and have APRA appear very much ‘on the front foot’ in terms of monitoring superannuation fund performance, by holding RSE licensees to account for underperformance with a significantly increased set of consequences, then it could be considered a successful first mission. On the other hand, if the goal is to help ensure that all members of superannuation funds are provided with the best possible future outcome for their retirement savings, then a claim of ‘mission accomplished’ remains very much a matter for conjecture. However, regardless of concerns with the performance test among superannuation industry participants, the fact remains the structure of the test is unlikely to change for the foreseeable future. Its formulae and benchmarks are defined in legislation, and changing it, even in minor ways, will require new legislation. Irrespective of which political party wins the 2022 federal election, the chances of amendments to this test becoming a priority for the new parliament, in Rainmaker’s view, is at best remote. fs

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Compliance

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. The inaugural super fund performance test was applied to: a) Part 6A products only b) MySuper products only c) MySuper and trustee-directed products d) All superannuation products with at least five years of performance 2. T o pass the inaugural performance test conducted in 2021, a superannuation product’s actual return must have: a) matched or exceeded the relevant benchmark return by 0.7% p.a. on average, over a five-year period b) matched or exceeded its benchmark return and reduced administration fees across a seven-year period c) matched or exceeded the relevant benchmark return by 0.5% p.a. on average over a timeframe of seven years d) exceeded the relevant benchmark return by 0.5% p.a. on average over a seven-year period 3. A ccording to Rainmaker’s analysis of the test results which aspect of performance is potentially overlooked? a) Risk b) Asset allocation c) Member timeframes d) Administration fees and charges

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

4. W hat does APRA expect from trustees of RSE’s offering products that failed the inaugural performance test? a) To identify reasons for, and rectify causes of, the underperformance b) Assess the implications of failing the test upon business sustainability c) Develop a contingency plan to assist members if the best course of action is to close the product d) All of the above 5. T he percentage of assets held by underperforming products in the inaugural performance test was 6%. a) True b) False 6. Eleven of the 13 MySuper products that failed the performance test were offered by AAA-rated superannuation funds. a) True b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Investment:

Investing in the global energy transition

By Tim Humphreys, Ausbil Investment Management

Downsizer contributions revisited

By Minh Ly, Challenger

Investment

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper investigates and compares investment in renewable energy companies versus regulated utilities as alternative ways for investors to take advantage of opportunities as the world transitions from fossil fuels to cleaner and renewable sources of energy. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Investing in the global energy transition

R Tim Humphreys

enewable energy companies are the typical ‘go-to’ exposure for the thematic of energy transition but can carry higher risk. An alternative way to play this transition is through the regulated utilities sector. Opportunity lies in the fact that utilities have been overlooked by markets, so far, as an essential part of the transition to renewable energy. This is about to change.

Transitioning from fossil fuels to cleaner and renewable energy The world has long relied upon fossil fuels. Now, organisations like the United Nations have set targets for the transition to new types of cleaner and renewable energies, including wind, solar, geothermal, hydro-electric, hydrogen gas, and carbon capture utilisation and storage (CCUS), among the many examples. The Paris Agreement seeks net zero carbon emissions by 2050. More and more governments are signing up to a ‘net zero by 2050’ target. For investors, this means they are still at an early stage in the development of renewables, and in the transition towards renewable energy dominated economies, and thus the opportunity to participate is rich with options.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

One of the challenges in investing in the energy transition is that, in many instances, renewable energy companies do not reach the benchmark for the Ausbil Global Essential Infrastructure Fund, even if they are positively leveraged to the energy transition. Essential infrastructure is made up of the assets that are essential for the basic functioning of a society, and typically generate stable regulated or contracted cash flows through the economic cycle. The flipside to this is that focusing on both essential infrastructure and leverage to the energy transition is likely to yield a portfolio that generates a superior risk-adjusted return, with less downside risk, and more stable investment cash flows. The key broad factors that are considered in terms of whether a renewable energy company meets Ausbil’s essential infrastructure criteria include the following: • the remaining duration of their power sale contracts (or purchase power agreements ‘PPA’) and how this is expected to evolve over time • the cash-flow certainty associated with the existing PPA, and the term of this certainty • the impact of any exposure to merchant electricity pricing (that is, renewable energy output not sold under long-term contracts, and exposed to volatile competitive prices) and how this will evolve over time • the renewable energy mix between technologies

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

• fundamental gearing and balance sheet metrics over time. The most significant risk with investing in renewable energy companies is merchant, or wholesale electricity, pricing risk which also ties back to the contract/PPA tenure, and pricing applicable to each asset and the company overall. Nearly all renewable energy projects or companies carry a level of merchant pricing risk that depends on the percentage of output contracted and how this evolves over time. Typically, companies with meaningful merchant price risk—20% or more of their revenue—and with an insufficiently long weighted average contract/ PPA duration of less than 10 years, do not display the cash flow certainty to qualify as essential infrastructure under Ausbil’s strict definitions. The challenge with merchant price risk is the difficulty and complexity in forecasting electricity prices, both in the short and longer term. Long-term electricity prices should converge towards long-run marginal costs and therefore are a function of expectations of future fuel costs—zero for renewables, capital costs, cost of capital, capacity factors and operating costs for different types of electricity generation. This, by definition, is influenced by technological trends that are inherently difficult to forecast. Also, renewable energy assets, particularly solar, can fall victim to their success. Solar plants located in a similar region or even the same country tend to generate electricity in high correlation to each other. As a result, when the sun shines it shines for all solar producers at once, impacting realised pricing outcomes. This in turn can mean competitive electricity price outcomes increasingly displaying ‘duck curve’ characteristics from low prices during daylight hours to higher prices at other times. This means that realised price outcomes for solar plants can be materially below average market prices, affecting their projected returns. Batteries are increasingly being paired with solar to store this energy for use when it is of higher value. In the longer term, however, there is an emerging view that green hydrogen could potentially become a significant new source of demand for renewable energy by, in effect, powering the electrolysers to produce hydrogen with renewable energy particularly when it is otherwise of low value. The resultant green hydrogen could be used to decarbonise parts of the economy, for example industrial feedstock and hydrogen powered vehicles, but also act as a source of storage for power markets. While being excited by the potential of green hydrogen it should be acknowledged that its economics are highly uncertain at this early stage of commercialisation. For infrastructure investors longer term PPA contracts provide a high level of certainty of cash flows such that the tail risk, after the initial contracts expire, is less meaningful to achieving an overall acceptable risk-adjusted return. But for these reasons, it is challenging for infrastructure investors to invest in these types of assets, which have exposure to competitive price outcomes or shorter term PPAs. There are a number of investment opportunities in re-

FS Super

Investment

newable energy companies globally and the conviction around these opportunities has only increased during 2021. Despite improving fundamentals, the share prices of many renewable energy companies globally have been under pressure, creating attractive opportunities for long-term investors. Ausbil’s most favoured renewable energy companies are NextEra Energy and Ørsted, each global leaders in renewables in their fields of US onshore wind and solar, and global offshore wind, respectively. Both these companies are in unparalleled competitive positions to grow strongly, successfully execute and deliver attractive risk-adjusted returns for their shareholders. But, as mentioned earlier, there is an additional alternative way to get exposure to this exciting investment opportunity, via regulated utilities. Put simply, regulated utilities, both electric and gas, are critical to the decarbonisation effort. The specific roles of regulated utilities in decarbonisation can take many forms depending on the nature of the business and its specific objectives and investment plans. Fundamentally, regulated utilities are critical enablers of decarbonisation with electric utilities having a more significant and unambiguous role than their gas counterparts. The main role of regulated electric utilities is grid investment, both at the distribution/low voltage level and the transmission/high voltage level. These investments are required to: • support the significant investment in renewable energy and allow that energy to be efficiently delivered to customers • ensure grid stability given much higher percentages of intermittent renewable energy • facilitate efforts to decarbonise the transport sector and support the increased uptake of electric vehicles • encourage more efficient use of electricity, and encouraging energy efficiency, for example through the deployment of advanced metering technology • increase grid resiliency to the increasing prevalence of extreme weather events from climate change • increase the efficiency of the network itself and reduce the energy lost in the wires between the point of generation and the point of consumption (which can be over 20% in old electricity grids). In North America, many regulated electric utilities are integrated by nature, in that they own power generation assets that supply their customer bases, together with the poles and wires. These utilities are, in nearly all instances undertaking significant investments in renewable energy, including onshore wind, offshore wind and solar, and at the same time retiring coal-fired generation with an ultimate objective of reaching net zero by no later than 2050. These investments are being made within a ‘regulatory construct’, meaning attractive, but relatively low, risk adjusted returns for equity investors, while at the same time allowing infrastructure investors to really participate in the decarbonisation journey. Critically, much of the electrical infrastructure in de-

The quote

The most significant risk with investing in renewable energy companies is merchant, or wholesale electricity, pricing risk which also ties back to the contract/PPA tenure, and pricing applicable to each asset and the company overall.

Tim Humphreys, Ausbil Investment Management Tim Humphreys is portfolio manager and head of global listed infrastructure at Ausbil. He has over 20 years of financial markets experience in Sydney and London with companies such as AMP Capital, AMP Capital Brookfield, RARE Infrastructure, Insight Investment and Rothschild Asset Management. He is a founding member of Ausbil’s global infrastructure team.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Investment

The quote

For investors seeking to gain exposure to the energy transition, investing in regulated utilities offers an attractive alternative to renewable energy companies as in most instances they display lower risk but comparable, and in some cases superior, return and growth profiles.

veloped markets is ageing, requiring a wave of investment. For example, Deloitte’s report Distribution grid investment to power the energy transition prepared for Eurelectric in January 2021, noted that in the EU currently 25-35% of assets are over 40-years old. If assets are not replaced after their useful life, then 40-55% of assets could be over 40-years old by 2030. This would see a further reduction in the resilience of the grid, its reliability and its efficiency and flexibility which are all characteristics necessary in an energy system increasingly powered by renewable energy. Regulated gas utilities are also playing an important role in decarbonisation. One example of this is using renewable natural gas (RNG) as a feed gas into their networks. Many gas utilities are also actively exploring the potential to blend hydrogen into the fuel mix and potentially, longer term, only transporting hydrogen. More immediately, gas utilities are investing heavily, especially in North America, to replace their ageing pipeline assets to reduce harmful gas leaks. For investors seeking to gain exposure to the energy transition, investing in regulated utilities offers an attractive alternative to renewable energy companies as in most instances they display lower risk but comparable, and in some cases superior, return and growth profiles. The attractiveness of these investment opportunities, from an energy transition perspective, is commonly misunderstood or overlooked, however this will change.

North American opportunities Regulated utilities in North America present attractive investment propositions for long-term infrastructure investors with a strong focus on the energy transition and achieving aggressive decarbonisation objectives.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

What sets North America apart are several unique investment characteristics that are particularly attractive, including the following: Vertical integration

Many utilities are vertically integrated, meaning they own and operate the full supply chain including generation, transmission and distribution assets. This in many instances enables the regulated utility to spearhead the decarbonisation of the supply chain, retiring fossil-fuel based generation typically before the end of their useful lives, investing in renewable energy, with return on investment based on invested capital, or the rate base, posing relatively low risks for investors. Consumer focused

This industry structure also means the utilities typically take greater ownership of the end user bill impacts and ensures that any investment or decarbonisation plans are structured with a real focus on end-user affordability considerations. Support from politicians and regulators

State governments and regulators, far more than the US Federal Government, are more influential in determining investment and decarbonisation plans. Many US states have a very supportive approach to investing in renewable energy and decarbonisation. At the federal level, the Biden administration has proposed stronger incentives for renewables, batteries and grid investments, and has a stated objective to decarbonise the US electricity network by 2035, providing a supportive federal policy backdrop for the sector. It should be noted that the US achieved record levels of renewable energy investment

FS Super

Investment

www.fssuper.com.au Volume 13 Issue 04 | 2021

during the Trump administration, suggesting that federal policies have, at least to date, been less important in driving the decarbonisation efforts in the US.

CPD Questions

Policy tools to reduce stranded asset risk

The public policy challenges associated with the early retirement of coal-fired generation has been addressed in many states. These challenges relate to stranded asset risk for investors but also potential affordability impacts from retiring assets before the end of their useful lives. The policy tool of securitisation is increasingly popular in the US and involves low-cost debt financing of the remaining rate base value of coal-fired generation through bonds with a governmentbacked promise of future payments from the customer base. While utility investors forgo an equity return on this remaining rate base, it can allow the utility to invest more significantly in renewable energy, decarbonise more quickly, and manage the customer affordability impacts. Attractive secular growth

Average compound annual growth rates are 5-7% with some growing closer to 10% p.a. Importantly, there is often, for the best-in-class North American utilities, high visibility with these growth rates and the potential for them to extend for decades.

Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Which of the following statements is correct regarding renewable energy companies? a) They are most often the first-choice option for investors into energy transition b) They are a lower-risk investment alternative c) Their key role is in grid investment d) They offer certainty of future cash flows 2. According to the author, by focusing on essential infrastructure and leverage to the energy transition, an investor’s portfolio will benefit from: a) stable investment cash flows b) enhanced risk-adjusted returns c) reduced downside risk d) All these options are correct

Attractive returns and value creation

Average allowed return on equity (ROE) is currently around 9.5%, with the top-performing utilities able to achieve ROEs in the low teens which is an attractive risk-adjusted return given the relatively low-risk nature of these investments. Combining attractive riskadjusted returns with strong compounding growth is a recipe with significant value creation potential over time. Key stock holdings in North American regulated utilities include NextEra, Ameren, Sempra, Emera, Eversource, and National Grid in the UK, which also has a meaningful exposure to US regulated utilities.

Positioning portfolios Ausbil’s Global Essential Infrastructure strategy has been gradually pivoting the portfolio to positively increase its leverage to the energy transition through increasing exposure to renewable energy companies and regulated utilities. More recently, the investment process has identified improved relative value in the renewables sector together with improved growth prospects so providing an opportunity to lift exposure. As a result, currently around one third of the portfolio has positive exposure to the energy transition. On the flipside, exposure to the regulated energy infrastructure and gas distribution sectors has been gradually reduced, particularly for those companies with higher exposure to oil where the long-term stranding impact from the energy transition is likely to be more pronounced versus gas.

In summary The investment opportunities in renewable energy are compelling, and even more compelling when captured through the regulated utilities that are essential in delivering renewable energy to clients. This is very much mis-understood across the general equity market, and herein lies a significant opportunity for experienced and focused infrastructure investors. fs

FS Super

3. What is the most significant risk associated with investment in renewable energy companies? a) They often fall victim of to their success b) Merchant pricing risk c) Capacity risk d) Illiquidity 4. Regulated utilities are a more favourable investment alternative than renewable energy companies because they: a) typically offer shorter term PPA contracts b) own the power generation assets that supply their customers c) display lower risk but equivalent or better returns d) can more readily access green hydrogen 5. Investments in North American regulated utilities are considered as well-suited to investors with less emphatic decarbonisation objectives. a) True b) False 6. Within developed markets, new investment is needed in to combat rapidly ageing electrical infrastructure. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Investment

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Eligibility to make downsizer contributions into superannuation is proposed to expand, from 1 July 2022, to include individuals 60 and over. This paper revisits the primary rules applied to these contributions including home ownership types, timing, how much and deceased estates. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Downsizer contributions revisited

I Minh Ly

n the 2021 Federal Budget, the government proposed expanding eligibility to make downsizer contributions to individuals 60 and over, from previously 65 and over, allowing more individuals from an expected start date of 1 July 2022 to use these rules to contribute to superannuation. Downsizer contributions do not count towards the concessional or non-concessional contribution caps, making them useful in helping to maximise retirement savings in a concessionally taxed environment. They can also be used to help increase the effectiveness of certain strategies such as re-contribution strategies where there are no surplus proceeds after the downsize. Since their introduction on 1 July 2018, there has been clarification from the ATO around certain eligibility rules for downsizer contributions. This paper will discuss these more recent developments as well as some of the nuances that individuals should be aware of when utilising these rules.

The eligibility requirements Currently, individuals need to satisfy certain requirements to be able to make downsizer contributions. These requirements are set out by the Australian Taxation Office (ATO) as follows:

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Eligibility for the downsizer measure

An individual will be eligible to make a downsizer contribution to superannuation if they can answer yes to all of the following: • they are 65 years old or older at the time they make a downsizer contribution (there is no maximum age limit) • the amount they are contributing is from the proceeds of selling their home where the contract of sale exchanged on or after 1 July 2018 • their home was owned by themself or their spouse for 10 years or more prior to the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale • their home is in Australia and is not a caravan, houseboat or other mobile home • the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset • they have provided their super fund with the downsizer contribution into super form either before or at the time of making the downsizer contribution • they make the downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement • they have not previously made a downsizer contribution to their super from the sale of another home.

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Note: If the home that was sold was only owned by one spouse, the spouse that did not have an ownership interest may also make a downsizer contribution, or have one made on their behalf, provided they meet all of the other requirements. While the government has proposed changing the age requirement to age 60 from age 65 from 1 July 2022, all other requirements are expected to remain unchanged.

How much can be contributed? The amount an individual can contribute under the downsizer contribution provisions is not governed by their concessional or non-concessional caps, or their total superannuation balance, and can be made in addition to these contributions. Downsizer contributions also do not affect an individual’s transfer balance cap, unless they subsequently commence a retirement phase income stream, or require the work test to be satisfied before the contributions are made. However, downsizer contributions do count towards an individual’s total superannuation balance. This can impact the individual’s ability to make non-concessional contributions or catch-up concessional contributions in the future. Once the rules are met, the amount that can be contributed is capped at the lesser of: • $300,000 for each individual • the gross capital proceeds received (before any mortgage repayments or costs incurred from the sale such as agent fees).

FS Super

Investment

For example, if a couple received $800,000 from the sale of an eligible property, they can each contribute up to $300,000 as a downsizer contribution. If their property was instead sold for $500,000, the most they could contribute is $500,000 between them, up to $300,000 for each spouse. The combination does not matter, that is, each could contribute $250,000 or have one spouse contribute $300,000 and the other $200,000. Although contributions can only be made in respect of one eligible property, regardless of how much was contributed, multiple contributions can be made for that property, for instance to different superannuation funds if they are made within the above cap and 90-day timeframe.

Can an in-specie downsizer contribution be made instead of cash proceeds? An individual can make a downsizer contribution as an in-specie contribution, provided the value of the assets does not exceed $300,000 or the gross capital proceeds received from the sale. This has been confirmed in the ATO’s Law Companion Ruling LCR 2018/9 Housing affordability measures: contributing the proceeds of downsizing to superannuation (LCR 2018/9). For example, an individual sells their home for $1 million. They meet all the eligibility requirements to make a downsizer superannuation contribution. Instead of using the cash proceeds from the sale of their home, the individual can choose to transfer their individually owned portfolio of listed shares into their SMSF if:

Minh Ly, Challenger Minh Ly, BCom, AdvDipFinServ, CFP, is a technical services manager at Challenger. He has extensive financial services industry experience, specialising in social security, retirement and aged care. During his career, Ly has worked with clients as a financial planner, supported advisers with strategic and technical advice, developed statements of advice, and contributed to industry publications.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Investment

The quote

An individual can make a downsizer contribution as an in-specie contribution, provided the value of the assets does not exceed $300,000 or the gross capital proceeds received from the sale.

• the value of the shares does not exceed $300,000 • the shares are transferred after the ownership interest in the dwelling is disposed of • the transfer was within 90 days of receiving the sale proceeds.

What if the property had been built for less than 10 years? To make a downsizer contribution in respect of an eligible property, an individual will generally need to have owned the property for at least 10 years. This ownership period would usually be from the settlement date of the initial contract to purchase the dwelling, to the settlement date of the contract to sell the dwelling. An individual can also be eligible to make a downsizer contribution without an ownership interest in a dwelling if their spouse holds an ownership interest in that dwelling. This could occur where a couple’s main residence is only owned by one spouse. However, the spouse that does not hold the ownership interest must also meet the other requirements to be able to make a downsizer contribution for themselves including the main residence exemption. There are also special provisions to allow periods where land is vacant, for instance due to the property having been destroyed or knocked down and another built, to continue to satisfy the 10-year ownership condi-

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

tion. This also extends to a vacant block that was bought and then later a dwelling is built on and lived in as an individual’s main residence. For example, an individual bought a vacant block of land in 2008. In 2016, a dwelling was built and the individual resided in the property as their main residence for five years. In 2021, the dwelling is sold and qualified for a partial main residence CGT exemption. Subject to meeting all other requirements, the individual can make a downsizer contribution as the 10-year ownership test is satisfied even though a dwelling wasn’t present for the entire 10 years.

What if the land was subdivided? Downsizer contributions can also be made in situations where land, with a dwelling on it, is subdivided and both lots are sold together along with the dwelling. Subdividing land generally splits the interest into separate assets but does not give rise to a CGT event based on section 112.25 of the Income Tax Assessment Act 1997 (ITAA 1997). To satisfy the downsizer rules in these situations, an individual needs to ensure there is a disposal of an ownership interest in a dwelling and the main residence exemption requirement is met. The ATO confirmed in LCR 2018/9 that both these

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

conditions can be satisfied where the subdivided land is adjacent land to the main residence, and is sold at the same time, and to the same person as the other lot with the dwelling. If the vacant subdivided land was sold on its own, it would not have satisfied the disposal of an ownership interest in a dwelling nor the main residence exemption requirements.

What if the trustees of a deceased estate disposed of the ownership interest instead of the individual? There are provisions in the ITAA 1997 relating to downsizer contributions that provide: For the purposes of determining whether an individual held an interest at a particular time, if the interest was held at the particular time by the trustee of the deceased estate of an individual who was your spouse when the individual died, the interest is taken to be held at the particular time by that individual. This means the surviving spouse can not only include the ownership period of their deceased spouse but can also include the period the dwelling is held by the trustee of the deceased estate towards the 10-year ownership requirement. It also means that just because the trustee rather than the individual sold the property, it does not preclude the surviving spouse from making a downsizer contribution, subject to all the other requirements being met.

What if only part of the home was sold?

Investment

or where there has been a sale and re-acquisition of the same dwelling.

What if the home was in a retirement village? The requirement to dispose of an ownership interest in a dwelling can also be satisfied where the sale is in relation to an interest in a retirement village. Although a retirement village arrangement often involves a long-term leasehold interest, the definition of ‘ownership interest in a dwelling’ in the ITAA 1997 is broad enough so that the disposal of such an interest can allow an individual to make a downsizer contribution. Based on the definition in the ITAA 1997, an individual is taken to have an ownership interest in a dwelling if: • for a dwelling which is not a flat or home unit, they have a legal or equitable interest in the land on which the dwelling is erected or a licence or right to occupy it • for a flat or home unit, the individual has one of: • a legal or equitable interest in a stratum unit • a licence or right to occupy it • a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that it gives them a right to occupy it. However, it is important that the retirement village accommodation does not meet the definition of a caravan, houseboat or other mobile home, as these are specifically excluded by the downsizer contribution legislation. One example would be transportable homes where the person owns the property but leases the land on which it stands.

One of the key eligibility requirements to make a downsizer contribution is that ‘the contribution is an amount equal to all or part of the capital proceeds received from the disposal of an ownership interest in a dwelling’. The Explanatory Memorandum accompanying the legislation clarifies that the meaning of ‘ownership interest in a dwelling’ includes an interest as a joint tenant or an interest as a tenant in common. This means although other parties may also hold an ownership interest in the dwelling, it does not prevent an individual from making a downsizer contribution in relation to the sale of their own interest. Additionally, in August 2020, the ATO clarified in a private ruling relating to DomaCom Australia Limited’s (DomaCom) equity release product that an individual does not need to sell their entire property to be eligible to make a downsizer contribution. A sale of part of their home is sufficient to meet the rules, including a part sale under DomaCom’s equity release product. However, it is important to note that the amount that can be contributed is still limited to the sale proceeds, or $300,000, whichever is lower. Although multiple contributions can be made in respect of one eligible property within 90 days, this does not extend to ownership interests in the same property that are sold at a later time. This could occur because of the sale of part of the ownership,

FS Super

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Investment

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Demi, an individual eligible to make one or more downsizer contributions, will have them counted towards her: a) concessional contribution cap b) total superannuation balance c) non-concessional contribution cap d) transfer balance cap 2. What is the maximum amount an eligible couple may contribute to their superannuation under the downsizer rules? a) The lesser of the gross capital proceeds from the home sale and $300,000 each b) The lesser of the gross capital proceeds from the home sale and $600,000 each c) The lesser of the net capital proceeds from the home sale and $300,000 each d) The gross capital proceeds from the home sale plus $300,000 each

What happens if the downsizer contribution is ineligible? If the ATO determines that a downsizer contribution does not meet all the eligibility requirements, they will notify the superannuation fund that received the contribution. The superannuation fund will then treat the contribution as a member contribution and assess whether the contribution can be accepted under the usual superannuation contribution rules contained in the Superannuation Industry Regulation (Supervision) Regulations 1994 - Reg 7.04: Acceptance of contributions – regulated superannuation funds. For example, for clients who are age 67 to 74 and have satisfied the work test and so are eligible to contribute, the fund can retain the contribution. This means, the individual may exceed their non-concessional cap if they have contributed $300,000 and are unable to trigger the non-concessional contribution bring-forward provisions. If the superannuation fund is unable to accept the contribution, for example when the person is over age 75 or does not satisfy the work test, the fund will return the contribution to the individual. fs

3. In which of the following situations can Rashid, age 66, make a downsizer contribution using sale proceeds of the home which he has lived in for the last two years? a) The home sale proceeds were received just over four months ago b) His recent principal residence was a mobile home c) He made a small downsizer contribution three years ago, using the sale proceeds of his former home d) His spouse was the sole registered owner of the home for over 15 years 4. When can multiple downsizer contributions be accepted from an individual? a) The individual making the contribution is over age 75 b) Each contribution is from sale proceeds of a different home c) The contributions are made to multiple superannuation funds d) The contributions are timed more than 90 days apart 5. Individuals must be 65 or over to be eligible to make downsizer contributions prior to 1 July 2022. a) True b) False 6. A downsizer contribution that fails to meet the eligibility rules cannot be retained by a superannuation fund irrespective of the age or work status of the contributing individual. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

SMSFs:

Cryptic with cryptocurrency

By Graeme Colley, SuperConcepts

SMSFs

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Crypto or digital currency is not a currency for Australian taxation purposes and is treated like any other asset owned by an SMSF. The paper answers key questions SMSF trustees and other professionals must consider when acquiring and disposing of cryptocurrency on behalf of an SMSF. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Cryptic with cryptocurrency

C Graeme Colley

ryptocurrency is a virtual or digital currency which allows people to pay for goods and services directly through an online system. It has no legislated or intrinsic value and it is simply worth what people are willing to pay for it on the open market. There are many types of cryptocurrency, with the most well-known being Bitcoin, but others include Litecoin, Peercoin and Dogecoin. In contrast, official currencies of a country, such as the Australian or US dollar, derive their value from being legislated as legal tender of that country. So, is it possible for an SMSF to acquire cryptocurrency and comply with the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations)? Here are 10 things to know about cryptocurrency and SMSFs.

1. Is cryptocurrency considered to be currency or money? In Australia, cryptocurrency is not legal tender nor is it a ‘foreign currency’ for the purpose of the Australian taxation law as per Taxation Determination TD 2014/25 Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997? Under the Currency Act 1965, the currency unit is the Australian dollar and is the only recognised form of payment. On 7 September 2021, cryptocurrency was recognised as legal ten-

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

der in El Salvador alongside the US dollar, which is its other official currency. It remains to be seen whether other countries will recognise as the decision in El Salvador to be considered as a currency of a ‘foreign country’.

2. How is cryptocurrency treated for capital gains tax purposes? Since cryptocurrency is not a currency for Australian taxation purposes, it is treated like any other type of asset. That is, losses or gains on the disposal of cryptocurrency are treated as the disposal of an asset for capital gains tax (CGT) purposes as per Taxation Determination TD 2014/26 Income tax: is bitcoin a ‘CGT asset’ for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? However, in some situations where the buying and selling of cryptocurrency is considered to be the carrying on of a business, any gains or losses will be treated as being on revenue account rather than capital account. Under the capital gains tax provisions, the buying or selling of cryptocurrency will determine the capital gain or loss from its disposal for the financial year. A capital gain arises where the proceeds from the disposal of the cryptocurrency is greater than its cost base, and a capital loss will arise where the proceeds from the disposal of the cryptocurrency is less than its cost base. Any capital gains will be added to any other capital gains or offset against any capital losses, including carry forward capital losses. The proceeds from the disposal of cryptocurrency will consist of what is given in exchange from the disposal. This may include cash

FS Super

SMSFs

www.fssuper.com.au Volume 13 Issue 04 | 2021

Graeme Colley, SuperConcepts

and the value of any goods, services or other property given to the seller in exchange for the disposal. The cost base of the cryptocurrency is the amount paid to acquire it and includes the value of any goods, services or other property given as part of the acquisition. If the cryptocurrency has been held for up to 12 months, the whole capital gain is assessable income. However, when it has been held for at least 12 months, any capital gain may receive a discount on the gain. In the case of an SMSF there is a one-third discount on the taxable capital gain which is taxed at 15% if the fund is in accumulation phase.

3. How is cryptocurrency treated if it is considered that a business is in existence? There is no single factor that determines whether a business of buying and selling cryptocurrency is in existence. What may start out as a casual hobby may grow and end up as a business. However, for a business to be recognised the activity must operate in a businesslike manner. This can include some of the following: • registration of the business • intention to make a profit at some stage • the size and scale of the activity is similar to other busnesses in the industry • there is repetition of the activities

FS Super

• the activities are planned and organised, such as establishing accounts and keeping records. If a business of buying and selling cryptocurrency, including mining, is in existence then any profit and loss is determined in the same way as any business. The sale price of the cryptocurrency less the cost of its purchase and other associated costs will determine whether a profit or loss has been made. At the end of the financial year any taxable income that has been earned by the business will be taxed, and if there is a loss it will be offset against any other income earned in the financial year. One misconception is that if the gains from buying and selling cryptocurrency is below a certain amount any profits are tax free. If a person is considered to be carrying on a business of cryptocurrency any profit is taxable just like any other business income. However, if the scale of the activity is no more than a casual hobby then things may be different. A ruling from the Australian Taxation Office (ATO) could be helpful to overcome any uncertainty.

4. Can an SMSF acquire cryptocurrency? It is possible for an SMSF to acquire cryptocurrency from unrelated third parties providing the acquisition is on an arm’s length basis. However, acquisition is prohibited from a ‘related party’ such as a member, trustee,

Graeme Colley is executive manager, SMSF technical and private wealth, SuperConcepts. He is a wellknown figure in the SMSF community with a long-standing reputation as an accomplished educator, technical expert and advocate for the sector. Colley has held senior roles at the Australian Tax Office, worked as assistant commissioner for the Insurance and Superannuation Commission, and most recently held the role of director, technical and professional standards at the SMSF Association.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

SMSFs

www.fssuper.com.au Volume 13 Issue 04 | 2021

The quote

If an SMSF is to acquire cryptocurrency, a trading account or exchange account with an exchange will need to be established in the name of the SMSF. This is not the same as opening a bank account as the trustees are left to their own devices to get things going or may need to rely on someone with experience who has established a trading account in the past.

relative of a member or trustee, or any company or unit trust that they control. The reason for the prohibition is that section 66 of the SIS Act prevents a superannuation fund from acquiring assets from related parties. There are exceptions to the general rule which include listed shares, commercial property and in-house assets, however cryptocurrency does not fall within any of the exceptions.

5. What SIS legislation applies to cryptocurrency? The same provisions of the SIS Act and SIS Regulations apply to cryptocurrency as they do to the fund’s investments. Some of the relevant provisions that apply are: • the covenants in the SIS Act require the trustee to act in the interests of the members and other beneficiaries • the investment strategy must be formulated and give effect to the whole circumstances of the fund including the investment risks involved, cash flows, diversification and liquidity • money and other assets of the fund are kept separate from a trustee’s personal assets • the prohibition of acquiring cryptocurrency from a related party • restrictions on placing charges over the fund’s assets • ensuring cashing requirements are met when pensions

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

are paid from the fund • ensuring cryptocurrency is acquired and maintained on an arm’s length basis • complying with the lending and borrowing rules.

6. How are acquisitions or disposals of cryptocurrency treated in an SMSF? Given cryptocurrency is not currency for Australian taxation purposes, it will always be treated as a CGT asset where an SMSF is the owner. It is not possible to have the acquisition and disposal of cryptocurrency by an SMSF treated as being as ordinary income. The reason is that the CGT provisions of the income tax law are the primary code for calculating gains and losses for superannuation fund investments. While there are some exceptions to this general rule, they do not apply to cryptocurrency.

7. How does an SMSF acquire cryptocurrency? Before acquiring cryptocurrency, the trustees should review the investment provisions of the SMSF’s trust deed to ensure it is an approved investment. This may not require the trust deed to be amended if the investment in cryptocurrency is possible. In addition, the investment

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

strategy of the fund should include a statement to indicate that the trustees will be investing in cryptocurrency and the range of the fund assets that will be used. If an SMSF is to acquire cryptocurrency, a trading account or exchange account with an exchange will need to be established in the name of the SMSF. This is not the same as opening a bank account as the trustees are left to their own devices to get things going or may need to rely on someone with experience who has established a trading account in the past. Therefore, a due diligence review of the exchange is required to ensure the account has been opened in the correct name and that the trustees understand the reports that are to be provided. Cryptocurrency is identified by wallets which do not store the cryptocurrency. However, it includes a public key also known as an address, very similar to a bank account number, which receives the cryptocurrency. The wallet also includes a private key which verifies the owner of the cryptocurrency that is being used for payment. Details of the private key need to be stored securely otherwise a loss will mean the address is unrecoverable.

8. Record keeping and cryptocurrency Like all things to do with SMSFs it is necessary to keep accurate records to assist with account preparation and for compliance purposes. With cryptocurrency investments records should be kept for up to five years of all transactions associated in acquiring, holding and disposing of cryptocurrency. This should include information about:

FS Super

SMSFs

• the cryptocurrency and its purchase or sale price in Australian dollars • when the transaction occurred including the date and time of acquisition or disposal • fees and costs associated with the acquisition or disposal • the exchange record concerning the transaction. While cryptocurrency continues to be held by the SMSF, records should be made concerning any software costs, the details of the digital wallet as well as the public and private keys, and the quantity of cryptocurrency received.

9. What are auditors interested in with cryptocurrency? In view of the added complexity in auditing cryptocurrency, SMSF auditors are in search of appropriate audit evidence in support that the SMSF is the legal owner of the cryptocurrency and that it actually exists. The trustee will need to show that the cryptocurrency is held in a secure manner at a public address. Audit evidence will include: • account verification including the account transactions, wallet address and that it has been used wholly and exclusively by the SMSF • the balance of the cryptocurrency account as at the end of the financial year • confirmation of purchases and sales including confirmation of the transaction in the fund’s bank account.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

SMSFs

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Questions

Where the valuation of the cryptocurrency is not in Australian dollars, this will require a conversion as at the end of the financial year determined by the last traded price prior to the end of that financial year.

10. ATO monitoring of cryptocurrency Earn CPD hours by completing this quiz via FS Aspire CPD. 1. The purpose of a cryptocurrency wallet is to: a) hold or store the cryptocurrency b) record each cryptocurrency transaction c) verify ownership of the cryptocurrency d) identify the specific type of cryptocurrency 2. An SMSF, in accumulation phase, purchases cryptocurrency, holds it for 15 months and then disposes of it, it will face a capital gains tax liability of: a) $0, as any gains are considered as revenue and taxed as income b) 10% on the assessed taxable capital gain c) 15% on the assessed taxable capital gain d) $0, as any gains from buying and selling cryptocurrency are tax-free

While some consider that cryptocurrency lives in an anonymous world surrounded by a digital cloud, the perception is that it is impossible to identify. However, things such as data matching and international sharing of tax information assists in identifying disclosure of the required information. Recent statements from the ATO have announced that cryptocurrency will be included in its data matching program for 2020/21. From a compliance point of view, cryptocurrency is an asset that is gaining popularity in a high risk and volatile environment. The issues for trustees, members and SMSF professionals provides a huge challenge and will depend exclusively on each fund’s situation. fs

3. Which type of information must an SMSF record and retain for every cryptocurrency transaction? a) Date and time of transaction with fees and associated costs b) The purchase and sale prices in Australian dollars c) The relevant exchange record d) All of these information types 4. What must be established in an SMSF’s name prior to it acquiring cryptocurrency? a) An exchange account b) A cryptocurrency wallet c) A foreign currency bank account d) A separate trust account 5. Cryptocurrency will always be treated as a CGT asset when owned by an SMSF. a) True b) False 6. Cryptocurrency does not possess intrinsic or legislated value. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Ethics & Governance:

Tackling modern slavery through finance

By Suzy Yoon, JANA Investment Advisers

Financial Accountability Regime (FAR) draft legislation

By Gabriela Pirana, QMV Legal

Ethics & Governance

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper exposes the history of slavery and investments, the prevalence of modern slavery and reviews key regulatory and other approaches taken to tackle modern slavery in investments. The choice for investment managers between engagement and divestment as a means of managing ESG risks, such as modern slavery, is also evaluated. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Tackling modern slavery through finance

T Suzy Yoon

his paper looks at the impact of modern slavery risks in investment management, what the industry can do to combat it and the approach JANA takes to ensure their investment managers are considering the risks within client portfolios.

The history of slavery and investments Financial instruments were utilised many centuries ago to support transatlantic trade for items such as sugar, cotton and most tragically, slaves. Merchants found the trade across the Atlantic, while lucrative, was slow and unreliable. As a solution, they issued credit notes that could travel relatively quickly and safely across the seas in exchange for the ‘goods’ such as slaves. In addition, plantation owners borrowed money to finance their expansion by using slaves as collateral. Fast forward a few hundred years and while such practices would be deemed as outrageous, ‘modern’ forms of slavery still exist in various forms along operational and supply chains. Some have claimed that slavery was a key element in developing financial markets, such as the evolution of banking practices in both the US and the UK. Others, such as the Lichtenstein Initiative for Finance Against Slavery and Trafficking Others (FAST), will assert that it was the innovations of the financial sector that led to the even-

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

tual abolishment of slavery in the 1830s. What can be concluded is that the financial sector has an obligation to help combat modern slavery. Contrary to some market commentary that questions if modern slavery still exists, modern slavery has an estimated worth of US$150 billion each year and occurs in every region of the world according to the International Labour Organization (ILO). The ILO estimated that on any given day in 2016, there were 40.3 million victims of modern slavery globally, of which 71% were women and girls. Walk Free, a global organisation established by the Minderoo Foundation with a mission to end modern slavery, estimated that there were up to 15,000 victims living in Australia. Figure 1 on the next page highlights some of the key findings of research conducted by the ILO and Walk Free.

The drive to tackle modern slavery through investments The Responsible Investment Association Australasia (RIAA) in its research: From Values to Riches Charting consumer attitudes and demand for responsible investing in Australia, November 2017, surveyed a small group of Australians to ascertain their interests and engagement for social and environmental issues when making decisions on their investments in superannuation and other financial products. RIAA found that 92% of the respondents expected their superannuation or other investments to be invested responsibly and ethically.

FS Super

Ethics & Governance

www.fssuper.com.au Volume 13 Issue 04 | 2021

In addition, 62% responded that human rights violations were among the top three things they wanted to avoid in their investments. Modern slavery features in the Sustainable Development Goals (SDGs) under the 2030 Agenda, which was agreed to by 193 member states at the United Nations Sustainable Development Summit in 2015. It is a commitment to eradicate poverty and achieve a sustainable world by 2030 and beyond, with human well-being and a healthy planet at its core. Of the 17 SDGs, goal number eight is Decent Work and Economic Growth with over 10 specific underlying targets. Target 8.7 aims to: Take immediate and effective measures to eradicate forced labour, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labour, including recruitment and use of child soldiers, and by 2025 end child labour in all its forms. The efforts of the European Union to direct private capital into sustainable finance can be seen in their Sustainable Finance Disclosure Regulation (SFDR) that utilised the SDGs as a foundation to establish and measure sustainable outcomes for investments. We can therefore expect an increased focus on private capital and investments on tackling sustainability issues such as modern slavery. Investment managers and asset owners have a significantly influential role in how global capital can be utilised to confront modern slavery risks. Increasing awareness and knowledge of modern slavery should lead to change and an allocation of capital in effective ways. The objective of the Commonwealth Modern Slavery Act 2018 (Slavery Act) is to reduce the “risk to people” rather than the risk to the value of investments. Notwithstanding, modern slavery risks can have impacts on reputation/ brand and cause disruptions to business operations and productivity. All these can have material financial implications and therefore companies will need to manage these risks with appropriate policies and strategies. It can be expected that companies that manage ESG risks such as modern slavery are likely to deliver better social and financial outcomes in the long run. It is also in the best interests of investors to address modern slavery risks given the overall benefits of the eradication of modern slavery through strengthened social systems on which capital markets and their investments rely.

ian managers have undertaken an assessment of modern slavery risk exposure across their investment portfolios. The Global Slavery Index developed by Walk Free estimated that US$354 billion at-risk products are imported by G20 countries. The industries identified as having the highest supply chain risks to modern slavery are agriculture and fishing, apparel, industry construction and building materials, mining and electronics. Modern slavery is also a risk in relation to the lending, investing, advisory and financing activities of financial services companies. The challenge with identifying modern slavery risks in portfolios arises due to the far-reaching and complex nature of supply chains across varying sectors. It is important to keep these unique characteristics in mind when assessing modern slavery risks within each asset class exposure, and thus managing expectations of what to expect when assessing the practices of each manager. Having said that, where analysis is possible, the best practice managers are expected to go beyond a tier 1 analysis of their supply chains in analysing and combatting modern slavery risks. Supply chains can be broken down into tiers, based on the closeness of a company to the final product or service. For example, a producer of widgets would have the contracted manufacturing facility as their tier 1 supplier, as that is with whom their biggest commercial relationship is, while their tier 2 supplier would be the business that provides the materials to the tier 1 supplier as a sub-contractor. While the Slavery Act does not set a minimum requirement for how many tiers of the supply chain must be examined, modern slavery risks are generally found deeper down the supply chain tiers. Managers who are proactive in combatting modern slavery look beyond tiers 1 and 2 and into tiers 3 and 4, where workers could be vulnerable to exploitation. The risks of modern slavery are particularly prevalent at the lower tiers of global supply chains, particularly in developing countries where there is less regulation, oversight and/or enforcement.

The quote

Modern slavery has an estimated worth of US$150 billion each year and occurs in every region of the world according to the International Labour Organization.

Figure 1. Prevalence of modern slavery

Regulation of modern slavery in investments The Slavery Act requires impacted entities to report on their operations and supply chains. Thus, where an investment manager forms part of a reporting entity’s supply chain as an external manager such as for an Australian reporting entity, that entity must outline how it is working with the external manager to assess the nature of the investments and ensure that the manager considers modern slavery risks when managing investments on their behalf. Consequently, most Austral-

FS Super

Source: International Labour Organization and Walk Free

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Ethics & Governance

JANA’s approach

Suzy Yoon, JANA Investment Advisers Suzy Yoon is a senior consultant and a member of the responsible investment research team. She holds a Master’s Degree in Global Affairs and Public Policy from Yonsei University in Korea, focusing on sustainable development and international cooperation.

JANA recognises that it can influence positive change for the millions of victims of modern slavery by explicitly engaging with managers in relation to how they factor modern slavery risk into their investment process. Investment managers are expected, at a minimum, comply with the relevant regulations prevailing in the jurisdictions of their operations, understand modern slavery issues and risks and undertake the appropriate measures to combat those risks such as diving deeper into their supply chains. This is done as part of a wider ESG due diligence process when evaluating a manager and their investment strategy. JANA includes a line of questioning, in relation to modern slavery risk, as part of the overall ESG due diligence process. While the ESG assessment is qualitative in nature, JANA uses a scoring framework, specific to each asset class, to assist the researchers in evaluating managers on a consistent basis and reach an overall assessment for each manager/strategy. To support their evaluations and engagement, JANA developed a modern slavery questionnaire requiring all investment managers to complete on an annual basis. The questionnaire was developed with the objective of understanding how each manager incorporates modern slavery risks at both the organisational level and as part of their investment activities to ascertain how they integrate, engage and manage modern slavery risks. The inaugural questionnaire was sent to all investment

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

managers with whom JANA clients have exposures to, based on investment activities over the financial year to 30 June 2020. JANA provided the following observations from a subset of the responses: • All investment managers domiciled in countries with explicit legislative reporting requirements fulfilled their obligation to produce a modern slavery statement. • A few investment managers were identified as voluntarily submitting modern slavery statements, despite not being a required reporting entity under the Slavery Act. This is indicative of the importance these managers are placing on the risks of modern slavery and their commitment to combat it. • A number of investment managers located in jurisdictions not bound by legislation stated their commitment to tackling modern slavery by adhering to the UN Global Compact Principles, which is a call to companies to align their strategies and operations with 10 principles related to human rights, labour, environment and anti-corruption. • One equity manager developed an internal model to identify the modern slavery exposures of their investee companies. They were able to utilise the information gathered from the data as a tool for engagement where they identified potential modern slavery risks within their investee companies. • The identification of modern slavery risks is somewhat challenging for some sub-asset classes such as securitised fixed interest and alternatives. While modern

FS Super

Ethics & Governance

www.fssuper.com.au Volume 13 Issue 04 | 2021

slavery risks are not entirely absent from these investments, assessment and identification is challenging. This, however, does not warrant inaction from investment managers. The questionnaire was recently recirculated to all JANA clientexposed managers for the 2021 financial year. The responses will formulate the questions that will be asked as part of the standard due diligence and assessment. A key role for JANA is to identify those managers that are genuinely committed to adhering to their ESG and modern slavery commitments and engage with those we feel are laggards in this space. It is challenging to identify modern slavery risks with data alone, this is where engagement is paramount.

Engagement versus divestment Taking a rigid approach to ESG risks such as modern slavery may result in further harm as opposed to improvement. Some managers may choose to ‘de-risk’ their portfolios by divesting from investee companies or terminating supplier relationships, where it is difficult to confirm compliance with modern slavery regulations. However, such divestment may not generally lead to a systemic reduction in modern slavery risks. A better outcome is when engagement leads to the changes that lessen and eventually discontinue the risks encumbered upon the most vulnerable victims of modern slavery. In effect: Engagement that deals with the crux of the issue. Divestment would be expected to occur when engagement does not lead to any practical changes to address the modern slavery risks. In its A Blueprint for Mobilizing Finance Against Slavery and Trafficking, September 2019, FAST suggests that it is most effective to be clear upfront when entering new business relationships about the possibility of divestment should adverse human rights impacts be identified and unaddressed. This type of engagement would make the possibility of divestment and exclusion more credible. There may also be some situations where the risk is so high that immediate action is warranted. Nevertheless, it must be remembered that in such cases divestment may do little to address the actual risk of modern slavery and could potentially have more far-reaching negative consequences.

Looking ahead There are consequences that need to be thought about. Is it merely adherence to the regulations or genuine commitment to reduce and eradicate modern slavery and exploitation of human rights? JANA believes it is important for the finance industry to work cooperatively to administer the changes necessary in combating modern slavery across investment portfolios for the benefit of our broader societies. fs

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. The objective of the Commonwealth Modern Slavery Act is to reduce the risk to: a) investment values b) business operations and productivity c) stable government d) people 2. Which financial instrument was often issued in exchange for goods to facilitate overseas trade in centuries past? a) Gold bullion b) Credit notes c) Bills of exchange d) Promissory notes 3. What percentage of respondents to a RIAA survey in 2017 identified avoiding human rights violations as one of their top three priorities for investment selection? a) 62% b) 71% c) 25% d) 92% 4. Two industries that have been identified as having some of the highest supply side risks to modern slavery are: a) financial advice and investment b) mining and transport c) agriculture and con-struction d) lending and tele-communications 5. According to the International Labour Organisation, modern slavery remains an ever-present risk in every region of the world. a) True b) False 6. For most businesses’ operations, the risks from modern slavery are typically concentrated in the first two tiers of their respective supply chains. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

FS Super

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Ethics & Governance

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The draft FAR legislation imposes a range of obligations upon all APRA-regulated entities including RSE licensees. The paper sets out these obligations with the underlying aim of the FAR to strengthen individual and entity level accountability across the financial services sector. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Financial Accountability Regime (FAR) draft legislation How far has it come?

A Gabriela Pirana

fter a long wait following Treasury's initial proposal paper issued in January 2020, the Financial Accountability Regime (FAR) draft legislation has arrived, and there are a few key items that require consideration by superannuation trustees.

How did we get here? There is no reason in principle why the directors and the senior executives of at least the large superannuation funds should not be subject to statutory obligations of a kind generally similar to those imposed on members of the board and banking executives by the Banking Executive Accountability Regime (BEAR). If the BEAR is seen as a necessary step in the proper supervision and regulation of at least some of the banks, proper supervision and regulation of superannuation funds needs no less. In his 2019 Final Report: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report), Commissioner Kenneth Hayne recommended that the BEAR be extended to APRA-regulated institutions.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

After consulting on a proposal paper that outlined the federal government's proposed model for the FAR in early 2020 and a delay caused by the COVID-19 pandemic, Treasury released in July 2021: • Exposure Draft legislation • Exposure Draft Explanatory Materials • Information paper: Joint administration of the Financial Accountability Regime between APRA and ASIC • Policy Proposal Paper Financial Accountability Regime - List of prescribed responsibilities and positions • Exposure Draft legislation Q&A.

What should superannuation trustees consider? Timeline for implementation

The Financial Accountability Regime Bill 2021 is being prepared for introduction in the 2021 spring parliamentary sittings. Commencement is intended for Registrable Superannuation Entity (RSE) licensees from the later of 1 July 2023 or 18 months after commencement of the regime, however, this timeframe is not prescribed in the draft legislation and is dependent on the Minister making a declaration to apply the FAR to RSE licensees.

FS Super

Ethics & Governance

www.fssuper.com.au Volume 13 Issue 04 | 2021

Individual Penalties

The exposure of individual accountable persons to civil penalties for breaches of their accountability obligations initially proposed has been removed from the FAR. Regulators will, however, be able to disqualify a person from being an accountable person for a period and to direct an accountable entity to reallocate responsibilities of its accountable persons. Significant Related Entity

By extending the initial proposal to allocate responsibilities to accountable entities for their subsidiaries where the activities of the subsidiary are significant, the draft legislation introduces the concept of a ‘significant related entity’. For RSE licensees, this includes a wider variety of entities than subsidiaries, including connected entities that have a material or substantial effect, or are likely to have an effect, on the accountable entity, or its business or activities of the accountable entity. The draft legislation provides a list of matters that may be taken into account to determine if a connected entity has a material and substantial effect on an accountable entity. While the significant related entities will not be subject to direct legal obligations under the regime, accountable entities must take reasonable steps to ensure significant related entities comply with the accountability obligations as if the significant related entity was an accountable entity. In practice, this may result in trustees reviewing current contractual arrangements, if any, with these entities, to ensure that the accountability obligations are documented along with other reporting and oversight mechanisms that would provide the trustee with the appropriate transparency to meet its obligations. Trustees that are part of a larger group need to consider the extent to which the expanded significant related entity applies to them and whether accountable persons of the significant related entity will need to be designated. The Exposure Draft Explanatory Materials suggest that: An accountable person may also be employed by a body other than the accountable entity or one of its significant related entities. Indemnity prohibition

While also generally included in Treasury's initial proposal paper, the draft legislation introduces a prohibition on indemnity that prohibits a related body corporate of an accountable entity from indemnifying the entity for penalties incurred as a result of breaches of the FAR, and from paying insurance premiums insuring the entity for such breaches. It does not prevent entities from obtaining insurance themselves and also does not apply more generally to legal costs. Taken together with the prohibition on indemnity from trust assets that comes into effect in January 2021 pursuant to the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, this may present further

FS Super

complexities for trustees that may be considering indemnity arrangements that would provide for insurance or an indemnity from a related body corporate, as such arrangements may not be effective in relation to the FAR. Accountable Persons

Commissioner Hayne's view was that the regulatory burden of complying with what is now the FAR should not be significant, and the obligations would not entail any "reporting or recording beyond what prudent administration would require anyway." The Exposure Draft Explanatory Materials note that: In practice, accountable persons will generally only include the directors and senior executives of an entity, such as the Chief Executive Officer and officers reporting directly to the Chief Executive Officer. The Policy Proposal Paper, however, lists prescribed responsibilities and positions that for many trustee offices may be broader than simply directors, and chief executives and their direct reports. For example, the heads of internal audit, compliance, AML/CTF and risk are listed separately and responsibilities and positions such as senior executives for management of dispute resolution, member remediation programs, breach reporting, member administration, financial advice, and insurance offerings are also listed. Trustees that do not have separate executives for each of these functions may need to consider whether they need to appoint one accountable person, for instance a current executive, that will hold the multiple prescribed responsibilities, or whether it is more appropriate to have separate accountable persons for each prescribed responsibility. The government will formally consult on the list of prescribed responsibilities and positions prior to the Minister making the final rules.

The quote

If the BEAR is seen as a necessary step in the proper supervision and regulation of at least some of the banks, proper supervision and regulation of superannuation funds needs no less.

End-to-end product executive responsibility

Commissioner Hayne in his Final Report recognised that more must be done to prevent processing and administrative errors, which arose from a combination of factors, including number and complexity of products, and the absence of end-to-end accountability. The Final Report refers to the testimony of the ANZ chief executive who discussed the disaggregation of the management of the value chain with no-one “accountable from the design of the product through to its implementation and if something goes wrong, remediating it and, importantly, keeping it fit for purpose." The Commissioner's statements were focused on banks, rather than RSE licensees. The FAR seeks to address this by requiring that a senior executive, or multiple senior executives, are jointly accountable for end-to-end product management. This includes all steps in the design, delivery and maintenance of all products and services offered to members, remediation, linkages to IT systems and data quality, outsourcing and incentive arrangements for frontline

Gabriela Pirana, QMV Legal Gabriela Pirana is a senior associate at QMV Legal where she primarily assists superannuation trustees in making risk-based decisions related to day-to-day operations, strategic projects and initiatives and regulatory change.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Ethics & Governance

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. According to the author, the intention behind the proposed FAR is to introduce supervisory and regulatory powers similar to those available under the: a) Global Finance regime b) BEAR c) BULL d) Your Future, Your Super (YFYS) regime 2. Under draft FAR legislation, what percentage of an accountable person’s variable remuneration will be required to be deferred, and over what timeframe? a) 40% over at least a six-year period b) 40% of variable remuneration up to a maximum of $50,000 c) At least 60% over a minimum of six years d) 40% over a minimum period of four years 3. An individual accountable person who breaches their responsibilities under the FAR could face: a) disqualification from the role for a period of time b) civil penalties c) criminal penalties d) a monetary fine of up to $50,000 4. Who, in practice, will be considered an accountable person according to the Exposure Draft Explanatory Materials to the draft FAR legislation? a) Every employee of a significant entity b) Directors and all heads of departments and/or responsible managers c) Directors and senior executives of an entity d) The board of directors and the chief executive

www.fssuper.com.au Volume 13 Issue 04 | 2021

staff. Treasury does attempt to make clear that "it is not necessary for an individual holding the end-to-end product responsibility to have technical expertise on every stage of the product value chain." This will present some difficulty for trustees that do not have a designated product management function with this responsibility spread across multiple areas. Trustees may wish to consider their implementation of the Design and Distribution Obligations (DDO) regime, which also targets a holistic approach to product management, in determining the appropriate accountable person(s). Remuneration deferral

The Exposure Draft Explanatory Materials state that: The deferral period is intended to be consistent with provisions of APRA’s proposed prudential standard to regulate remuneration in APRA-regulated industries (Prudential Standard CPS 511 Remuneration) that would also require deferral of variable remuneration for an overlapping class of persons in those industries. This will enable persons regulated by both regimes to comply with the requirements under each framework. While the variable remuneration deferral requirements in the most recent version of Prudential Standard CPS 511 Remuneration (CPS 511) differ from those contained in the draft legislation, the intention seems to be that the FAR requirements are intended to only be a baseline. For example, CPS 511 requires that significant financial institutions defer at least 60% of the chief executive officer’s total variable remuneration over a minimum period of 6 years, whereas the FAR generally requires deferral of 40% of an accountable person's variable remuneration over a minimum period of 4 years. While the case may be that in complying with CPS 511, a trustee also complies with the FAR, trustees should consider stepping through the provisions and calculation methodologies required under each to ensure that the result of compliance with CPS 511 is also compliance with the FAR. Both the FAR and CPS 511 provide that the deferral rules do not apply if the variable remuneration is less than $50,000. The FAR also exempts accountable persons that are filling a temporary or unforeseen vacancy, who are not registered or required to be registered under the FAR because they only hold the position for 90 days or less. fs

5. Once the FAR legislation is declared applicable to RSE licensees they will be expected to meet their new obligations no later than 1 July 2022 or 12 months after commencement of the FAR. a) True b) False 6. A significant related entity, as defined by the FAR, will include any entity that has, or is likely to have, a material or substantial effect on the business activities of an RSE licensee. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Communications & Marketing:

Corporate ‘greenwashing’

By Andrew Korbel, Corrs Chambers Westgarth

Communications & Marketing

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Alongside ever-increasing demands upon companies to be ESG-aware are the risks associated with ‘greenwashing’. This paper sets out practical steps that can be taken to minimise, or better still avoid greenwashing allegations and ensure companies comply with their legal requirements. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Corporate ‘greenwashing’ The latest target for climate litigation

A Andrew Korbel

s an oil and gas giant recently became the first corporate to be hit with Australian proceedings for alleged climate-related ‘greenwashing’, one thing is clear: companies need to be very careful when making claims about their climate-friendly credentials. In the environmental context, potentially misleading disclosures and claims are known as ‘greenwashing’, a term which encompasses a wide range of actions which exaggerate and misrepresent ‘green’ credentials. At one end of the scale, it may be marketing spin designed to create a favourable impression about a company or its products. While at the more nefarious end it is conduct designed to mislead and deceive investors and customers. Amid growing urgency for corporate Australia to respond to the climate crisis and the release of the Intergovernmental Panel on Climate Change’s Sixth Assessment Report, AR6 Climate Change 2021: The Physical Science Basis, in August 2021, Australian companies have found themselves under increasing pressure to make climate-related disclosures and statements. At the same time, ‘green’ competition and the need to keep up with rivals is propelling the frequency of climate and sustainability-related business targets and product claims. The pace of these actions, and the infancy of climate-related

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

risk evaluation, valuation and disclosure practices creates a probability of error and misrepresentations. As demonstrated by the case the Australasian Centre for Corporate Responsibility (ACCR) has filed against Santos in the Federal Court, even a hint of a misleading climate-related disclosure or claim can quickly become a material financial and reputational risk. Consumers, regulators and stakeholders are clearly alive to greenwashing. In an atmosphere where climate-related shareholder activism and litigation continue to loom large for corporate Australia, there is a growing need to manage and understand this risk.

‘Red flag’ greenwashing practices There are several aspects of a company’s climate reporting and promotion which are ripe for allegations of greenwashing: • Climate-related disclosures: financial and other disclosures regarding exposure to climate risk. • Broad corporate goals: representations in relation to drivers such as: o alignment with Paris Agreement goals o achievement of net zero or other emissions reductions targets by a specified date. • Green marketing: product and brand marketing which makes representations about products or practices being environmentally friendly, sustainable or ethical.

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Communications & Marketing

The quote

The infancy of climate-related disclosures and net zero and other sustainability or emissions-related targets naturally means that there is a lack of precedent, clarity and alignment for companies seeking to engage.

The latest focus: misleading or deceptive conduct allegations If not carefully managed, each of these elements has the potential to become misleading or deceptive, or a breach of relevant reporting obligations. In turn, each raises the potential for actions from a broad range of possible claimants including class actions litigants and the regulators, such as the Australian Competition and Consumer Commission (ACCC), the Australian Securities and Investments Commission (ASIC) or the Australian Prudential Regulation Authority (APRA). Outside the financial reporting rules, actions targeting greenwashing behaviours are most likely to be brought under the Competition and Consumer Act 2010 – Schedule 2 The Australian Consumer Law, or the Australian Securities and Investments Commission Act 2001 (ASIC Act). The prohibitions in these statutes are deliberately drafted in wide terms, and do not require that any person is actually misled or deceived or that the organisation in question intended to mislead or deceive anyone. A mere likelihood that consumers or other stakeholders will be led into error is enough. This can arise through confusing messaging, a failure to properly disclose the bases on which representations are made where these are relevant, and representations about the future that are not based on reasonable grounds. Legal challenges on this basis have already begun. The types of statements that are likely to be tested, and open to litigation, include: • claims about future emission reductions (including targets) which are made without a short or medium-

FS Super

term strategy to achieve progress towards the goals, or which are only based on technological advancements that have not yet occurred • claims about business strategies being ‘Paris-aligned’, or just consistent with local or national climate policies, when on closer inspection there is not genuinely an alignment, or it only exists in some limited scenarios. Among regulators, the ACCC has been alive to greenwashing for some time and has not shied away from green claim actions, nor seeking significant penalties. In December 2019, in response to action by the ACCC, the Federal Court ordered the highest penalty on record of $125 million against Volkswagen for false representations about the compliance of 57,000 vehicles with Australian diesel emissions standards. Challenges specific to climate representations have also already been occurring overseas. Chevron currently faces accusations of greenwashing in a false advertising complaint jointly filed by Global Witness, Greenpeace and Earthworks with the US Federal Trade Commission in early 2021. The trio complain that Chevron’s promotions: • imply that its business operations do not harm (and even help) the environment, despite environmental disasters • state that it produces ‘ever-cleaner’ or ‘clean’ energy, while spending less than 0.2% of its capital expenditures on renewable energy sources • misrepresent the benefits of ‘renewable natural gas’ • mislead consumers with confusing phrases as ‘reducing emissions intensity’ while continuing to increase overall oil and gas extraction and production.

Andrew Korbel, Corrs Chambers Westgarth Andrew Korbel, partner at Corrs Chambers Westgarth is an experienced litigator and trusted adviser to both the private sector and government for more than 20 years. He works with clients to resolve complex and high-value commercial disputes and protects their interests in inquiries and investigations.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Communications & Marketing

The quote

It is critical that companies strive to strike the right balance between engaging with climate challenges and reflecting on the potential for any representations to be misleading or deceptive before they are made public.

More recently a shareholder class action has been brought in the US against one of the world’s largest oat milk companies, seeking damages said to result in part from misleading statements about sustainability. The statements include that the conversion from cow’s milk to Oatly results in 80% fewer carbon emissions, 79% less land usage, and 60% less energy use. However, based on information gathered by an activist short-seller of Oatly shares, it is alleged that those claims rely on a dated analysis of the company’s operations, and that the company’s sustainability credentials ignore the fact that Oatly’s production process generates dangerous volumes of wastewater and that its supply chain includes an entity which has faced criticism for the environmental impact of its business on the African ecosystem.

The challenge Climate risk and opportunity cannot be ignored, rather companies are obliged to consider exposure to climate risk and make climate-related disclosures. In addition, many companies want to provide climate rated information in response to calls for corporations to take more climate responsibility and to remain competitive in a world where a company’s green credentials are increasingly considered as important by customers and investors.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

On the flip side, the infancy of climate-related disclosures and net zero and other sustainability or emissions-related targets naturally means that there is a lack of precedent, clarity and alignment for companies seeking to engage. It can be difficult to stay across the everchanging landscape of climate-related developments, regulatory expectations and stakeholder preferences. To the extent that companies are publishing climaterelated disclosures, targets or even just mission statements, it critical to develop and integrate appropriate procedures into assessment and verification frameworks, so that disclosures and claims are legally supportable, and do not simply open up additional risks.

Where to start There are several steps that can be taken to strike the right balance and minimise greenwashing risks. Broadly, that involves considerations of: • whether statements are open to misinterpretation, and if so, whether any assumptions and conditions should be made clear. For instance, where scenario analysis has been used in assessing the impact of physical risks resulting from climate change. While generalised statements such as ‘we care about climate change’ may be hard to fault, care should be taken to

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Communications & Marketing

make sure that climate related statements are not likely to mislead in the broader context of a company’s operations • whether representations about the future, such as commitments to net zero or staged emission-reduction targets, are based on reasonable grounds. That may incorporate two levels of assessment: whether the representations are ‘scientifically sound and appropriately substantiated’, and if they correctly reflect the company’s actual intention at the time they are being made • whether statements which may once have been true remain so. In a fast-changing environment, it is easy for representations to move from accurate to misleading, and so regular and probing re-assessment is needed. Similarly, in the context of setting net zero targets, Noel Hutley SC and Sebastian Hartford Davis proposed several practical steps for avoiding greenwashing in their Climate Change and Directors’ Duties: Further Supplementary Memorandum of Opinion, April 2021, that included: • developing a net zero strategy which is integrated with the company’s operational strategy and documenting any assumptions • explaining the emissions reductions that the target encompasses (Scope 1, 2 and 3) and the time frame in which those reductions are to take place • continually reassessing the achievability of the target and disclosing changes. For climate-related financial disclosures, there are additional steps companies should take to ensure compliance with legal requirements and avoid greenwashing allegations.

Looking forward: remain on high alert The claim launched by the ACCR is suspected to be just the beginning. Like most other climate-related litigation in Australia in recent years, it is strategic, in the sense that it is seeking declarations and injunctions and is ultimately aimed at setting a bar for climate-related representations. Increased attention from regulators may well follow; for instance, ASIC has announced a review of environmental, social and governance (ESG) claims on investment products to see whether the practices of the funds match the promotion of the products. Regulatory action means potential exposure to significant penalties. Perhaps even more significant is the risk of class action damages suits. These may be brought on behalf of investors if, for example, it becomes apparent that sustainability claims which attracted shareholders or customers to a company are exaggerated or untrue, and the value of the company or its shares falls as a result. Although loss will be harder to prove, claims may also be brought by customers, who have purchased products based on supposed green credentials,

FS Super

including climate commitments, which later turn out to be misleading. For unwary corporates it may simply be a matter of ‘wrong place, wrong time’ for future actions. The risk of greenwashing claims in relation to climate-related disclosures, net zero targets or other climate-related advertising and promotional materials, is unequivocally real. Equally real are the risks associated with a failure to engage with climate change from both a business, regulatory and reputational risk perspective. It is therefore critical that companies strive to strike the right balance between engaging with climate challenges and reflecting on the potential for any representations to be misleading or deceptive before they are made public. fs

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Communications & Marketing

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Which of the following statements most accurately describes ‘greenwashing’? a) Corporate denial of the risks of climate change b) Substantiated claims of company strategy as ‘Paris-aligned’ c) Misleading claims over the eco-friendly nature of a company d) Promotion of company involvement in the forestry industry 2. A company will face a heightened risk from allegations of greenwashing when it makes: a) representations over the green credentials of its product(s) b) climate-related financial disclosures c) specifically-dated goals for emission reduction targets d) All of the options 3. F or any company setting net zero targets, a practical step for avoiding greenwashing, put forward by Hutley and Hartford Davis is to: a) develop a standalone net zero strategy b) explain the emissions strategy and expected time frames c) resist continual changes once a net zero target is set d) tailor them with a statement about caring for climate change

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

4. T he legislation under which allegations of greenwashing are most likely dealt with is: a) ASIC Act b) Trade Practices Act c) Corporations Act d) National Consumer Credit Protection Act 5. T he author argues that class action damages suits are a significant risk for companies accused of greenwashing. a) True b) False 6. In 2021, most companies have clarity and precedent when preparing their climate-related disclosures and emission targets. a) True b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Administration:

An evolving administration environment

By Steve Freeborn, Deloitte

Administration

www.fssuper.com.au Volume 13 Issue 04 | 2021

CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The preferred administration model in the Australian superannuation market is rapidly evolving. The paper explains how funds are striving to insource services that are of high-value to their members, and then selectively outsourcing remaining functions to specialist service providers. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

An evolving administration environment

A Steve Freeborn

dministration operations models in the Australian superannuation market are evolving. What funds want from their providers and what service providers can offer is changing. This paper will discuss the evolving requirements of administration operations, the functions that are increasingly being brought inhouse by funds and how providers are enhancing their offerings to accommodate the changing landscape.

Evolving requirements of administration operations Historically, the market has adopted one of two main models for administration operations. The first is a fully outsourced model where the administrator is the primary provider of nearly all the operational capability of the organisation. Under this model, trustee staff typically have low levels of involvement in administration, instead focussing their efforts primarily on governance, investments, and marketing of the fund. The second is a model of full insourcing, under which there are several bespoke systems, or versions of them, and a significantly higher number of internal staff supporting all the various operational needs of the fund and the trustee office.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

More recently, there has been significant growth in the adoption of a hybrid model approach which, by its very nature, is not a singular option. How a hybrid model operates very much depends on the fund’s appetite for operational responsibility and scale. The three administrative models are illustrated in Figure 1 (on next page). The hybrid model will typically evolve over time. An example of this would be when a fund takes control of the contact centre inhouse, followed later by other functions such as data analytics. There is growing interest in software as a service. Historically a fund adopting a fully insourced model would select the administration registry system and have their internal IT team take responsibility for hosting and applying updates to the software. Alternatively, a fund can buy a licence for a hosted version of the administration registry system from a vendor. This can result in a significant uplift in data security, at a time when this is becoming increasingly important for funds. It can also result in considerable savings from a reduced IT team and capability requirement. Software vendors also benefit from avoiding version proliferation. The extent of offshoring which can realistically be achieved by administration providers is difficult from a scale and political point of view, although offshoring can deliver significant cost savings for individual funds. Funds that self-administer may look to automation to solve this cost equation. The hybrid model can achieve a balance in this area.

FS Super

www.fssuper.com.au Volume 13 Issue 04 | 2021

Administration

Figure 1. Administration models

The quote

In general, funds are seeking to retain control of most, if not all, member facing activity. This frequently takes the form of funds inhousing the contact centre which allows the voice of the fund to be created and maintained. Source: Rice Warner

Overall, the trend is for the administrator to move from being the supplier of all things to being a vital but more narrowly “scope-defined” partner of the fund.

Functions being retained / brought in-house by funds In general, funds are seeking to retain control of most, if not all, member facing activity. This frequently takes the form of funds in-housing the contact centre which allows the voice of the fund to be created and maintained. This not a cost saving strategy, although the initial business case may be positioned as such. In general, funds might be expected to spend more on an in-house operation than they might have been prepared to pay an external administrator. This allows for the adoption of a customer relationship management system (CRM) to support the contact centre while also promoting a more personalised service to the member. Smaller funds often lack the scale to bring these services in-house. Next in focus are websites, member portals and mobile apps. Often there is frustration around the interface and user experience of the member portal, which needs to also access the administration registry system, being quite different to the fund’s own website. Funds are also looking to fully integrate other member tools such as calculators and contribution tools to have a single source of truth for members. Servicing of employers is an area that can be more challenging to bring in-house especially if the clearing house is provided via the administrator. However, this is an area where funds are seeking to have greater input. As funds in-house more investments this can have an impact on the administrator around cash flow management and the striking of unit prices and subsequent uploading of these to the administration system. Any service that creates a meaningful point of inter-

FS Super

action with the member will be one that funds will consider retaining or insourcing, for example, complaints handling and insurance claims. In general, in a hybrid model this needs to be supported by a comprehensive CRM of some sort.

The importance of data and member engagement As funds bring in-house those services with a high value member interaction, data becomes an increasingly important commodity. In particular, the ability to own and access data is critical for how funds seek to differentiate their approach to member engagement. Most funds use data to drive marketing campaigns instead of blanket marketing to the whole membership and/or prospective membership. However, the degree of sophistication can vary significantly, and it would be fair to position the industry at a point where there is more intent and desire than true delivery in this space. Many funds have found themselves unable to effectively reach their desired state due to a lack of data or lack of ability to integrate data in an effective or timely manner. Data integrity issues can also impact the ability to integrate data successfully. Funds have a small number of data points for default members, often limited to date of birth, account balance and contribution information. Many funds run age-based and balance-based campaigns typically with the objective of retaining members into retirement and avoid losing large balance members to competitors. Funds are striving to engage more effectively around particular life and activity milestones, for example engaging with a member with who has recently married or has newly dependent children. However, funds are often limited in their ability to so do efficiently by data which is dated and less insightful. This is often a con-

Steve Freeborn, Deloitte Steve Freeborn is a partner in Deloitte’s Sydney office in the Actuarial Consulting practice. Freeborn has over 25 years’ experience in the financial services industry across all parts of the value chain, bringing a high level of market knowledge together with a deep technical knowledge of the superannuation, insurance and investment industries and participants.

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Administration

The quote

As funds bring inhouse those services with a high value member interaction, data becomes an increasingly important commodity.

sequence of the frequency with which data is extracted from the administration system and the time taken to run models and generate insight. The ideal model will be one where the data is processed on a near real time basis and a single source can be used to drive all engagement activity. More holistic and timely data allows funds to have more specific individualised engagement with the member. The most advanced funds are using such data to drive the next best conversations with the members as they contact the fund, although in general this is in early stages of development. There are interesting examples of large financial services operations in the US where such insight directs the member’s inbound call to the operator most equipped and skilled in the area the call is most likely to be focused on. This results in shorter handling time and fewer abandoned calls, as the call does not need to be transferred as often. All of this ultimately leads to higher member satisfaction and a better experience.

What else are administrators doing for funds? Based on conversations and work with funds and providers alike, the following have been identified as key focus areas in the market today:

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

www.fssuper.com.au Volume 13 Issue 04 | 2021

Cybersecurity

Cybersecurity as an administrative service continues to be a key area of focus. In particular, significant improvements have been seen from some providers around fraud and identity theft prevention, for instance, ensuring the security of member actions and protecting any such activity from fraudulence. Strong capabilities in this area are becoming increasingly valued by funds. Such capabilities would be difficult for self-administered funds to offer and as such, administrators are positioning themselves so that they can add value in this area. Financial planning and advice

Many funds require that the administrators be able to provide or support the provision of advice. If not fully outsourced to the provider, funds may still use the provider as an external resource to scale demand as required. The range of services in this area is extensive and it is important that providers have developed capabilities for example, intra-fund advice, digital advice and tools. Technology: Digital strategy

Many funds seek an administrator who can provide a full digital solution with a clearly articulated digital strategy. The vision is for high touch and high-cost

FS Super

Administration

www.fssuper.com.au Volume 13 Issue 04 | 2021

functions such as call centres and advice to shift predominantly to, or at least supported by, digital interfaces. As the industry moves to a world where members are stapled to funds, there will naturally be more non-default members joining funds. Online systems and portals should facilitate user friendly and efficient onboarding, and while it is common for funds to retain ownership for these systems, administrators will certainly have a part to play. Further areas where funds are developing their capabilities include data analytics, improving data access, increasing automation and support of direct shares and SMSFs. Pension transfer bonus

The pension transfer bonus is a feature that a growing number of funds are offering to members. When a member transfers to an account-based pension, unrealised capital gains tax provisions are released, creating the potential bonus to the member. Design of such pension transfer bonus schemes can vary and there are complex considerations from an implementation and ongoing administration perspective. Indeed, not all providers currently have the capability to administer such schemes. There will be growing pressures on administrators who do not currently have this capability to develop it, as the pension transfer bonus becomes a more common offering by funds.

Conclusion It is clear that administration operations models are evolving and will continue to do so. The industry is facing multiple pressures in a post Royal Commission era to improve member outcomes, reduce costs and navigate an increasingly complex risk and compliance environment. All the while balancing the need to improve member experience, improve retirement incomes and deliver new products and services. The merger landscape is as active as it has ever been as funds aim to better leverage economies of scale to deliver improved member outcomes. Now more than ever, funds are expecting their providers to be future focused, innovative, efficient and ambitious. Automation, accessibility, cost-effectiveness, data management, insightful data analytics, emerging technologies; these are the tools that the industry is turning to ultimately deliver real benefits to member experience and outcomes. fs Note: This paper was published by Rice Warner on 12 April 2021. As of May 2021, the Rice Warner team joined the Deloitte superannuation and wealth management advisory business.

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Which type(s) of administrative model allows trustee staff to primarily focus on fund governance, investments, and marketing? a) A hybrid model b) A fully outsourced model c) A fully insourced model d) In all three administrative models 2. Funds are less inclined to retain or insource services involving: a) employer services b) insurance claims c) complaints handling d) investor tools 3. Administrators are now developing service offerings for funds that can meet their needs in the area of: a) digital strategy b) cybersecurity c) financial advice d) All three areas 4. According to the author, how can funds take advantage of improvements in their data integrity? a) Funds can drive broader or ‘blanket type’ marketing programs b) They can provide more personalised engagement with members c) They can reduce the resources dedicated to risk management and compliance d) Funds are automatically able to offer members a pension transfer bonus 5. A clear market trend is for funds to partner with an administrator for a tightly defined set of services. a) True b) False 6. Funds typically aim to outsource control over the majority of their member-facing activities. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

FS Super

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Finished reading? Content from this journal is CPD accredited. Go to FS Aspire CPD and search ‘FS Super’ to start earning CPD hours.

Available for individual and corporate subscribers Administrators can upload exams and build training plans FASEA reporting functionality Access to hundreds of hours of FPA and CPE accredited content Content from Australian and international thought leaders Claim CPD from events Track your progress via the live dashboard Device-friendly user interface Access to whitepapers, video, audio and event material Access to FS TechZone, your technical resource library

To request a demonstration call 1300 884 434 or visit www.financialstandard.com.au and click ‘FS Aspire CPD’

Don’t just do your CPD, discover your professional potential

Quick reference

www.fssuper.com.au Volume 13 Issue 04 | 2021

News and opinion

Whitepapers

Active Super

AMG Super

APRA

7, 8, 10, 13

Asgard 6 ASIC

6, 7

AUSIEX 12 AustralianSuper 13 BlackRock 10 Colonial First State Diversa Trustees Ethos CRS Future Fund

10 6 9, 11 5

LUCRF Super

NGS Super

OnePath 7 QSuper 10 Rainmaker Information

Compliance The super fund performance test has landed

Investment Investing in the global energy transition

Downsizer contributions revisited

SMSFs Cryptic with cryptocurrency

Ethics & Governance Tackling modern slavery through finance

Financial Accountability Regime (FAR) draft legislation

Communications & Marketing Corporate 'greenwashing'

Administration An evolving administration environment

Rest 8 Schroders 6 Stockspot 7 Sunsuper

10, 12

TelstraSuper 13

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

For more than 30 years, we’ve been quietly building solutions for the world’s most sophisticated and progressive ESG investors. There’s no need to make noise when results speak for themselves. – $155 billion of sustainable AUM 1 – Pioneering ESG investing since 1988 – Managing five of the world’s largest ESG index funds 2 – Named 2021 Responsible Investment Association Australasia Leader – Best-performing U.S. asset manager on environmental & social shareholder resolutions 3

Introducing our latest innovation — The Northern Trust ESG Vector Score™

SASB Investors Advisory Group

TCFD Supporter

UNPRI Member

Learn more at northerntrust.com/esgvectorscore

One Planet Asset Manager Initiative Founding Member

Climate Action 100+ Founding Signatory

1 Data as of September 30, 2021. Amounts in USD. 2 Source: eVestment. Data as of December 31, 2020. Universe for comparison consists of 52 total passive equity products within “All ESG Universe.” 3ShareAction 2020 report Voting Matters — Northern Trust Asset Management ranked 18th overall globally and first among U.S. asset managers.

In Australia, The Northern Trust Company of Hong Kong Limited (TNTCHK) is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act. TNTCHK is authorized and regulated by the SFC under Hong Kong laws, which differ from Australian laws. Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. © 2021 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.

Actual investors think in decades. Not quarters.

SEARCH FOR ACTUAL INVESTORS

FS Super Volume 13 Issue 04

Articles inside

FAILING ASGARD SUPER OPTION CLOSED DOWN

MERGER LEGISLATION PASSES

$450 SUPER THRESHOLD BILL ABANDONED

SUPER EXECUTIVES SWITCHING IN CONFLICT

DEFAULT MYSUPER FEES DROP TO 1